NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned its 'A' rating on $115 million of Love Field Airport Modernization Corporation's (LFAMC) senior lien airport revenue bonds, series 2017, and has affirmed its 'A' rating on $110 million of senior lien airport revenue bonds series 2015, issued on behalf of the city of Dallas (city) for the Love Field Airport (DAL). The Rating Outlook remains Stable.
The rating reflects DAL's resilient and growing traffic base within a strong Dallas metropolitan region. The rating also incorporates the continuation of a sharp increase in traffic as the airport transitions to a larger base of enplanements following the October 2014 expiration of the Wright Amendment capacity restrictions. Traffic growth following this transition period of increased growth will be limited given the operational constraints of DAL's terminal. The rating also reflects the risks inherent in Southwest Airlines dominating service with 91% enplanement market share and the proximity of the larger Dallas-Ft. Worth Airport (DFW) airport serving the metroplex; however, these risks are mitigated in part by Southwest's long-term commitment to serving the airport, low costs, and established underlying demand. Furthermore, senior lien leverage is moderate and evolves down relatively quickly given minimal capital needs going forward.
KEY RATING DRIVERS
Revenue Risk: Volume - Midrange
Carrier Concentration Offsets Service Area Strength: DAL is the second major domestic airport serving the economically strong Dallas-Fort Worth metroplex. As of Sept. 30, 2016 (end of FY2016), enplanement levels reached 7.78 million (+76.8% over two years), outperforming last year's 2016 expectation of approximately 7 million. However, longer term growth is still expected to be constrained by the airport's permanent 20-gate terminal capacity. Southwest Airlines (which Fitch recently upgraded to 'BBB+'/Stable Outlook) accounts for over 90% of enplanements and scheduling decisions could impact operational performance. Air service competition with DFW remains an ongoing concern, although Fitch views DAL as a strong complimentary airport for the air-trade service area.
Revenue Risk: Price - Stronger
Solid Cost Recovery Framework: DAL operates under a cost-center residual use and lease agreement (AUL), with a 20-year term lasting through 2028 that provides for sound carrier commitment and stable financial performance, even with the new debt and the expected annual reimbursements for Southwest's non-recourse special facilities bonds. Budgeted fiscal 2016 airline costs are low for a medium-hub airport at approximately $5 per enplanement and are expected to decline to $3.91 in 2016 before rising to $4.90 in 2017, continuing to rise moderately over the forecast period to $9.21 by fiscal 2025 taking into account the new debt and Southwest reimbursement payments. Fitch notes that this cost per enplanement (CPE) level will be competitive at a national level for medium-hub airports and is projected to be below forecasted costs at DFW. DAL is exposed to operating deficits at the city-owned executive airport and heliport; however, surpluses generated from other non-airline revenues are more than sufficient to offset these cashflow shortfalls. Should there be considerable service reductions, or a Southwest cessation of operations, reimbursement payments for the special facility bonds would terminate in full; thus ensuring the airport maintains an attractively low CPE for new entrants.
Infrastructure Development/Renewal - Stronger
Manageable Capital Plan: The airport expects to debt-fund approximately $208 million in costs associated with the construction of a new parking garage with senior lien, parity series 2015 and series 2016 bonds. Separately, its capital improvement plan (CIP) for fiscal 2015-2024 reflects works totalling $428 million expected to be funded with a combination of federal grants (18%), passenger facility charge (PFC) revenues (55%) and internal liquidity (27%). While there are no assumed debt issuances for the 5-year CIP, the airport's longer-term plans include bond proceeds from future issuances in 2022 for airfield related works. Key airport facilities are in good condition following the recent completion of the reconstructed terminal and new concession areas that should well accommodate projected traffic levels.
Debt Structure Risk - Stronger.
Conservative Debt Structure: There is currently $109 million of general airport revenue bonds outstanding. Following the proposed series 2017 bond issuances, the airport system's debt profile will have all fixed-rate debt with level debt service requirements, reaching maximum annual debt service (MADS) of $19.1 million in fiscal 2033 and a final maturity in fiscal 2036. While the system's sum-sufficient rate covenant is more limited than for other airports, all other structural features are satisfactory.
