Fitch Affirms Allegheny County Airport Authority, PA's Rev Bonds at 'A-'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms Allegheny County Airport Authority, PA's (ACAA) outstanding $279.4 million senior airport revenues bonds at 'A-' with a Stable Rating Outlook. The airport also has $3.7 million of outstanding subordinate lien airport revenue bonds series 2001 A&B, which Fitch does not rate.

The rating affirmation reflects stabilized traffic performance that primarily has an origination and destination (O&D) profile, favorable carrier diversity, elevated but stable cost per enplanement levels, low leverage and stable coverage metrics. Traffic increased 1.3% for the first five months of 2015 following a 1.3% rise in FY 2014. Upcoming capital needs are manageable but will be clearer with a master plan update in 2016. Debt service expenses are anticipated to decline sharply in 2019 which, with rapid debt amortization, could bolster the financial profile of the airport going forward.

KEY RATING DRIVERS

O&D Airport with Limited Competition-Volume Risk: Midrange

The airport serves primarily an O&D passenger base following the de-hubbing operations of US Airways. Compared to an extended downward slide due to US Airways de-hubbing, recent operational results indicate a more stabilized enplanement base, 1.3% year-to date (FYTD) 2015 after a FY 2014 rise of 1.3% to 4.0 million enplanements. The airport faces limited competition with no major airports within 100 miles and is serviced by a diverse share of carriers. US Air/American Airlines is the largest carrier with 35% market share.

Subsidized CPE-Price Risk: Midrange

The airport utilizes a cost center residual use and lease agreement that provides strong cost recovery terms through 2018. Cost per enplanement (CPE) is around $14, which is above average for a regional airport, and is expected to remain stable in the near term with the use of gaming tax and gas drilling revenues. Fitch expects the near-term CPE to remain at the current level through the use of external revenues, passenger facility charge receipts, and previously received payment from the gas drilling lease agreement to reduce airline costs. Future airline costs starting in 2019 will depend on the airport's successor airline agreement as fixed costs associated with debt will be at a lower level.

Manageable Capital Program-Infrastructure Development and Renewal Risk: Stronger

The airport's capital improvement program (CIP) for 2014-2020 totals $302 million with slightly less than half coming from FAA grants. The 20-year old terminal is in the process of being renovated, and most projects go towards repair and rehabilitation. No additional debt is anticipated to fund the CIP, although an updated airport master plan could identify additional projects.

Rapid Debt Amortization-Debt Structure: Stronger

Debt service schedule is front loaded and amortizes quickly. $279.4 million of revenue bonds outstanding are all fixed rate, and a majority of it will be amortized within the next four years. Debt service payments decrease from $66.3 million to $57.5 million by 2018 and then decline to $15.6 million in 2019. Final maturity is in 2031. Bond covenants and reserve levels are adequate for an airport at this rating level.

Low Leverage and Improved Liquidity

The airport has low leverage with net debt to CFADS of 2.5 times (x) in 2014. Debt service coverage remains adequate at 1.43x, and Fitch expects coverage to remain in the 1.4x range going forward; however, leverage is likely to continue downward with future debt repayments. In 2014, the airport had a very favorable fund balance of $73.6 million, equal to 355 days cash on hand (DCOH).

PEER ANALYSIS

Compared to other airports in Fitch's portfolio with an 'A-' rating such as Cincinnati and Cleveland, Pittsburgh International Airport has favorable or comparable leverage ratios but elevated CPE. Liquidity is also comparable to these peers providing almost a year's worth of cash on hand.

RATING SENSITIVITIES

Positive: Reduced cost to airlines on a sustained basis as a result of careful expense management, lower debt service cost will improve the airport's competitive position may lead to further positive rating action. While not certain as a stable revenue stream, future gas drilling royalties could enhance the airport's financial and airline cost position.

Negative: Service reductions from airlines or unmanaged expense growth leading to a higher CPE could pressure the current rating level.

SUMMARY OF CREDIT

Enplanements increased 1.3% in fiscal 2014 and 1.3% in fiscal YTD 2015 following annual declines partly due to JetBlue discontinuing service to New York. The airport recently added 18 nonstop services and four scheduled carriers. Fitch expects slight enplanement growth going forward fuelled by continued economic developments and stability of the Pittsburgh region. The airport's residual agreement expires in 2018, and Fitch will consider the impact of a renewed agreement to the airport's financial profile.

In fiscal 2013, the airport received an upfront bonus payment of approximately $46 million upon execution of a lease with CNX Gas Company LLC for gas drilling on airport property. $3.5 million were set aside by CNX Gas company in escrow to be released as mineral rights on deeds are cleared through legal assistance. The airport will also receive monthly royalty payments equal to 18% of gas proceeds from Consol Energy which will be allocated based on geographical cost center under the current use and lease agreement. While an additional revenue source, gas royalty payments are volatile, and Fitch will monitor the reliability as an ongoing source of revenue. The wells are outside the airport operations area, but the airport will avoid residential or environmental disturbance.

Operating revenues increased 8.7% to $151.3 million in FY2014 due to higher terminal area airline fees, concessions, and rental car revenues. The airport is in a position to enhance revenues going forward. It will receive greater concession revenues starting in 2018 due to an extended concession agreement increasing gross income to 77% from 59%. The airport also expects to receive royalties from gas drilling operations beginning early 2016 but will not include these payments in the budgeting process until revenues have a proven history.

Operating expenses grew 3.4% to $94 million in FY2014; this was primarily driven by cost increases in salaries, wages and benefits, utilities and professional services. The airport aims to contain expenses by focusing on customer service and updating their energy management program with Honeywell for future utility savings. Operating expenses have grown at an elevated rate with a five-year CAGR of 5.5%.

Fitch conducted several sensitivity analyses. The base case scenario assumes annual traffic growth of 1% and inflationary expense growth of 3%. Under this scenario, CPE is expected to remain $13-$14 through 2018 when applying the $46 million upfront bonus from the gas drilling lease and decrease to $8-9 after debt service drops in 2019. Fitch's rating case sensitivity analysis assumes an 8% traffic decrease in 2016, bringing enplanements down to 3.7 million, and slightly higher inflationary expense growth of 3.5%. In this scenario, the airports CPE rises to $16.5 with the use of PFC, gas drilling bonus, and gaming revenues. Although the current CPE of $13.91 is considered high, Fitch believes the airport has sufficient liquidity to maintain stable cost to airlines. The airport's low leverage and stable enplanement base is consistent with the 'A-' rating.

SECURITY

Bonds are secured by the net revenues generated from the operations of the airport.

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

Applicable Criteria

Rating Criteria for Airports (pub. 13 Dec 2013)

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

Rating Criteria for Infrastructure and Project Finance (pub. 12 Jul 2012)

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

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Contacts

Fitch Ratings
Primary Analyst
Samuel Marsico
Analyst
+1-212-612-7810
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
or
Committee Chairperson
Yvette Dennis
Senior Director
+1-212-908-0668
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Samuel Marsico
Analyst
+1-212-612-7810
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Seth Lehman
Senior Director
+1-212-908-0755
or
Committee Chairperson
Yvette Dennis
Senior Director
+1-212-908-0668
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com