CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the city of El Paso, Texas' approximately $18.9 million airport revenue bonds at 'A'. The city's airport revenue bonds were issued on behalf of the El Paso International Airport. The Rating Outlook is Stable.
The rating reflects the airport's small air trade service area, serving 1.4 million enplaned passengers, and a traffic profile that is vulnerable to both economic cyclicality and carrier decisions. The airport has recently seen some narrowing of its operating margin which may constrain future operating and financial flexibility; however, its zero net leverage level, a flexible capital program, and strong liquidity position mitigate potential operating risks.
KEY RATING DRIVERS
Revenue Risk-Volume: Weaker
Small Market Airport, Notable Airline Concentration: The airport has experienced significant traffic declines in recent years, despite limited competition and a predominantly origination and destination (O&D) traffic profile. Traffic is 19% below its 2007 peak but is showing recent signs of stabilizing. Elevated concentration risk exists with Southwest Airlines Co. (Southwest, rated 'BBB'/Outlook Positive) accounting for 49% of the airport's fiscal 2014 enplanements.
Revenue Risk-Price: Midrange
Historically Low Cost Profile: The airport's cost per enplaned passenger (CPE) has held steady in recent years and was at a competitive $5.90 level in fiscal 2014. However, the five-year airline agreement in place through 2017 employs a hybrid rate-setting methodology that passes through only a portion of the airport's fixed and variable costs. Only the series 2003 debt service is directly recovered through the agreement, resulting in a relatively high reliance on non-airline revenues, although the diversity of non-aviation-related revenue partially mitigates this concern.
Infrastructure Development & Renewal: Midrange
Manageable Near-Term Infrastructure Needs: The airport's $133 million, five-year capital improvement plan is funded through a combination of federal grants, passenger facility charges, customer facility charges and airport funds, with no reliance on future debt issuance. The terminal was last renovated and expanded in 2011, and the airport does not anticipate capacity constraints that will require additional capital spending.
Debt Structure: Stronger
Conservative Debt Structure: The airport's debt is fixed-rate with a declining amortization profile. Maximum annual debt service (MADS) of $2.13 million occurs in fiscal 2016, coinciding with the series 2003 maturity. After fiscal 2016, debt service is reduced to an average level of $1.4 million through 2033. The rate covenant and additional bonds test operate under terms comparable for most U.S. airports
Zero Net Leverage, Abundant Liquidity: The airport's debt/O&D enplanements is $13.53, however its net debt-to-cash flow available for debt service (CFADS) is zero. Fiscal 2015 balance sheet liquidity is strong, with 471 days cash on hand (DCOH), reflecting $40 million in available cash and reserves. Debt service coverage was 1.96x in 2014 and is projected to maintain at least 2x in the near-term as long as traffic and revenue levels remain stable.
Peer Group: El Paso's peer group consists of similarly-rated airports within the 'A' category, including Tucson, Arizona ('A'/Outlook Stable) and Albuquerque, New Mexico ('A+/A'/Outlook Stable). The airports benefit from zero net leverage and strong DCOH, providing the flexibility to withstand narrower operating margins. However, both El Paso and Albuquerque are subject to volatility in near-term traffic following the expiration of the Wright Amendment.
Negative - Performance: Material erosion (in excess of 10%) of either airline operations or traffic volumes would likely signal additional credit weakness;
Negative - Coverage: An inability to support margins from operating revenues, should expenses rise, that results in DSCR levels below 1.5x for a sustained period of time;
Negative - Non-Airline Revenue: Revenue volatility or declining trends in non-core airport operations, materially affecting current revenue diversification, may pressure financial results;
Positive: The airport's size and traffic profile, coupled with inherent vulnerabilities to economic activity, restrict the likelihood of a higher rating at this time.
The airport's passenger volume, which has demonstrated economic sensitivity, fell by nearly 20% since fiscal 2007 with minimal recovery. Continued uncertainty around the Wright Amendment's expiration, and its effect on future traffic, is a moderate concern. However, traffic increased 0.4% in fiscal 2014 and is in line with the prior year for fiscal 2015 through April. Southwest recently reduced frequency by two flights per day to Dallas Love Field (Love Field Airport Modernization Corporation, rated 'A'/Outlook Stable) and one flight per day to three other destinations as a result of the October 2014 Wright Amendment's expiration. Other service changes include a reduction in capacity by American Airlines ('B+'/Outlook Stable) but an increase in flight frequency by Delta Air Lines ('BB+'/Outlook Positive).
While airline revenue decreased 13% in fiscal 2014, this was a function of the airport's reimbursement to its carriers for prior years' actual operational costs and not a reflection on the airport's financial management. The airport now plans to increase landing fees in fiscal 2015 to offset this recent year's drop and does not expect any additional airline remittance in the near term. The airport maintains non-airline revenue diversification through the operation of industrial parks, hotels and a golf course, providing some cushion from dependence on parking revenue and other concessions. However, non-airline revenue was down 5.6% in fiscal 2014, resulting in a flat five-year annual growth rate for total operating revenue, or $33.6 million in fiscal 2014.
Total operating expense grew 9.2% in fiscal 2014, to $30 million, driven by increases in personnel services, outside contracts and materials / supplies. Fitch views the airport's expense recovery measures as prudent, despite the recent increase, as they have historically demonstrated the ability to contain costs as indicated by a five-year annual growth rate of 1.3%. Looking forward, Fitch expects the airport to increase airline rates and charges in order to offset the revenue reduction experienced in fiscal 2014, as well as reign in expense growth, maintaining the current cost level.
The airport's five-year capital plan will finance runway pavement reconstruction, ticketing and baggage expansion, parking improvements, new passenger loading bridges, and a separately-financed rental car facility expansion.
Fitch's five-year base case forecast, which assumes flat enplanement growth and escalating costs of 2% annually, coverage maintains the 2x level in the near term. As the airport increases landing fees in fiscal 2015, Fitch expects CPE levels to only marginally increase to the $6 range. Fitch's rating case assumes a near-term enplanement stress of 10%, with only slight recovery thereafter. Some declines to the coverage levels are likely under these conditions and CPE is expected to be annually adjusted but only reach the $7 range over several years. As long as coverage levels are not materially impacted by further traffic losses, the credit profile would likely remain stable as the airport benefits from high levels of excess cash and some room for CPE increases while still maintaining an 'A'-category rating.
The bonds are supported solely by the net revenues of the airport, after the payment of operating and maintenance expenses. Customer facility charge revenue is not pledged, nor is it expected to be used, as a source of revenue for the airport's general airport bonds.
Additional information is available on www.fitchratings.com
Rating Criteria for Airports (pub. 13 Dec 2013)
Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)
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