Fitch Rates Charlotte, North Carolina Airport Rev Rfdg Bonds 'A+'

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to Charlotte, North Carolina's (the city) approximately $108 million series 2014 fixed-rate airport refunding revenue bonds, series A&B, issued on behalf of the Charlotte Douglas International Airport (the airport, or CLT). Fitch has also affirmed the city's approximately $591 million in outstanding airport revenue bonds at 'A+.' The Rating Outlook is Stable.

RATING RATIONALE

The A+ rating on the city of Charlotte's general airport revenue bonds reflects the airport's extremely strong financial metrics and stable traffic performance offset by the risks posed by both a high degree of carrier concentration in American Airlines / US Airways ('B+'/Stable Outlook) and a potentially large capital program after 2016 that would call for sizeable additional debt funding.

KEY RATING DRIVERS

Revenue Risk-Volume: Midrange

Large and Concentrated Connecting Hub: The airport enjoys a stable to growing travel base of 22 million enplanements due primarily to its strategic location and status as a primary American Airlines / US Airways hub. CLT is exposed to the carrier's dominant market share and potential volatility with scheduling decisions, as 76% of traffic consists of connecting passengers.

Revenue Risk-Price: Stronger

Strong Revenue Profile: The airline use agreement, coupled with solid contributions from non-aeronautical revenues, allows for strong debt service coverage metrics well above those achievable with a traditional residual framework and the ability to accumulate exceptional liquidity, while still translating into an extremely competitive cost per enplaned passenger (CPE), currently at $1.33 (unaudited fiscal 2014).

Infrastructure Development & Renewal: Midrange

Flexible and Potentially Large Capital Program: The airport's capital improvement program (CIP) includes $308 million of projects currently funded and underway. Future projects are flexible, require airline approval and a renewed airline use agreement in 2016, and may call for sizeable debt issuance if pursued.

Debt Structure: Midrange

Low Debt-Structure Risk: The airport's general airport revenue bonds (GARB) profile is flat to declining and fully amortizing with standard strong structural features. Following the issuance of bond anticipation notes (BANs) on the senior lien in conjunction with the 2014 refunding, an estimated 28% of par will float at unhedged variable rates.

Very Strong Financial Metrics: An estimated net debt-to-cash flow available for debt service of approximately 2.1x after the refunding, nearly 1,500 days cash on hand, and a debt per enplanement figure of $31 after the refunding and the BAN issuance compare favorably to other large connecting hub airports.

Peers: A peer to CLT is Atlanta Hartsfield ('A+') given the percentage of connecting traffic and concentration risk in Delta Air Lines ('BB-'/Stable Outlook). CLT's financial profile is arguably stronger, but Atlanta's origin and destination (O&D) base is more substantial.

RATING SENSITIVITIES

Negative: A reduction or elimination of American Airlines' hubbing activity.

Negative: The initiation of significant debt-funded capital projects without an increase in air traffic and revenue sufficient to support new facilities.

Positive: Despite concentration and hubbing risks, positive rating action would be possible if the financing plan for the airport's potentially large capital program preserves the airport's extremely low financial risk metrics in the context of continued strong commitment to the airport by American Airlines and continued growth in its O&D travel base.

TRANSACTION SUMMARY

The 2014 A&B refunding issuances are expected to total $107.6 million and are being issued to take out the existing 2004 A&B bonds, of which $122.7 million is currently outstanding. The MBIA sureties in place for the 2004 bonds will be replaced by a fully cash-funded debt service reserve fund (DSRF) for the 2014 series, funded by airport cash instead of bond proceeds.

In conjunction with the refunding, the airport is also issuing a new money BAN to be directly purchased by PNC Bank ('A+'/Stable Outlook). The BAN is on a parity lien with the senior GARBs, with the full amount of the principal due on Nov. 6, 2017. The airport intends to use the BAN to begin a number of its current capital projects and reimburse itself for capital projects already funded and has indicated it plans to refinance the BAN with a long-term GARB in advance of the bullet maturity.

Although it is planned that the senior lien BANs, which do not benefit from a dedicated reserve fund, will be refinanced, that risk associated with a potential refinancing is effectively mitigated by the airport's substantial liquidity balances expected to remain far in excess of the expected BAN par amount. Nevertheless, the BAN creates additional unhedged variable-rate exposure on parity with the current GARB debt which Fitch considers more consistent with a midrange debt structure assessment, as enumerated in Fitch's "Rating Criteria for Airports."

Passenger traffic growth at the airport has been strong in recent years and continues to outperform prior traffic forecasts. Charlotte's traffic base achieved a record of nearly 22 million enplaned passengers in fiscal 2014, due to strong growth in connecting passengers as American Airlines / US Airways continued to focus on hubbing through the airport. O&D traffic also grew solidly in 2013 by 5.0% and by another 2.3% in 2014. Connecting enplanements demonstrated robust growth through the 2008-2009 downturn and are 52.0% above 2007 levels without a single year of decline since 2003. Continued strong performance is expected, even though the airport conservatively forecasts overall enplanements to grow just 0.1% per annum through fiscal 2017.

