NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed its 'BBB' rating on the city of Pensacola's (Florida) approximately $34.1 million in outstanding series 2008 airport capital improvement revenue bonds issued on behalf of Pensacola International Airport (PNS). The Rating Outlook remains Negative.
KEY RATING DRIVERS
--Narrow Airport Role with Uneven Performance: PNS serves a relatively small local market enplanement base of just over 756,000 supported by a mix of business (50% of traffic), tourism (25%), and a strong military presence (25%). Reflecting the economic environment, enplanement performance has been uneven and could be influenced in future years due to the presence of competition at other regional airports. PNS' direct air service is somewhat limited to serving traffic into connecting hub markets, with enplaned passengers on regional jets comprising a relatively large 43% of the total base. Carrier concentration remains elevated with Delta Airlines (Issuer Default Rating [IDR] 'B+'; Outlook Stable) accounting for nearly half of total enplanements and now serving a single destination -- Atlanta.
Revenue Volume: Weak
--Limited Cost Recovery Framework: The airport operates on a month-to-month basis under an extension of the prior airline use and lease agreement which expired in 2008. The agreement is technically compensatory on the terminal side and residual on the airside, but ultimately costs in the terminal that are not chargeable to the airlines are included in the calculation of landing fees. The execution of a longer extension is uncertain. Meanwhile, airline cost per enplanement (CPE) remains moderate at $7.04 in fiscal 2012 (ended Sept. 30), but this figure represents an increase of 6% over the 2011 total of $6.62. Airlines provide for only 33% of operating revenues, creating dependency on both non-airline revenues and capital fund transfers to support operations and annual debt service obligations.
Revenue Price: Weak
--Moderate Debt Structure: PNS' capital structure includes 79.3% fixed rate debt outstanding, 14.7% synthetically fixed through an interest rate swap with BBVA Compass Bank (IDR 'BBB'; Outlook Stable), and 7% unhedged variable rate debt, including a $6.3 million loan which assumes a variable rate of interest on Oct. 1, 2017. Aggregate debt service increases slightly through 2019, and then steadily falls to maturity.
Debt Structure: Midrange
--Constrained Finances: Airport leverage is elevated at 9.9x net debt/cash flow available for debt service, meaningfully above other airports rated 'BBB.' Low debt service coverage marginally above 1.0x without capital fund transfers and low balance sheet liquidity remain credit concerns. PNS is currently working with the FAA through a potential reimbursement for land purchases which could add to its cash balances.
Debt Service and Counterparty Risk: Weak
--Minimal Capital Expenditure Needs: PNS recently completed its 2008 expansion and renovation program ($36 million), and its upcoming capital program is modest through fiscal 2017. Spending needs should be met by grant funds, with no debt required in the medium term. A $6.3 million loan was extended to the airport in 2012 and is being used to meet capital needs from fiscal 2012 onwards. In addition, PNS was recently awarded an $11.1 million grant from the Florida Department of Transportation (FDOT) for airside improvements.
Infrastructure Development & Renewal: Strong
RATING SENSITIVITIES
--Ongoing Lack of a Longer-term Airline Cost Recovery Framework: Should PNS continue to operate on a month-to-month basis under the AUL that expired in 2008 and fail to reach a longer-term agreement that generates both healthy and stable financial performance under current traffic levels, Fitch would likely lower the rating one or more notches.
--Sluggish Traffic: A lack of markedly improving passenger traffic levels could trigger a downgrade.
--Lack of Broad Improvement in Financial Metrics: Continuation of the airport's narrow debt service coverage ratios generated from net operating revenues and/or meaningfully increasing CPE could lead to a downgrade.
--Expense Fluctuations: Though Fitch recognizes improvements to the airport's expense profile, continued volatility could lead to a downgrade.
SECURITY
The bonds are secured by the net revenues of PNS' operations and certain funds under the bond resolution.
CREDIT UPDATE
PNS' enplanements have experienced moderate fluctuations over recent years. Traffic rebounded by a combined 11.2% in fiscal 2011 and 2010 after realizing a reduction totaling 16.5% over the previous two years. Capacity cuts of nearly 4% in fiscal 2012 as a result of nationwide adjustments by the airlines, particularly at small-to-mid size airports such as PNS, led to a 3.1% enplanement decline to just over 756,000 in that year. However, the first eight months of fiscal 2013 have seen airlines increase capacity by 4.2%, leading to more marginal enplanement growth of 1.3%. In addition, Southwest has announced a twice-daily service to Nashville and once-daily service to Houston Hobby beginning November 3. As the airport's rolling use and lease agreement leads to a dependence on non-airline revenue generation on the terminal side, lack of meaningful traffic growth would continue to drive sluggish financial performance.
Fitch recognizes the marked improvement in PNS' operating expense profile over the last year and eight months. Operating expenses in fiscal 2012 declined by nearly 12% as the airport began outsourcing staff in certain areas and renegotiated existing contracts with service providers. These actions created enhanced efficiencies compared to previous arrangements for police, janitorial, parking management, and building maintenance services, and have led to additional year-over-year decreases of nearly 5% through eight months of fiscal 2013.
PNS has also been able to establish additional sources of contractual non-airline revenues going forward. Starting this fiscal year, the airport was able to negotiate an increased reimbursement from the Transportation Security Administration (TSA) for law enforcement services which will lead to an additional $68,000 annually over the current contract. In addition, the airport hotel has just opened on airport property over which the operator is required to pay a minimum annual rent guarantee (MAG) of $108,000 starting in 2014. The airport is also undergoing a process to relocate and improve its concession infrastructure, a development which management projects will lead to a significant increase to the MAG required from concession operators. Currently, through eight months, final fiscal 2013 non-airline revenues are projected to increase in excess of 10%.
Fitch views the above improvements, as well as the ability to sustain these results, as necessary for PNS to retain an investment-grade financial profile. However, the airport's leverage metric at nearly 10x on general airport revenue debt is well above average for small hub airports, typically closer to 4x, especially of concern given the historical narrow coverage generated on a net revenue basis. Furthermore, considering the airport's small service area and competition from nearby airports with similar low-cost carrier services, the lack of a renewed agreement with airlines that adds more clarity to the longer-term ability of the airport to recover operational costs and generate increased cushion above the airport's fixed cost base would leave the airport highly exposed to discretionary action on the part of airlines. The failure to implement an arrangement with airlines that provides solid cost recovery and improving financial performance under current traffic levels going forward would likely lead to a downgrade.
Fitch's base case currently projects a 7.1% increase in net operating income for debt service from actual 2012 through forecasted 2017 that leads to a stabilization of CPE below $8. Fitch-calculated debt service coverage marginally improves from current levels and does not require additional charges back to the carriers. Increased capital fund transfers above what PNS projects are also not required to maintain debt covenant compliance. These transfers have averaged $2.3 million the last 5 years, and are projected to even out below $800,000 after fiscal 2013.
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 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=797316
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