NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A-' rating on approximately $207.6 million of outstanding Birmingham Airport Authority, Alabama (BAA, or the authority), airport revenue bonds, series 2003 A&B, 2007, and 2010.
The Rating Outlook is Stable.
KEY RATING DRIVERS
--Historically Stable Service Area: The Birmingham-Shuttlesworth International Airport (BHM) serves an established service area. Its predominantly origin and destination (O&D) enplanement base has experienced some softening in recent years but remains in the 1.4 million range. The airport experiences no material airport competition but is exposed to carrier concentration, with Southwest Airlines (Southwest) and Delta Airlines (Delta) accounting for 41% and 29% of BHM's enplaned passengers, respectively.
Revenue - Volume: Midrange
--Adequate Airline Cost Recovery Structure: The compensatory airline use and lease agreement (AUL) which took effect in fiscal 2012 enables the airport to use non-airline revenues to keep cost per enplanement (CPE) at a level favorable for the carriers. However, the agreement's one-year rolling terms expose the airport to future renewals should traffic and revenue performance change.
Revenue - Price: Midrange
--Conservative Debt Structure: The airport benefits from a fixed-rate debt structure with passenger facility charge (PFC) revenues irrevocably committed to portions of the 2010 debt service.
Debt Structure: Stronger
--Solid Financial Metrics: The authority has maintained average debt service coverage ratios (DSCRs) of 1.9x since 2005 and currently holds 420 days cash on hand, though this figure could fall as the authority finishes its capital program. DSCR should become more diluted as debt service associated with the debt used to fund development of the new terminal becomes payable, but is projected to remain above 1.5x going forward. CPE is also expected to rise as new terminal operating costs come online. Considering BAA's strong historical expense management record and the more attractive debt terms achieved at financial close compared to projections, CPE is currently projected to meet expectations even in a sluggish traffic performance scenario. However, sustained traffic underperformance could result in higher CPE than expected upon original financing of the 2010 capital program.
Debt Service & Counterparty: Midrange
--Large Capital Program: BAA assumed additional leverage with the 2010 bond issuance to help fund its $369 million capital improvement program, largely focused on a modernization of the airport's aging terminal facility. The program is currently around 74% complete, with all terminal projects having been completed on time and to budget.
Infrastructure & Renewal: Midrange
RATING SENSITIVITIES
--Sustained Traffic Declines: Continued service reductions by BHM's major carriers that cause enplanements to fall below the 1.3 million range with only modest recovery thereafter;
--Sluggish Revenue Performance: Revenue underperformance driven by either continued enplanement declines or non-airline revenue growth which does not meet expectations;
--Stressed Financial Metrics: DSCR remaining below 1.5x on a sustained basis, or CPE stabilizing above $13;
--Operating Expense Volatility: Management's inability to control costs effectively.
SECURITY
The bonds are secured by a pledge of net revenues, including any transfers of funds to the revenue fund, less current expenses.
CREDIT UPDATE
The airport is the main air transportation facility in the state of Alabama and faces little in-state competition. The vast majority of traffic is O&D, providing a stable base with minimal exposure to hubbing decisions of any particular carrier. Overall annual enplanements have averaged 1.5 million since 2000 through various economic cycles, having grown from around 1 million in 1990. Nevertheless, as major carriers have refined their flight schedules following mergers, BHM has experienced two straight years of enplanement declines of 1.9% in fiscal year (FY) 2012 and 2.5% through 11 months of FY 2013, following a modest recovery in FY 2011. Management is projecting flat enplanement growth in FY 2014.
Over the past year, Southwest has cut routes to New Orleans, Nashville, Louisville, Jacksonville, and Phoenix, and has reduced services to Baltimore. In November of 2012, Delta announced that it would be cutting service to Memphis. Management indicates that Southwest plans no further reductions at this point. Partly mitigating Southwest's contraction, Delta and American have added mainline aircraft to their fleets at BHM, marginally increasing their capacity.
Parking revenue, historically the primary driver of revenue at BHM, has endured sluggish performance in line with enplanements. Concession revenue grew in fiscal 2012 despite the decline in enplanements, driven by an increase in auto rental revenues. However, the auto rental revenue line is expected to decrease by approximately 5.4% in FY 2013. It will be important for the airport to maintain stable annual enplanements and generate healthy growth of non-airline revenues as the new terminal comes fully online so as to preserve financial metrics.
After increasing to a six-year high of 2.22x in FY 2010, DSCR fell back to 1.85x in FY 2011, broadly in line with its average of 1.84x since 2005 and in line with other 'A-' rated airports. Coverage in 2012 again rose to 2.2x, a function of increased airline revenues associated with the authority's new AUL, which came into effect on July 1, 2011. Along with the increase in coverage was an increase in CPE, which migrated up to $8.91 from around $7 where it had remained over the previous three years, on account of the new airline rate structure and declining enplanements. This CPE increase was broadly consistent with expectations, with the effect of declining enplanements offset by the authority's strong expense management; operating expenses for FY 2013 are expected to be $22 million, 12.6% below projections at the time of the 2010 bond issuance.
Looking forward, DSCR is expected to fall as interest and principal on the 2010 debt becomes payable -annual debt service requirements will increase from $10 million in 2011 to $16.5 million by 2016, with approximately $5 million of PFC revenues committed annually to offset debt service. In a scenario of moderately declining enplanement growth in FY 2014 followed by slight growth through 2016, coverage drops to around 1.6x, recovering thereafter as airline rates and charges increase with new terminal expenses and debt service. Fitch-calculated coverage, which treats PFC as a revenue instead of an offset to debt service, falls to a minimum of 1.4x. In an alternative scenario in which Southwest cuts back its presence at BHM by 25% in 2014, CPE rises above $13 in the near term as higher airline revenues are needed to cover debt service and operating expenses.
A sponsor-provided forecast at the time of the 2010 bond issuance projected relatively flat enplanement growth for FY 2012, followed by a sustained 3% annual growth rate thereafter. Actual performance has lagged this trend, but expense savings and lower debt service costs than originally modeled at financing have allowed airport financial metrics to remain competitive. Fitch will continue to monitor performance. Further enplanement contraction combined with non-airline revenue growth which materially lags projections could result in negative rating pressure.
Fitch is aware that a tragic accident occurred in late March involving the collapse of a terminal monitor. Fitch understands that the contract documents indemnify the authority against legal or financial obligations as this event occurred during the contractors' warranty period. Fitch does not anticipate any long-term investor risk at this time.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--Rating Criteria for Infrastructure and Project Finance, July 11, 2012;
--Rating Criteria for Airports, Nov. 27, 2012.
Applicable Criteria and Related Research:
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695600
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=794277
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