Moderate Leverage and Robust Coverage: The airport system's initial senior lien leverage is estimated at a moderately high 10x in fiscal 2017, evolving down to a low 2.9x in FY2020 after the capitalized interest period ends, debt amortization ramps up and debt service costs start being fully recovered through airline rates and charges. Senior lien debt burden is lower than peers at approximately $29 debt per enplanement ($36 per O&D enplanement). Liquidity is expected to remain modest given the requirements of the airline agreement. Fitch's base case senior coverage averages about 2.5x between fiscal 2017 and 2025. Under Fitch's rating case that incorporates a 20% decline in enplanements in 2018.
Comparable rated peers include airports with material exposure to a single carrier, including Chicago's Midway Airport (Southwest accounts for more than 90% of enplanements) and Long Beach (Jet Blue at 80% of enplanements). Midway currently has higher overall leverage (14.66x in 2015) and airline costs (CPE of $9.16, versus DAL's $3.75). Long Beach has limitations for service growth and leverage (4.31x) and CPE ($8.92) levels that currently exceed DAL; it also has a narrower operating profile as a small hub airport and somewhat limited ratemaking flexibility.
Negative: A material downshift or volatility in the traffic profile of greater than 20% could lead to negative rating action given the Southwest concentration;
Negative: If leverage remains over 5x, the DSCR falls below 2x due to revenue underperformance, or operating expenses are materially higher than expected, this could pressure the current ratings.
Positive: Upward credit migration is unlikely given the traffic limitations and the service exposure to Southwest.
SUMMARY OF CREDIT
The series 2017 bonds are expected to be the second of the two new money issuances planned for the airport that, collectively, are expected to fund approximately $208 million in costs associated with the design and construction of a new 5,000-space public parking garage (Garage C) at DAL. Proceeds of the series 2017 bonds will be used to fund approximately $100 million of Garage C costs, issued in a fixed-rate mode amortizing through November 2036. It is anticipated that no additional borrowing will be needed to fund the Garage C project.
DAL is a medium-hub airport located approximately seven miles northwest of the city's business district serving the economically vibrant Dallas metropolitan region and the Dallas Ft Worth metropolitan area. The airport, together with Dallas Executive Airport are managed and operated as an airport system by the city's aviation department. Southwest's headquarters are adjacent to the airport; Southwest has operated at DAL since 1971, capturing more than 90% of the airport's market share since then. DAL has a unique history for a U.S. airport, as Wright Amendment restrictions have been imposed on DAL since 1979, limiting permitted service to destinations within Texas and to four neighboring states. Later amendments allowed four additional states for service as well as one-stop and through-ticketing to other markets. Starting in October 2014, all restrictions for domestic service have been lifted.
DAL's enplanements grew at a 1.6% CAGR between fiscal 2000 and 2014. The airport suffered a 20% drop in enplanements in fiscal 2002 following the September 11 terror attacks which negatively impacted air travel throughout the country. Following a period of recovery, enplanements rose significantly (up 20%) in fiscal 2007 driven by elimination of the through-ticketing restriction. The airport's steady growth was interrupted once again in fiscal 2009 when enplanements declined by nearly 5% due to the economic recession, after which they grew at a 2.4% CAGR between fiscal 2009 and 2014 reaching peak enplanement levels of $4.3 million. The pace of connecting traffic growth slightly decreased over this period, resulting in 23% of volumes in fiscal 2014 compared to 25% in fiscal 2010.
