CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB+' rating to the city of Dayton, Ohio's approximately $32.5 million series 2016 airport revenue bonds, issued on behalf of the James M. Cox Dayton International Airport (the airport). Fitch has also affirmed the 'BBB+' rating on approximately $47.1 million outstanding parity airport revenue bonds. The Rating Outlook on all bonds has been revised to Negative from Stable.
RATING RATIONALE
The Negative Outlook reflects Fitch's view that absent stabilization of the enplanement base, the airport's financial flexibility may become pressured with rising costs per enplanement as well as lower coverage and higher leverage ratios, which could lead to reduced competitiveness with airports in the region.
The rating reflects the airport's elevated traffic volatility, its vulnerability to economic factors in the air service area and, to a moderate extent, competition from larger airports in the state. Fitch remains uncertain as to the extent of future traffic declines given the airport's recent enplanement volatility. The airport's historical leverage, cost per enplanement (CPE) levels, and coverage ratios have been largely stable even in a period of deteriorating traffic; however, the additional borrowing and declining use of airline subsidies are likely to weaken airport metrics. Softening financial metrics are partially mitigated by the airport's residual-style airline agreement and adequate liquidity.
KEY RATING DRIVERS
Revenue Risk - Volume: Weaker
Weaker Service Area; Moderate Competition: The airport serves a mostly origination and destination (O&D) market consisting of approximately 1.07 million enplanements. The airport's enplanement base, however, has demonstrated a historically volatile profile with single-year traffic shifts ranging from a positive 9% growth to approximately 16% declines since 2005, resulting in a 10-year compounded annual growth rate of (1.3%). The airport mitigates some carrier concentration risk due to its largest carrier holding only 38% market share, though competition exists with both Columbus and Cincinnati/Northern Kentucky airports located less than 80 miles from Dayton.
Revenue Risk - Price: Midrange
Full Cost Recovery: Carriers operate under an annual operating permit with a hybrid rate-setting methodology. Airline revenues have remained relatively low in recent years compared to other small hub airports, due to an airport rate subsidy to airlines. However, Fitch expects CPE to increase to the $12 range through 2021 as the airport phases out the subsidy, which Fitch views as elevated for a market with Dayton's characteristics. Fitch remains uncertain as to the long-term economics for airlines serving the region if net charges continue to rise, especially during periods of traffic decline.
Infrastructure Development & Renewal: Midrange
Manageable Capital Program: The airport's current CIP through fiscal 2021 totals $116.2 million and is funded via proceeds from the current series 2016 bond issuance, airport improvement entitlements, airport improvement discretionary funds, state grants, airport cash, and customer facility charges. Proceeds from the 2016 issuance will finance public entrance renovations, HVAC replacement, sewer upgrades, and public restroom relocation and renovations. The capital plan remains flexible, and Dayton has capacity for near-term traffic growth without any expansion. Further, no additional leverage is expected in the near-term in conjunction with the CIP.
Debt Structure: Stronger
Standard Debt Structure: All outstanding debt will be fixed-rate and fully amortizing with aggregate level debt service payments expected to be approximately $5.8 million, post-issuance of the series 2016 bonds. Bonds will have a final maturity of 2041 with standard structural features tied to producing at least 1.25x coverage of maximum annual debt service. Reserves are currently cash funded at their required amounts.
Financial Metrics
Increasing Leverage; Ample Liquidity: In conjunction with the new debt issuance, the airport's leverage will increase to approximately 7x net debt-to-cash flow available for debt service (CFADS) in the near-term, and eventually trending to the 4x to 5x range through 2021. Debt service coverage of 1.96x in 2015 is a decline from the prior year of approximately 3x, and Fitch expects further decreases in coverage following traffic volatility and an increase in debt service requirements. The airport's CPE remained in line with the prior year at $6.61, though is expected to increase as the airport reduces its airline subsidy through 2018. Additional traffic decreases that hinder the airport's ability to generate non-aviation revenue will increase CPE and lessen Dayton's competitiveness to surrounding airports. The airport maintains solid liquidity with $32.1 million of unrestricted cash, equivalent to 421 days cash on hand.
Peer Comparison
Airports that provide secondary service or experience competition from larger nearby airports, such as Fresno ('BBB'/Positive Outlook) and Rhode Island Airports Corporation (RIAC; 'BBB+'/Stable Outlook) serve as comparable peers to Dayton. Dayton's leverage will be slightly elevated in the near-term, but is expected to become comparable to both airports after issuance of the 2016 bonds. CPE levels are expected to rise to levels comparable, but below RIAC ($13.36 in 2015) in the near-term with coverage expected to fall below both its peers. Dayton serves a smaller service area than RIAC (1.8 million enplanements in 2015); however, traffic levels remain above Fresno (704 thousand). Further, Dayton's traffic volatility in recent past is elevated compared to both of its peers.
RATING SENSITIVITIES
Negative: Continued contraction of passenger traffic below the 1 million enplanement-level may pressure revenue generation and result in higher airline costs above $12, which could lead to a negative rating action.
