Fitch Affirms Susquehanna Area Regional Airport Auth's (PA) Sr. and Sub Airport Revs at 'BB+'

NEW YORK--()--Fitch Ratings has affirmed the Susquehanna Area Regional Airport Authority's approximately $148 million senior airport revenue bonds at 'BB+' and the authority's approximately $4.2 million subordinate airport revenue bonds at 'BB+'. The Rating Outlook on all bonds is Stable.

RATING RATIONALE

The 'BB+' ratings reflects the authority's (SARAA) small enplanement base with elevated exposures to air service competition, a high debt load lending to above average airline costs, and narrow overall coverage levels from airport cashflows. A modest sized capital program without additional borrowing requirements coupled with a new airline agreement with backstop protections for full cost recovery are positive considerations. The two liens are rated equally given the debt service payment structure which, in Fitch's view, provides little differentiation to both operation and cashflow risks.

KEY RATING DRIVERS

REVENUE RISK- VOLUME: WEAKER

SMALL ENPLANEMENT BASE WITH COMPETITION: Harrisburg International Airport (MDT) serves primarily as an origination/destination (O&D) airport of slightly below 600,000 enplanements serving the state's capital region. MDT's location draws passengers from a regional air trade service area, anchored by economic support from state government, corporations, and universities. However, the traffic base is still constrained by significant regional competition, particularly from Baltimore-Washington International Airport, Philadelphia International Airport, and Dulles International Airport.

REVENUE RISK- PRICE: WEAKER

HIGH COST STRUCTURE: The recently implemented airline use agreement, which runs through 2019, allows for the authority to raise airline rates and charges as necessary to meet all costs. However, given a high fixed cost profile, the current airline cost per enplanement (CPE) is notably elevated for its airport size, at over $15 per enplanement. While overall airport costs are expected to remain stable in the near term, airline charges could still be exposed to even higher average levels under a scenario of any future passenger contraction.

INFRASTRUCTURE DEVELOPMENT AND RENEWAL: STRONGER

MODERN FACILITY WITH LIMITED CAPITAL NEEDS: Updated facilities allow the Authority to maintain an internally funded five-year capital plan that totals approximately $62 million. Funding is expected to be sourced primarily from federal and state grants, and no near-term debt is likely. Some use of airport cash funds to support the capital program could limit the authority's ability to retain or expand its overall level of funds and reserves.

DEBT STRUCTURE: STRONGER (SR), MIDRANGE (SUB)

CONSERVATIVE DEBT STRUCTURE: All senior and subordinate lien bonds are fixed rate, and aggregate annual debt service is flat through 2033. The subordinate bonds reach final maturity in 2017 and debt service on senior lien bonds subsequently rises in 2018 from $7.6 million to $12.4 million to maintain a stable but not declining level of total debt service.

THIN COVERAGE AND HIGH LEVERAGE:

SARAA's overall coverage ratio, exclusive of the coverage account and treating PFCs as revenues, was narrow in fiscal 2015 at 1.08x. Traffic declines from the prior year, with its impacts to revenues and costs, have led to lower coverage from fiscal 2014 (1.16x). Still, SARAA's indenture approach coverage, at 1.24x for all debt, met the rate covenant requirements (1.25x senior debt service, 1.10x subordinate). The authority has a high debt burden and debt per enplanement ($264) driven by prior capital spending and is also currently highly leveraged at 10.9x total net debt to cashflow available for debt service. Unrestricted cash and operating reserves provide only 60 days cash on hand but SARAA has additional capital designated reserves as well as a bond coverage account for additional liquidity support.

PEER ANALYSIS: Amongst its closest rating-level peers in the 'BBB' category, such as Burlington ('BBB-'), Fresno ('BBB') and Pensacola ('BBB-'), the airport demonstrates higher leverage airline costs, with narrower debt service coverage and liquidity.

Fact Tool: U.S. Airports

FACT Tool: U.S. Airports (Opens in an Excel worksheet)

RATING SENSITIVITIES

NEGATIVE: Measurable contraction or elevated volatility in passenger traffic as a result of airline service changes or competition from larger airports operating within the region.

