Fitch Affirms JFK IAT Project Bonds at 'BBB'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'BBB' rating on the Port Authority of New York and New Jersey JFK International Air Terminal's (JFK IAT or the terminal) approximately $1.5 billion parity special project bonds series 6 and series 8. The Rating Outlook is Stable.

KEY RATING DRIVERS

The 'BBB' rating reflects the strong performance of the project one-year after its headhouse and gate expansion project completion. The rating also reflects IAT's strategic significance to foreign-flag carriers and to Delta ('BB-'/Outlook Positive) as the hub for its international operations in the New York area and the significant investment Delta has made into the asset. The single asset nature of IAT as well as its heavy reliance on one dominant carrier present material credit risks that keep the credit in the 'BBB' category. In addition, IAT faces on-going competition for international traffic from other terminals at JFK and Newark airport.

Strong Market with Competition - Volume Risk: Midrange

The NYC region remains one of the most affluent and historically, culturally and economically important regions in the U.S. and, as such, Terminal 4 benefits from an exceptionally strong catchment area, both for its international and domestic services. Nevertheless, Terminal 4 faces a high degree of competition, not only from other independently operated JFK International Terminals 1, 5, 7 and 8, but also from Newark Liberty International Airport (EWR) and LaGuardia Airport (LGA). The effect of competition is partly mitigated by limited capacity in the market, particularly during peak travel periods. The terminal experienced significant passenger growth in 2013 following completion of the expansion project with enplanements up 44% to 6.5 million with 7.6 million enplanements projected in 2014.

Reasonable Pricing Power - Price Risk: Midrange

IAT has complete flexibility to enter into agreements with airlines and set rates as it sees fit. IAT's agreement with Delta essentially functions as a blend of cost recovery methodology and a traditional lease, and agreements with contract carriers reflect negotiated pricing based on market conditions. IAT's pricing power benefits from Terminal 4 being the only facility at JFK with a 24 hour FIS facility making it desirable for international traffic. Airline cost per enplanement (CPE) is comparatively high, and has remained in the $35-$45 range over the past few years; however, this should be viewed in the context of high ticket prices for international travel and limited significantly cheaper options for airlines wishing to serve the region.

Well Structured Debt Protects Noteholders -Debt Structure: Stronger

All IAT debt is fixed rate maturing prior to the expiration of the Port Authority of New York and New Jersey's (PANYNJ) lease with the City of New York. All reserves are cash funded at their required amounts.

Limited Future Capital Needs - Infrastructure & Renewal Risk: Stronger

Following completion of the expansion project in 2013, terminal facilities are in a good condition and are not expected to require major renewal in the foreseeable future. Initial teething problems experienced with the new baggage system appear to have been rectified. Phase II expansion, which is Delta funded and includes 11 regional jet gates, is expected to be completed in the first quarter of 2015.

Improving Financial Profile Following Project Completion

The 2010 issuance of series 8 to fund its expansion project doubled IAT's outstanding senior debt quantum, and the increased leverage was seen by Fitch as amplifying the effect of construction risks on IAT's credit profile. With construction now complete, Fitch expects net debt to cash flow available for debt service (CFADS) to below 6.0x in 2014, falling steadily thereafter to around 5.0x by 2020. Fitch also expects that IAT will be able to maintain a debt service coverage profile in the 1.70x-1.90x range, whilst returning a cut to CPE to airlines to below $40 over the period 2014-2020.

Peer Analysis

The nearest comparable peer to IAT is Terminal One Group Association (TOGA) which operates under a similar relatively unique business model as IAT and competes for New York international travel with other terminals at JFK and Newark Airport. IAT is more highly leveraged and more dependent on one dominant carrier relative to TOGA. However, IAT has a much larger operating scale with a 2013 enplanement base that is more than double TOGA.

RATING SENSITIVITIES

Positive: If Delta continues to ramp up activity at Terminal 4 while other airlines remain largely committed to the terminal and coverage levels remain in excess of 2x an upgrade could be warranted.

Negative: A sharp decline in enplanements driven either by a reduction in services offered by airlines other than Delta or else by a failure by Delta to fully utilize the terminal as planned could put downward pressure on the rating.

Negative: Any further significant construction works at the terminal funded by IAT, increasing its leverage profile, could result in negative rating action.

CREDIT UPDATE

Traffic at Terminal 4 has increased substantially following completion of the expansion project with enplanements up 44% in 2013 to 6.5 million and expected to reach 7.6 million this year. The current level of traffic exceeds the forecasted traffic anticipated at the time of the 2010 bond issue funding the expansion project. The significant increase in passenger traffic, tied to Delta's expanded use of the terminal, has improved the financial performance with overall revenues increasing nearly 17% from $260 million in 2012 to $304 million in 2013 which is directly linked to the increase in the Delta payment during the same period from $52 million to nearly $96 million. The growth in revenues from Delta has enabled JFK IAT to maintain solid coverage levels, > 2x, as debt service from the expansion project has ramped up. The growth in revenues has brought down the project's overall leverage with net debt to cash flow available for debt service (CFADS) of < 7x which is faster than initially anticipated. On the surface the project's CPE seems high $32 for Delta and $41 for non-Delta carriers, however, when viewed in the context of higher airfares for international flights and limited options it is more reasonable. In comparison, the blended CPE for all carriers at Terminal One was about $34 in 2013.

Several carriers have left the terminal since Delta's expansion including Qatar, TAM, LAN and Aer Lingus while China Southern has been added. Fitch expects JFK IAT to maintain a diverse mix of carriers going forward, with no one carrier other than Delta accounting for more than 10% of enplanements.

Phase II of the expansion project, which is Delta funded, is currently 80% complete with occupancy expected in the first quarter of 2015. Phase II includes 11 additional regional jet gates at the end of the B concourse which will add about 75,000 square feet of terminal space.

JFK IAT is ultimately owned by N.V. Luchthaven Schiphol, the owner and operator of, amongst other things, Amsterdam Airport Schiphol. In April 2010, Delta acquired Class B membership interest in JFK IAT Member LLC in anticipation of the 2010 expansion project.

SECURITY

The bonds are secured by a facility rental payment made to the Port Authority of New York and New Jersey, by JFK IAT, in an amount sufficient to cover the required debt service obligations annually through to maturity, and by a leasehold mortgage pledged to the trustee in the leased premises.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=889474

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Contacts

Fitch Ratings, Inc.
Primary Analyst
Scott Zuchorski, +1-212-908-0659
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings, Inc.
Primary Analyst
Scott Zuchorski, +1-212-908-0659
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson
Chad Lewis, +1-212-908-0886
Senior Director
or
Media Relations
Elizabeth Fogerty, +1-212-908-0526
elizabeth.fogerty@fitchratings.com