NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'BBB+' rating on the City of Dayton, Ohio's outstanding $33.4 million series 2003 and series 2005 airport revenue bonds for Dayton International Airport (Dayton or the airport). The Rating Outlook is Stable.
KEY RATING DRIVERS
Strong Regional Competition: Dayton Airport serves mostly an origination and destination (O&D) market with 1.3 million enplanements. However, the airport's enplanement base can be volatile due in part to the high degree of competition from nearby Cincinnati/Northern Kentucky International Airport (Kentucky Airport) and Port Columbus International Airport (Columbus Airport). Historically, enplanements grew as much as 14.3% and declined by as much as 15.4% over the last decade resulting in a 10-year compound annual growth rate (CAGR) of 1.3%. The airport is subject to low carrier concentration risk, with no single airline exceeding 26% of market share.
Revenue Risk - Volume: Weaker
Full Cost Recovery: Carriers operate under an annual operating permit. Rate setting is cost center residual for airfield and terminal cost centers. Management has made a significant effort to improve the competitive position of the airport, reducing cost per enplanement (CPE) to $3.80 in 2012 from $13.84 in 2005.
Revenue Risk - Price: Midrange
Conservative Debt Structure: All outstanding debt is fixed-rate and fully amortizing with no refinance risk. Annual debt service payments are flat at $3 million through 2020 then decline to $2.4 million until the final maturity in 2032. No additional debt issuances are contemplated in the near term.
Debt Structure: Stronger
Low Leverage and Solid Liquidity: The airport has low leverage with net debt to cash flow available for debt service (CFADS) of .21 times (x) in 2012. Debt service coverage of 2.87x in 2012 is lower than 3.43x in 2011 but still provides strong financial protection and remains similar to historic levels. The airport also has a strong liquidity position with $26.9 million of unrestricted cash, equivalent to 415 days cash on hand.
Debt Service and Counterparty Risk: Stronger
Manageable Capital Improvement Program (CIP): The 2013-2017 CIP totals $71.3 million funded primarily by grants, passenger facility charge (PFC) revenues, and customer facility charge (CFC) revenues. The program is primarily focused on routine maintenance of the existing terminal and airfield.
Infrastructure Development and Renewal: Midrange
RATING SENSITIVITY
--Management's ability to maintain solid financial profile and very low cost structure to its airlines.
--Ability to maintain traffic levels despite competition from larger airports operating in the region.
--Deterioration of the airport's strong liquidity position can limit the airport's ability to manage the CPE level.
SECURITY
The bonds are secured by net revenues generated by the operations of Dayton Airport.
CREDIT UPDATE
Dayton's traffic has increased by 2.8% to 1.3 million enplanements in 2012, after increases of .4% in 2011 and .9% in 2010. Year-to-date traffic growth is approximately 2.3%. Historically, traffic levels have demonstrated volatility due to competition from nearby airports. Local area passengers may opt between Dayton, Cincinnati (55 miles from the city) and Columbus airport (70 miles). Fitch notes that the close proximity to competition in Cincinnati and Columbus and the consequent enplanement volatility limits upward ratings movement of the airport.
The airport is serviced by a diverse group of carriers. Delta is the leading carrier with 26% of enplanements, followed by AirTran (19.5%), United Airlines (17.4%), US Airways (17.1%), American (12.1%), and Frontier (6.6%). AirTran is currently in the process of rebranding into Southwest which began service to Denver in 2012. Frontier discontinued service in May 2013 to consolidate their operations in Cincinnati. However, management does not expect this change to materially impact traffic levels since the Denver route is currently served by Southwest and United.
The airport's financial performance is generally strong. The airport has made significant efforts in recent years to improve their competitive position. From 2005-2010, passenger airline revenues were reduced by 80% to $3.3 million while concession revenues were increased by 23% to $16.3 million. During the same period, operating expenses were reduced by 30% to $18 million, largely due to reduction in personnel. However, expenses grew by 11% in 2011 and 15% in 2012 due to some restoration of personnel and higher maintenance cost associated with the new inline baggage system. Fitch believes that strategic management of operating expenses is important for the airport to remain competitive given the price sensitive nature of the region. Uncontained expense growth absent enhancement to non-airline revenues can lead to higher cost for air carriers.
Fitch has conducted several sensitivity analyses. Under Fitch's base case scenario which assumes flat to slight traffic growth along with higher expenses in 2013, CPE is expected to increase to the $4 to $5 range in the near term to maintain current coverage levels. Fitch's analysis also applied a higher sensitivity in the rating case scenario which assumes traffic decline of 15% followed by a modest recovery. Under such scenario, the airport can manage CPE in the $4 to $5 range while maintaining coverage level above 2.0x. Although the airport is highly dependent on non-airline revenues which are largely driven by passenger levels, Fitch believes that the airport's high coverage and strong liquidity can help manage CPE levels during periods of traffic volatility.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July 12, 2012);
--'Rating Criteria for Airports' (Nov. 27, 2012).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695600
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=793707
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.