Fitch Affirms Kansas City, MO's Sub Airport Revs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A' rating on Kansas City, MO's $25 million subordinated airport revenue bonds, issued on behalf of the Kansas City International (KCI) Airport. The Rating Outlook is Stable.

Fitch does not rate the airport's outstanding $171 million senior airport revenue bonds.

The rating reflects a robust airport market of over five million enplanements with a solid origination/destination (O&D) demand profile, serviced predominately by Southwest Airlines (Southwest; 'BBB+'/Stable Outlook). Also reflected is the inherent residual strength within the senior master bond ordinance executed in 2013 and the airport's hybrid airline use and lease agreement (AUL), which have bolstered the airport's total financial position. A near zero net leverage position coupled with strong liquidity provide ample cushion to sustain weakness in operational performance. The rating further incorporates uncertainty surrounding future terminal redevelopment plans, which could result in higher leverage and/or possible usage of cash balances.

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange

Occasionally Volatile Service Area: The airport benefits from a 95% O&D enplanement base with no competing alternatives within the metropolitan statistical area (MSA). In the last decade, enplanements have experienced some volatility, most recently in fiscal 2013 with an 8% drop; however, traffic has since stabilized as carriers backfilled lost routes. Moderate carrier concentration exists with Southwest servicing approximately half of enplaned passengers.

Revenue Risk - Price: Midrange

Strengthened Cost Recovery Framework: The amended hybrid AUL executed in 2013 greatly increases KCI's ability to recover costs and bolsters their airline revenue generation, although some cost exposures remain. Cost per enplanement (CPE) levels are currently in the $6 dollar range and are competitive with many airports of similar size and rating level.

Infrastructure Development and Renewal: Midrange

Manageable Capital Improvement Program: KCI's capital plan for fiscal 2016-2020 of approximately $169 million is funded via grants, passenger facility charges (PFCs) and airport funds, with no additional debt. Near-term projects include runway and taxiway rehabilitation, as well as other general maintenance. The terminal redevelopment plan remains in the early stages of development with no funding sources outlined at this time; however, it may be reasonably assumed that borrowings will cover a substantial portion of this cost.

Debt Structure: Midrange

Rapid Amortization: All debt is fixed-rate with standard reserve covenants, and KCI's revised master bond ordinance includes beneficial covenants that inherently protect both liens. Subordinate debt accounts for only 12.7% of the airport's total outstanding indebtedness. The Midrange score reflects the subordinated nature of the rated debt and covenant levels at lower coverage ratios versus the airport's senior obligations.

Financial Metrics

Low Leverage, Strengthened Metrics: KCI's fiscal 2016 total net general airport revenue bond (GARB) debt-to-cash flow available for debt service (CFADS) of 0.18x is very low compared to peers. Liquidity of 498 days cash on hand (DCOH) is viewed as a key offset to limited subordinate lien covenants. The airport also has approximately $15 million in unrestricted cash that is earmarked for other uses and not included in Fitch's calculation of the above metrics. Including the additional fund, DCOH increases to approximately 567 days, and leverage falls to zero. Including the rolling coverage account at the senior lien level, total GARB coverage is forecast to remain above 2x in Fitch's five-year rating case.

Peers: Amongst its peers in the 'A' rating category, such as Columbus (OH; senior lien 'A+'/Stable Outlook) and San Antonio (TX; senior/subordinate liens 'A+/A'/Stable Outlook) airports, Kansas City demonstrates low leverage comparable to Columbus, and CPE levels generally similar to San Antonio. Kansas City boasts high debt service coverage similar to Columbus, and softened susceptibility to economic activity given its revenue generation capabilities. Airport's with senior debt obligations in the 'AA' category typically demonstrate monopolistic characteristics such as very robust traffic levels with limited dependence on one carrier, substantial liquidity, and a competitive CPE level. Operating agreements are typically structured such that the airport can recover a substantial portion of operating expenses and debt service from airlines. KCI is likely limited to the 'A' category as traffic levels remain below 'AA' category peers, and the operating agreement recoups a much smaller portion of debt operating costs.

RATING SENSITIVITIES

Negative - Traffic Base: Measurable contraction or elevated volatility in passenger traffic as a result of airline service changes;

Negative - Revenue Generation: Deterioration of the airport's non-airline revenue or reduced AUL terms in the future;

Negative - Financial Flexibility: Dilution of total debt service coverage for a sustained period below 1.5x or a material increase in leverage due to future terminal redevelopment;

Positive - The proposed terminal redevelopment, and its funding uncertainty, currently restricts the likelihood of a higher rating at this time.

CREDIT UPDATE

The airport's enplanements continue to grow behind increased flight frequency and capacity by airlines. In fiscal 2016, revenue traffic increased 3.9% to 5.2 million, and through one month of fiscal 2017, has increased an additional 5.3%. Airport traffic has increased annually since the 2013 loss of Frontier Airlines, as carriers backfill lost routes. Southwest remains the dominant carrier at nearly 50% of the airport's enplanements. As such, the airport remains susceptible to service decisions that could impact future traffic.

Stemming from the aforementioned traffic growth, total operating revenue increased 1.3% to $121.7 million in fiscal 2016. Total operating revenue has grown 4.7% annually over the last five years, due in part to the airport's restructuring of the 2013 AUL. The airport's non-airline revenue is driven by strong parking revenue, which accounted for approximately 43% of total operating revenue in fiscal 2016. Parking revenue has increased 5.3% to $52.6 million, and airport management expects an additional over 5% increase in fiscal 2017, as the airport increases parking rates. Parking revenue remains stable as the airport benefits from little parking competition and recent increases in passenger traffic. Parking rate increases should provide the airport with additional financial flexibility to offset some occasional traffic volatility.

Operating expenses at the airport declined 0.8% in fiscal 2016, despite a sizeable increase in passenger volume. The airport's ample liquidity and the rolling coverage account should also help soften any future effects of occasional traffic volatility. The airport expects to maintain only slight expense growth in the near term. As a result of the 2013 restructuring, coupled with increases in non-aviation revenue and expense declines, the airport recorded a total coverage level (including coverage account) of 2.43x in fiscal 2016. CPE levels of $6.53 remain strong compared to peers.

The airport's terminal redevelopment remains uncertain at this time, as Kansas City Council chose to put plans on hold for fiscal 2016. Future terminal redevelopment plans will require Council and voter approval. While there are no funding plans outlined at this time, Fitch expects additional airport borrowings to finance portions of the terminal, which could impact current financial metrics.

Fitch's base case assumes moderate enplanement growth and reasonable cost escalation, and results in total GARB debt service coverage averaging 2.47x through fiscal 2021. The rating case assumes a near-term enplanement shock consistent with recent stresses and greater cost increases. This scenario results in total GARB debt service coverage that averages approximately 2.17x. In both cases, leverage evolves down to zero after fiscal 2017 as the airport retains strong cash balances and total GARB debt amortizes. While the airport's financial metrics remain strong compared to peers, uncertainty surrounding future the terminal redevelopment could impact current metrics.

SECURITY

The bonds are secured, on a subordinate basis, by a pledge of the airport's net revenue including customer facility charges.

Additional information is available on www.fitchratings.com

Applicable Criteria

Rating Criteria for Airports (pub. 25 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877676

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882594

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009294

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009294

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Contacts

Fitch Ratings
Primary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jeffrey Lack
Director
+1-312-368-3171
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Jeffrey Lack
Director
+1-312-368-3171
or
Committee Chairperson
Scott Zuchorski
Senior Director
+1-212-908-0659
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com