NEGATIVE: Deterioration of the airport's non-aviation revenue that pressures its CPE levels.

POSITIVE: Sustained improvement in the airport's traffic base which generates higher operating revenue and stronger coverage levels may lead to a higher rating.

CREDIT SUMMARY

SARAA's enplanement base at Harrisburg has a long-term history of enplanement stability although traffic levels can exhibit elevated volatility in individual years. Fiscal 2015 traffic, at 590,262, fell 9.1% as a result of Frontier's departure from the market starting in April 2015. These losses carried into the early months of 2016 but overall traffic for the full year is expected to remain almost unchanged due to new services from other carriers. While MDT's service area has a sizeable population base of nearly two million to draw passenger, competition from larger airports in Philadelphia and Baltimore limit the likelihood of steady traffic growth. MDT relies on a mix of national and low cost carriers, with American Airlines as the leading carrier at 38% of enplaned passengers.

SARAA executed a five-year airline agreement starting in 2015 which includes an extraordinary coverage protection (ECP) from signatory airlines if SARAA doesn't meet the required rate covenant levels, which Fitch views as a mitigation to revenue volatility tied to traffic performance. The agreement also allows for some revenue sharing based on surpluses and authority funding for capital.

In fiscal 2015, operating revenues increased 2.2% with higher revenues derived from passenger and cargo carriers, offset by increases in operating expenses by 3.9% despite the lower traffic levels. In turn, total debt service coverage did narrow in fiscal 2015, to 1.08x (treating PFCs as revenues and excluding the coverage account balance) from 1.11x in fiscal 2014. On an indenture basis, the senior lien and total DSCR was 2.28x and 1.24x, respectively.

Supporting the coverage levels are the use of about $2.4 million in PFC revenues. To the extent traffic levels were to experience a further downturn, Fitch believes it is likely the use of additional airline payments would need to be called on to maintain rate covenant compliance. Airline costs are high even for a small market airport, at $15.15 in 2015. The high fixed-costs from the airport's debt burden are a contributing factor.

Fitch calculated leverage from cashflow is about 10.9x and is expected to remain elevated (around 10x) based on current cashflow levels remaining flat due to the slow amortizing debt service schedule. The aggregate debt service schedule is flat, but the subordinate lien debt service will mature after 2017 and senior debt service will rise so that gross annual debt service remains at a similar level of about $12 million.

Fitch's Base Case assumes flat enplanement growth and inflationary cost escalation at 2.5% per year, while Fitch's Rating Case, assumes a near-term enplanement shock totalling 10% but a more moderate level of cost escalation (averaging 1.5% per year). Base case results indicate stable coverage levels near the 1.25x level through FY2020 with airline CPE holding in the $15-$16 range. The Rating Case does require a higher airline share of costs and CPE could increase further from $15 to $23. Leverage in both cases remains elevated at above 10x.

SECURITY

The senior bonds are secured by a first lien on airport net revenues while the subordinate bonds have a second lien pledge on airport net revenues.

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

Applicable Criteria

Rating Criteria for Airports (pub. 25 Feb 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877676

Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=882594

Related Research

Fitch Analytical Comparative Tool - U.S. Airports

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=876822

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Contacts

Fitch Ratings
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Seth Lehman
+1-212-908-0755
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10033
or
Secondary Analyst
Jeffrey Lack
Director
+1-312-368-3171
or
Committee Chairperson
Yvette Dennis
Senior Director
+1-212-908-0668
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Seth Lehman
+1-212-908-0755
Senior Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10033
or
Secondary Analyst
Jeffrey Lack
Director
+1-312-368-3171
or
Committee Chairperson
Yvette Dennis
Senior Director
+1-212-908-0668
or
Media Relations:
Elizabeth Fogerty, New York, +1 212-908-0526
Email: elizabeth.fogerty@fitchratings.com
Hannah James, New York, + 1 646-582-4947
Email: hannah.james@fitchratings.com