Fitch: Metro Washington Airport Authority Realigns Cost Terms into New Airline Lease Agreement

NEW YORK--()--The Metropolitan Washington Airports Authority (MWAA) will begin to operate under a new airline use and lease agreement (AUL) starting in January 2015, which Fitch Ratings views as a sound approach to managing two airports with different demand and cost profiles.

The new AUL will replace a long-standing 1990 agreement governing MWAA's large-hub commercial airports: Reagan National (DCA) and Dulles International (IAD). The new agreement will begin to address some of the significant airline cost disparities that currently exist between the two airports, particularly over the next several years as Dulles' annual debt costs reach peak levels. At the same time, the new AUL will allow MWAA to maintain its overall sound underlying financial profile. Fitch currently rates MWAA's long-term debt 'AA-' with a Stable Rating Outlook.

The new AUL will be effective for all airlines serving at both airports but will extend to a 10-year term at Reagan National and a three-year term at Dulles. Key revisions under the AUL include new provisions to increase MWAA's debt service coverage to higher levels than were previously permitted. The agreement will also modify the revenue sharing arrangements from surplus cashflow between the authority and the signatory airlines as well as introduce a new formula to subsidize IAD's debt costs that are passed on to carriers using a portion of the surplus revenues derived at DCA.

Under the hybrid cost recovery methodology at each airport, airlines serving at IAD were subject to a considerably higher average cost profile in recent years ($25-$27 cost per enplanement) as compared to airline charges at DCA ($11-$14), and this differential poses greater challenges at IAD to attracting new flights. Still, it is the only airport in the Washington, DC market that can serve passengers for long-haul/transcontinental domestic flights as well as international markets. IAD serves nearly 11 million annual enplanements of which over 30% are derived from international flights. DCA serves a slightly lesser enplanement base of 10.2 million, primarily short- and medium-haul domestic destinations.

Fitch sees the new mechanics for revenue sharing as the most important revisions delivered in the new airline agreement. Revenue sharing between the authority and the signatory airlines from surplus cashflow will be modified to allow for MWAA to keep higher percentages of such surpluses in the earlier periods and with lower percentages to retain later on. MWAA will also be able to apply a portion of the net revenues derived from DCA to subsidize IAD's overall debt costs passed on to carriers, subject to maximum annual amounts. Further, to the extent there are changes with regards to the federally mandated DCA perimeter rule, additional surplus cashflow diversions from DCA to IAD would be allowed.

Overall rate setting at airline cost centers will incorporate a sliding scale of hard coverage levels over the 10-year term for MWAA's debt service: 1.35x coverage from 2015-2017, 1.30x from 2018-2023 and 1.25x in 2024. In Fitch's view, these coverage factors are higher than what is typically seen in airline agreements implemented at most U.S. large hub airports. Further, the agreement will keep its previously existing extraordinary coverage protection provision which protects the overall cost recovery even in times of weaker than expected operational activities.

Overall, the new agreement brings more flexibility to MWAA to manage the unequal cost structures between IAD and DCA but will not bring an equalization of costs. IAD will still continue to be subject to much higher costs due to the significant capital invested over the past 15-year period. However, even modest reductions to IAD's airline charges without impairing the overall financial integrity of the airport system are sound approaches on the part of airport management.

In Fitch's view, the new terms under the updated airline agreement is not likely to alter the preferences of domestic carriers wanting to serve at DCA. Its close proximity and convenient transportation links to central Washington D.C. has supported its position as the primary facility for many domestic-based national and low cost carriers operating within the MWAA airport system.

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

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Contacts

Fitch Ratings
Seth Lehman
Senior Director
+1-212-908-0755
Fitch Ratings Inc.
33 Whitehall St
New York NY 10004
or
Jeffrey Lack
Associate Director
+1-312-368-3171
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Seth Lehman
Senior Director
+1-212-908-0755
Fitch Ratings Inc.
33 Whitehall St
New York NY 10004
or
Jeffrey Lack
Associate Director
+1-312-368-3171
or
Media Relations
Elizabeth Fogerty, New York, +1 212-908-0526
elizabeth.fogerty@fitchratings.com