NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'A' rating to approximately $6.15 billion in outstanding joint improvement revenue bonds, issued by the cities of Dallas and Fort Worth, Texas for Dallas - Fort Worth International Airport (DFW). The Rating Outlook is Stable.
DFW also issued approximately $280 million in parity joint improvement revenue bonds series 2016 sold in a private placement in September 2016. These debt obligations are not rated by Fitch.
The rating reflects the strong demand for air travel in an expanding market, the strategic location of Dallas-Ft Worth to serve as a hub, a stabilizing regional competitive environment following both the American Airlines-US Airways merger and Wright Amendment expiration at nearby Dallas Love Field, as well as stable coverage metrics. The high degree of single carrier exposure and the large capital program leading to a sizable increase in airport borrowings in recent years constrains the rating. Operating characteristics and leverage metrics are comparable to other large-hub 'A' category airports.
KEY RATING DRIVERS
Revenue Risk- Volume: Midrange
SIZABLE TRAFFIC BASE WITH CONCENTRATION AND CONNECTING EXPOSURES: DFW is located in a strong primary market area that generates strong demand for air service. DFW has a base of 31.8 million total enplanements, of which 13.5 million are categorized as origination/destination. Further, DFW's favorable central geographic location provides for a well-balanced traffic profile for both domestic and international passengers. DFW is primarily served by American Airlines (85% of enplanements); however, neither the merger with US Airways nor the recent expiration of the Wright Amendment at nearby Dallas Love Field airport have adversely impacted operations.
Revenue Risk - Price: Stronger
STRONG RATE SETTING MECHANISM: The current airline use agreement (which runs through 2020) allows for timely recovery of costs within all airline cost centers. The agreement also provides for adequate cash flow generation to meet all funding requirements under the bond documents as well as funding for renewal and replacement. Airline costs are currently low for a large-hub airport at $8.75. However, they are projected to steadily increase to over $12 within the next two to three years as airport capital spending is funded, even under conditions of modest traffic growth.
Infrastructure Development and Renewal: Midrange
LARGE SCALE CAPITAL PROGRAM WITH RELIANCE ON ADDITIONAL BORROWINGS: DFW is in the midst of a substantial capital program. Much of the currently budgeted $2.7 billion terminal renewal and improvement program (TRIP) as well as another $1.1 billion of airport improvements are well underway with most borrowings already completed. The final TRIP budget may be impacted by future decisions on moving ahead with the terminal C redevelopment; however, Fitch currently does not see this development as a material credit concern.
Debt Structure: Stronger
FIXED RATE, CONSERVATIVE CAPITAL STRUCTURE: All of DFW's debt is issued in fixed rate mode with generally conservative debt amortization. To the extent all of the TRIP improvements are completed, the aggregate general airport debt is projected to peak at or above $7 billion by 2020 and approximately 30% - 50% of future debt service is expected to be paid from passenger facility charges (PFC).
STABLE BUT MORE LEVERED FINANCIAL POSITION: Debt service coverage and liquidity metrics have been sound. In fiscal 2015 (ended Sept. 30), debt coverage was 1.52x combined (including the use of rollover coverage funds) with 694 days cash on hand. High leverage of 13.4x remains a concern but should evolve to 10x or lower over the next three years.
PEERS: DFW's peers include other major hub airports with similar market and elevated leverage characteristics (approximately 12x-13x), such as Chicago O'Hare (rated 'A'/Outlook Stable) and Miami (rated 'A'/Outlook Stable. DFW has similar coverage levels to Miami (about 1.5x) but stronger liquidity metrics and lower airline costs.
RATING SENSITIVITIES
Positive:
Favorable execution of the capital programs while maintaining positive enplanement and cashflow trends resulting in lower leverage (i.e. below 10x) and increased financial flexibility.
Negative:
Enplanement Declines - Losses in total enplanements that signify a change in American's total support at DFW (15%-25% reduction from current levels).
Negative: Borrowing Beyond the Current Plan - Significant additional borrowing beyond the airport's current plan.
SUMMARY OF CREDIT
Fitch views DFW as an airport with an important role in the national aviation system and a favorable geographic location to support its standing as a Midwestern transportation hub. Fiscal 2015 operating data indicated positive trends in enplanements (31.8 million), up 1.1 % over the prior year, supported by growth in both domestic and international passengers. Connecting passengers remain the dominant component of traffic, representing 57% of total passengers.
For the first 10 months of fiscal 2016, the airport has realized comparable growth to about 1.8%, which demonstrates the limited competitive effects from the Wright Amendment expiration from nearby Dallas Love Field. Love Field has physical limitations for growth and would not be introducing international service and therefore would continue to act as complementary airport in the greater DFW air trade service area.
American Airlines currently accounts for an 85% market share of traffic. Even through the post-merger integration with US Airways, American has demonstrated a strong commitment to the Dallas-Ft Worth market and is expected to remain a vital hub for its global network. DFW is the largest hub operation in the combined American - US Airways network, with approximately 900 daily departures and is supported by a favorable, high average passenger yield. The current rating level assumes the combined carrier will maintain a comparable level of operation at DFW.
Financial performance under the current airline agreement is healthy evidenced by stable debt service coverage levels and strong reserve balances. The ongoing capital programs, including the $2.7 billion TRIP, have resulted in a much higher leverage position in recent years. Still, the program is expected to enhance non-airline revenues while airline costs should be competitive with many of the hubs operated by other major network carriers.
The multi-year TRIP plan calls for an estimated $2.7 billion of expenditures at four existing terminals built in the 1970s. Three of the four identified terminals are well underway for timely completion and within current budgets. Terminal C, primarily used by American, is under evaluation for redevelopment and may be delayed. The budgeted cost is over $800 million. The original financial plan anticipates much of the TRIP funding will come from borrowings and much it has already been issued.
Fitch's base case assumes 1.5% average enplanement growth through 2020, a lower growth rate as compared to the airport's most recent forecast financial plan. Total revenues are expected to grow at 5.8% driven by airline revenue growth of 7% while operating expenses are forecasted to grow at 4% annually through 2020, much of which is above historical levels. Under this scenario, the cost per enplanement (CPE) is likely to reach the $11-$12 range from the $8.75 level in fiscal 2015. Similarly, net debt to cashflow is now very high, even for a major airport, at 13.4x, but will evolve to 10x or less over the next several years under both the airport's financial plan and Fitch's base case forecast. Under this base case, debt service coverage levels are expected to remain stable near 1.5x (including the use of rollover coverage funds).
Fitch's rating case assumes a weaker -0.6% average enplanement growth through 2020, taking into account an approximately 6% combined loss in 2016 and 2017 with recovery in future years. Operating revenues are expected to grow at 7% driven by airline revenue growth of 10.4% while operating expenses are forecasted to grow at 4.5% annually through 2020. Under this scenario, the CPE is likely to reach nearly $15 and net debt to cashflow will still evolve downward to approximately 10x or less over the next several years slightly/moderately higher than Fitch's base case forecast. Under Fitch's rating case, debt service coverage levels are expected to range between 1.50x and 1.55x.
SECURITY
The bonds are secured by a senior pledge of the airport's net revenues.
Additional information is available on www.fitchratings.com
Applicable Criteria
Rating Criteria for Airports (pub. 25 Feb 2016)
https://www.fitchratings.com/site/re/877676
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
https://www.fitchratings.com/site/re/882594
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