NEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades to 'A-' from 'A' the rating on the outstanding $77 million Department of Airports of the City of Los Angeles, Ontario International Airport (ONT) revenue bonds. The bonds are secured by a net revenue pledge of the airport with a final maturity on all bonds by 2026.
The Rating Outlook on all bonds is revised to Stable from Negative.
The downgrade to 'A-' reflects continued annual enplanement declines experienced at ONT in fiscal 2009 and 2010 as well as sustained year-over-year monthly passenger and cargo declines which have created uncertainty regarding future operation levels. Based on ONT's fiscal year 2010 annual financial disclosure enplanements declined 26% in fiscal year 2009 and 24% in fiscal year 2010. It is Fitch's understanding that management is investigating a potential discrepancy in the disclosed 2010 enplanement figure; however, Fitch does not expect any such discrepancy to have an impact on the overall credit profile of the airport. While management has made considerable efforts to control expenses in 2009 and 2010 (operating expenses dropped 8% and 7% respectively), debt service coverages equaled 1.39 times (x) and 1.41x, respectively, below Fitch's expectation of coverage between 1.5x-2x during the same period. In addition, the sharp declines in enplanements have driven ONT's CPE to $13.50 in 2010 from $9.70 in 2008. The significant rise in CPE is concerning considering Southwest's high 53% market concentration and the intense competition in the Los Angeles area.
The 'A-' rating reflects the following:
--High Origination & Destination (O&D) passenger base, comprising 98% of the market;
--Management's proactive approach to cost reduction in light of enplanement declines;
--Solid cash balance with unrestricted cash representing 48% of total outstanding debt in fiscal 2010;
--Relatively low debt burden with no increases planned;
--ONT operates as a system airport of Los Angeles World Airports and benefits from its experienced management and financial support.
Offsetting credit concerns include:
--Loss of passenger traffic has caused several adjustments to financial operations which could lead to erosion of financial flexibility should business performance remain challenged;
--Competitive air passenger service area with four competing facilities in the vicinity, a fact which could make relatively high CPE problematic;
--General macro and regional economic weakness that has already decreased the supply of air service could ultimately dampen -demand for air service;
--Moderate to high cost structure for an airport of this size and scope;
--High market share concentration in passenger service (Southwest 53%) and cargo service (UPS 66%).
Future rating actions are likely to be influenced by the following:
--Future trends in passenger traffic;
--Management's continued ability to pass costs along to airlines pursuant to the residual agreement;
--Ability to maintain strong cash position.
SECURITY:
The bonds are secured by a net revenue pledge of the airport.
CREDIT SUMMARY:
Enplanements have dropped 44% from their peak in FY 2008 of 3.55 million to 1.99 million in FY 2010. From July 2008 to November 2010 ONT averaged year-over-year monthly declines of 9.8%, among the highest in its peer group. For the first five months of FY 2011, passenger traffic was flat. GAAP operating revenues have decreased since the time of the last rating, though at a more moderate rate than enplanements due to the airport's pass-through of costs to the carriers. In 2009, revenues decreased to $75.154 million from $90.807 million, a decline of 17% after increasing in 2008 over 2007 by 3%. In 2010, operating revenues decreased a further 3% to $73.008 million. During this same time period ONT has maintained a solid balance sheet with a FY 2010 cash balance of $36 million which is comparable to the cash balance in FY 2008.
In an effort to address the significant drop in enplanements management has instituted several cost cutting initiatives including the following: running only one runway during nights and evenings to save on utility costs on the airfield; re-deploying employees to LAX to save on terminal costs; consolidating administrative offices; consolidating airline gates used to the core center of the terminal to save on utilities and cleaning and maintenance terminal costs at the extreme ends of the terminals. As a result, operating expenses decreased by 1% in 2008 to $80.383 million from $81.499 million, by 8% to $74.233 million in 2009, and by a further 7% to $68.999 million in 2010. Through expense reduction initiatives and the pass-through of costs to carriers, coverage came in at 1.39x and 1.41x in 2009 and 2010, respectively. While these coverage levels remain consistent with the 'A' category and are more moderate than the analogous declines in enplanements, they fall below Fitch's previous expectations for the period of 1.5x - 2x. Furthermore, Fitch views the airport's ability to weather future stresses to enplanements or expense levels as reduced, a limit which may put additional pressure on coverage going forward.
Southwest comprises roughly 53% of the market; US Airways, American Airlines, and United Airlines each have 6%-9% of the market since 2002. ONT has not lost any carriers since Fitch's last review in 2009; however, it has seen significant reductions in service in recent years. For example, weekly departures dropped to 487 in January 2011 from a peak of 918 in June 2007 with no clear indication of when service will return to anywhere close to peak levels. Jet Blue Airways and Frontier Airlines have tried to serve this market in the past, but ultimately withdrew service in FY 2009. Given the current economy and the average cost per enplanement's rising to approximately $13.50 in 2010 up from $9.70 in 2008, it is unlikely that any new carriers will enter this market and ramp up service to any meaningful level within the next three years.
The LA/Ontario International Airport is located 35 miles east of downtown Los Angeles and serves the Inland Empire, including the counties of San Bernardino, Riverside, and eastern portions of Los Angeles and Orange Counties. The airport's service area has historically been a warehousing hub for national trade moving from the Ports of Los Angeles and Long Beach to other parts of the country. The service area is also home to several tourist destinations that include Palm Springs, Palm Desert, Big Bear, Lake Arrowhead, and Lake Perris. The economy has been negatively impacted by the construction and finance industry as well as the collapse of the housing and credit markets. The latest unemployment rate of 14% is relatively higher than the 10% national average and could lead to further softening in demand for air service. Fitch will continue to monitor passenger traffic and management's corresponding response.
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance,' (Aug. 16, 2010);
--'Rating Criteria for Airports,' (Nov. 29, 2010).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745
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