With the benefit of strong business performance, debt service coverage remains very comfortable at or above the 3.0x range, using the airport's indenture-based coverage calculation. In Fitch's more conservative calculation, DSCR equaled 1.8x and 1.9x in fiscals 2013 and 2014, respectively, excluding revenue carried over from prior years and treating passenger facility charges (PFCs) as an addition to revenue rather than a debt service offset. Going forward, the airport expects to generate coverage levels in line with historical performance, hitting a low of slightly under 2.7x in fiscal 2015 (1.6x using the Fitch calculation).

The airport's low debt burden results in extremely competitive CPE levels. Historically, the airport's CPE has been consistently under $1.00, ranging from $0.78 to $0.96 during the period from 2010 to 2012. Based on corresponding 16.7% and 19.3% increases in operating expenses in fiscals 2013 and 2014, respectively, CPE rose to $1.13 and $1.33 these same years. The increases in operating expenses were the result of the airport's addressing of deferred maintenance needs and also enhancements that the tenant airlines requested. The airport projects expenses to substantially increase through 2017 as it continues to address these deferred needs, stabilizing thereafter. However, the airport still expects CPE to remain below $2.00 through 2017. Internal liquidity remains a key credit strength, with the airport maintaining nearly 1,600 days cash on hand as of fiscal 2014 unaudited results.

The current Airline Use and Lease Agreement (AUL), previously a 30-year agreement, expires at the end of fiscal 2016. Fitch will monitor progress towards a new agreement and the ability of the airport to preserve its current ability to generate healthy non-airline revenues to build liquidity and keep airline costs competitive even with the assumption of a large capital program.

Current capital projects on course for completion or underway soon total $307.4 million. The full 2015-19 capital plan calls for $1.5 billion in projects, with the majority assumed following the expiration of the AUL. The plan requires majority-in-interest (MII) approval from the airlines and would not proceed in full unless approval is granted through the negotiation of a new AUL. Major potential projects include a new 24-gate domestic concourse, a new runway and associated airside and taxiway projects, roadway improvements, and other terminal improvements.

With the US Airways - American Airlines merger closed in December of 2013, there is the potential for operational changes at all of the combined carrier's hubs, including Charlotte. Still, Fitch notes that Charlotte is well-positioned to maintain greater credit stability even under adverse conditions with regard to adverse scenarios for carrier service or connecting traffic. Specifically, if the combined American / US Airways were to measurably restructure its route network and de-emphasize Charlotte airport as a primary connecting hub, there would likely be an immediate effect on the airport's operations. The combined carrier handles approximately 66% of the total O&D traffic base, and the timing and possibility for backfill may be uncertain. However, the airport's strong internal liquidity, flexibility to increase PFC charges (currently levies a $3.00 PFC), and low cost structure position the airport well to deal with such a challenge.

Under a high-stress sensitivity scenario reviewed by Fitch that assumes a 100% reduction in Charlotte's connecting traffic, CPE would remain moderate compared to peers at around $6.70. This stress scenario also indicates that coverage would fall only marginally below 2.0x, reflecting the assumption that management would take steps to increase the airport PFC rate to $4.50 and apply unspent PFC balances to reduce annual debt service requirements. Lower passenger levels would likely affect the revenue sharing benefits with the signatory airlines, but overall solid 'A' category credit metrics would likely be maintained. This sensitivity scenario assumes the connecting traffic cuts occur in 2016. Were the airport to proceed with its large capital program upon the negotiation of a new AUL and experience a significant loss of connecting traffic thereafter, credit metrics could be more constrained than currently envisioned.

Fitch's rating case assumes a more modest 25% loss of connecting traffic which results in temporary losses on the O&D side as well. Resulting CPE reaches a maximum of $2.41 through 2017, with indenture-based DSCR remaining above 2.5x and leverage rising only modestly above 2.0x.

The airport is owned by the city of Charlotte and operated as a self-supporting enterprise fund. An appointed aviation director manages airport operations and capital improvements. In July of 2013, the North Carolina General Assembly enacted Senate Bill 380 into law, creating the Charlotte Regional Airport Authority. Subsequently, the city challenged the legislation and was granted an injunction blocking transfer of control of the airport to the new commission. A ruling in the case is expected shortly. It is not known at this time what impact, if any, this change would have on the airport's management and operations.

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

Applicable Criteria & Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

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

Applicable Criteria and Related Research:

Rating Criteria for Airports

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

Rating Criteria for Infrastructure and Project Finance

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

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=892455

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Contacts

Fitch Ratings
Primary Analyst
Charles Askew
Associate Director
+1-212-908-0644
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Charles Askew
Associate Director
+1-212-908-0644
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
or
Committee Chairperson
Saavan Gatfield
Senior Director
+1-212-908-0542
or
Media Relations
Elizabeth Fogerty, New York, +1-212-908-0526
elizabeth.fogerty@fitchratings.com