With the ending of the Wright Amendment, the number of non-stop destinations at the airport immediately increased to 44 from 14 and the number of daily departures increased to 172 from 130. Increasing seat capacity and destinations by Southwest and new mainline service from Delta Air Lines and Virgin America resulted in growth since 2014 of 77% in two years. While Southwest remains the main air carrier at DAL, operating on 16 of the 20 gates (in addition to the one gate it shares with Delta), its market share decreased to approximately 91% of enplanements in FY2016 from 96.5% in FY2014. Delta has operated at the airport since FY2009 and began mainline service in October 2014, currently operating on two gates (including the one it shares with Southwest) and capturing just about 2% of total enplanements. Virgin America began its operations at DAL in October 2014, operating on two remaining gates and now makes up about 6% of the airport's enplanements. The airport's traffic consultant expects enplanements to remain at 7.8 million through FY2017, growing approximately 0.5% per annum for the next eight years through airline seat capacity only, not through aircraft landings or turns per gate. The airport will have reached its landing capacity by 2017.
Demonstrating its long-term commitment to DAL, Southwest (and the other signatory carriers) executed a 20-year renewal of the residual AUL in fiscal 2008. This airline agreement approach has provided for stable airline costs and financial performance, and is expected to continue to do so through the forecast period. While Southwest secures the payments on the LFAMC's series 2010 and 2012 special facility bonds, issued for the reconstruction of the terminal building, the city and Southwest also entered into a revenue credit agreement which provides for a mechanism to credit back to Southwest the annual net facility payments subject to Southwest making their payments obligations and maintaining a material presence at DAL. The AUL includes provides rate-setting terms that are sufficient to cover these facility payment reimbursements, net of other eligible revenues. Currently, the airport applies $10 million in PFCs and roughly $7 million in letter of intent (LOI) revenues to facility payments prior to making revenue credit reimbursements payments to Southwest; however, the LOI funds will expire in 2018.
The airport system's 2016-2024 CIP is currently manageable at $438 million and does not require new bond issuances with the exception of future airfield needs for the period between FY2021 and FY2024, which are currently estimated at $181 million. The city contemplates funding approximately $36 million of these costs with future bonds.
The sponsor forecast reasonably considers operational constraints of a reasonable 10 turns per day for each of the 20 gates. Traffic is projected to stay flat at approximately 7.8 million through FY2017 and increase at a 0.5% CAGR thereafter through FY2026. Non-airline revenues track enplanement and inflationary growth, while airline revenues start rising in FY2018 to support the new debt service requirement of the 2015 and 2016 bond issuances after the capitalized interest periods expire. Operating expenses are assumed to grow at inflationary growth rates (2.57% CAGR between FYs 2017 and 2025). Incorporated in the forecast is the issuance of additional debt in 2022 for future airfield projects. These assumptions are consistent with Fitch's view of the airport's medium- to long-term growth and operating environment, and exclude debt service on Southwest's guaranteed debt.
FITCH RATING CASES
Base case airport revenue bond DSCR ranges from a low of 2.36x In FY2022 to a high of 3.92x in FY2017 while the capitalized interest period is still in effect. CPE increases from $4.30 in 2017 to a maximum of $9.21 in FY2025. Base case leverage, calculated as net airport revenue bond debt/cash flow available for debt service, is 10x in FY2016, 6.1x in FY18, 4.7x in FY2019 and 2.9x in 2020, decreasing to 1.7x in FY2025.
Under a Fitch rating case scenario that assumes a 20% decline in enplanement in FY2018, followed by a four-year growth recovery to fiscal 2017 levels, airport revenue bond DSCR ranges from a low of 2.35x In 2025 to a high of 3.63x in FY2017 while the capitalized interest period is still in effect. Leverage, calculated as net airport revenue bond debt/cash flow available for debt service, is 10x in FY2016, 6.3x in FY2018, 4.9x in FY2019 and 3x in 2020, decreasing to 1.7x in FY2025. CPE is projected to reach a still very moderate $9.73 in FY2025. Fitch notes that annual net remaining revenues, after the payment of all operating and debt service costs as well as revenue reimbursements to Southwest, range between $5.6 million and $10.8 million, providing for a buffer in the event that operating costs, including those of the Executive Airport, exceed projections.
The senior lien general airport revenue bonds are secured by a pledge of the net revenues generated at the airport on a senior basis.
Additional information is available on www.fitchratings.com
Rating Criteria for Airports (pub. 25 Feb 2016)
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
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