Negative: Deterioration of the airport's non-aviation revenue or increases in operating expenses, resulting in sustained leverage of over 5x or coverage projected to fall below the 1.4x range.
Positive: Firm stabilization in traffic trends that allows the airport to generate consistent non-aviation revenue, partially mitigating the expected decrease in coverage and increase in CPE, may lead to revision of the Outlook to Stable.
TRANSACTION SUMMARY
The airport plans to issue approximately $32.5 million (up to $35 million) of airport improvement revenue bonds to finance the costs of certain capital improvements. The series 2016 bonds are being issued to finance the renovation of the airport's public entrance, replacement of various HVAC systems throughout the terminal building, upgrades to the sanitary sewer system, and the relocation and construction of existing and new public restrooms. The bonds will also fund costs of issuance. The bonds will be issued on parity with current outstanding senior-lien bonds, will be fixed-rate, fully amortizing, and mature in 2041.
Pursuant to the 2016 supplemental bond indenture, the airport is now required to deposit collected passenger facility charges (PFCs) for the eligible series 2016 debt service in an irrevocable trust held by the City of Dayton. The City transfers collected PFCs to the airport in an amount no less than the PFC eligible debt service requirement. Fitch views positively the additional bondholder protection as a result of the commitment by the City of Dayton to apply eligible PFCs to debt service. However, Fitch does not expect the airport's credit quality to be materially impacted as the airport has historically applied eligible PFCs to debt service.
PERFORMANCE UPDATE
The airport's enplanements continue to decline behind realignment of service by Southwest Airlines ('BBB+'/Stable Outlook) following the acquisition of AirTran Airways. Southwest now operates only three flights from Dayton all to Chicago Midway, whereas AirTran accounted for 8 daily flights to five different destinations. In fiscal 2015, traffic dropped 6.2% to 1.07 million, following an 8.7% decrease in 2014. Through September 2016, enplanements are down an additional 4.1%. The airport has suffered significant traffic volatility in the past, though airport management remains optimistic about future traffic growth.
Allegiant Airlines recently added new flights to Sanford, FL and St. Petersburg, FL, and is expected to add additional flights to Punta Gorda, FL in the near-term. Fitch remains uncertain as to what level of traffic growth the airport can achieve given the rising costs to airlines, competition from other airports in the region, and the lack of economic strength within Dayton's immediate service area. However, despite recent volatility, the airport has historically maintained a base level of at least 1 million enplanements in the past two decades.
Total operating revenue decreased 1.2% in fiscal 2015, driven by a 3.8% decrease in non-aviation revenue following traffic declines. The airport's airline related revenue increased approximately 2.9%. Fitch expects additional airline revenue increases as debt service requirements increase. Fitch views positively the airport's ability generate increases in non-aviation revenue, as additional airline costs may affect the airport's economic attractiveness to airlines in a highly competitive Ohio region.
Operating costs increased approximately 10.7% to 27.9 million, following a 4.4% increase in 2014. Expenses increased due to a one time fluctuation in contractual services associated with the airport's master plan and current bond issuance. Fitch expects expenses to moderate in the near-term. The airport's ability to manage costs remains important as any material expense growth will exacerbate increasing airline costs and could pressure the current rating.
Historically, in an effort to reduce CPE from previously high levels and attract new carriers, the airport subsidized airline charges through a cost center residual approach to its current annual operating permit. The airport no longer plans to fund airline expenditures and continues to phase out the subsidy by passing through these charges to airlines. The airport plans to fully phase out the subsidy by 2018. While CPE marginally increased in 2015 to $6.61 from $6.02 in 2014, debt service coverage substantially declined, to a Fitch calculated 1.96x from 2.99x in 2014. Fitch expects debt service coverage to stabilize in the 1.3x range as the airport recovers additional revenue from airlines, with CPE expected to increase to the $12 range through 2021.
Fitch's five-year base case forecast assumes marginal annual enplanement growth and escalating costs of approximately 3% annually, following a conservative 7.8% increase by the airport in 2017. Fitch's base case results in declining coverage to the 1.3x range in 2018, which is held constant through 2021. Net CPE is forecast to increase annually to the current $6 range to the high $12 range in 2021, as the airport phases out its subsidy to airlines, debt service requirements increase, and the airport realizes marginal traffic growth.
Fitch's rating case contemplates a fiscal 2017 enplanement stress of 10%, with only slight recovery thereafter, and an increase in costs to 4% annually. Under this scenario, coverage levels are held constant with the base case forecast. Additional costs must be passed through to airlines in comparison to the base case, which results in CPE growth to the high $14 range in 2021, from the current $6 range. Fitch's cases convey the airport's pressured financial metrics following continued traffic declines.
SECURITY
The bonds are secured by a pledge of the net revenue of the airport's operations and certain funds under the bond resolution. PFCs will be applied to the series 2016 debt service through a designated PFC fund irrevocably maintained by the City of Dayton.
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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