NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms St. Louis, Missouri's outstanding $875.4 million general airport revenue bonds for Lambert-St. Louis International Airport (Lambert) at 'BBB'. The Rating Outlook remains Negative.
RATING RATIONALE:
The 'BBB' rating on Lambert's general airport revenue bonds reflects the airport's increasing level of origination and destination (O&D) traffic making it less susceptible to the scheduling decisions of a particular airline, limited competition within the metropolitan area, a broad and diverse economic base to support the demands of air service, and a modest capital improvement plan (CIP) funded largely by federal grants. Proceeds from the 2009 bond issuance funded a portion of the airport's modernization and renovation program called the Airport Experience Program. However, Fitch notes, given the age of some of Lambert's facilities, additional funding of capital improvements and modernization to maintain an attractive facility could be needed in the medium term.
Key credit concerns include continuing traffic declines along with a front loaded debt service schedule which may impact the cost to airlines, which is partially mitigated by the internal stabilization fund (sized to 35% of maximum annual debt service in 2012). Terms of a new use and lease agreement are also under negotiations and at this time, it is unclear whether a new rate-making methodology will be able to adequately pass increasing costs to airlines even under conditions where non-aeronautical revenue initiatives do not meet management expectations. Additional concerns include the ability to attract new air service given uncertain O&D demand and connecting levels and management's capacity to reduce expenses commensurate with the level of operations at the airport to maintain financial flexibility and cost per enplanement (CPE) levels consistent with similar 'BBB' category airports.
WHAT COULD TRIGGER A DOWNGRADE?:
-- Unfavorable terms of a new use and lease agreement that impede the ability to pass costs to airlines and adjust for the changing structure of the airport.
-- Management's inability to control expenses in the event that enplanement levels assumed by the airport fail to come to fruition.
SECURITY:
The bonds are secured by the net revenues generated through the operations of the airport. In addition, the airport may pledge certain passenger facility charge (PFC) revenues for eligible projects through a supplemental indenture for an individual issue.
CREDIT SUMMARY:
Since American Airlines (American) pulled down services at St. Louis in 2009 leaving a large amount of vacant space, the airport closed two of the four concourses in terminal 1 to cut cost and strengthen concessions at the remaining concourses. There are currently 36 out of 88 gates that are vacant. Although cost cutting measures reduced expenses by 8% in 2009 and were viewed favorably by Fitch, 2010 resulted in a 1.5% increase. Furthermore, the adopted budget for fiscal year (FY) 2011 showed expenses at $94.9 million which will bring operating expense above 2008 levels and erase cost cutting measures taken in the past two years. The airport has embarked on a number of expense reduction initiatives; however, actual expenditures through six months of FY2011 showed spending levels above budgeted amounts. To the extent the airport is able to reduce expenditures, as previously anticipated, while not diminishing core airport services, it would be viewed favorably toward improving overall credit quality.
Southwest Airlines responded to American's reductions by expanding their service by nine flights to six new destinations. Southwest Airlines has become the airport's top carrier with 42.5% market share in 2010, followed by American at 20.2%. Delta has also ramped up services bring their market share to 8.3%.
The airport continues to experience a declining trend in enplanements, decreasing by 12.2% in FY2009 and 6.1% in FY2010. This decline was primarily driven by service changes of American Airlines. The number of connecting enplanements dropped at an alarming pace from 8.1 million enplanements in FY2000 to 1 million in FY2010. O&D traffic has been declining as well but at a steadier pace. Connecting enplanements have been decreasing at a five-year compound annual growth rate (CAGR) of 7.9% while O&D enplanements were declining at a five-year CAGR of 1%. The airport's enplanements are now 83.8% O&D. The traffic consultant forecast was revised to show a recovery starting one year later at 2012. Fitch generally views the consultant's forecast as very optimistic with a 2.7% average annual growth rate (AAGR) between 2012 and 2016 given the uncertainties with regard to economic recovery and carrier service levels.
Revenue visibility remains unclear as a new use and lease agreement is under negotiations. The current agreement is set to expire on June 30, 2011. The financial flexibility of the airport relies on the ability of the new agreement to pass costs down to airline carriers. The new agreement may need to have cost recovery terms to compensate for the lost of concessions due to the closing of the two concourses. Positive results from the use and lease agreement negotiations could improve credit quality. The airport faces additional near-term pressures associated with their front loaded escalating debt service profile along with the likelihood of sustained traffic levels. Without a significant recovery in enplanements, substantial reduction in operating expense must be made to maintain a competitive cost profile. Coverage levels fell to 1.25 times in 2010 and the airport initiated the use of the airport development fund and airline incentive revenue transfers to meet rate covenant. CPE has risen from $10.82 in 2008 to $14.01 in 2010. Under Fitch's no growth traffic scenario, CPE may increase to $18.56 by 2020 if cost cannot be contained.
The Capital Improvement Program at the airport includes the Airport Development Program, a five-year rolling CIP, and Part 150 Noise Mitigation Program. The five-year CIP (2011-2016) is estimated to be $260.2 million. 46% of the plan will be funded by federal grants. Major projects in the plan include the Explosives Detection System for baggage screening which is primarily funded by TSA grant and the Airport Experience Program which will renovate the interior of the operating concourses and renew the old condition of the airport. The Airport Development Program includes plans for airport development over a 20-year planning period. The first phase of the project has been completed in 2006 at the cost of $1.1 billion. Phase 1 included the construction of a new runway as well as acquisition of certain land adjacent to the airport for the construction of new runway. Phase 2 calls for certain terminal improvements, design and construction of new terminals which is placed on hold until passenger demand warrants its reactivation.
The St. Louis metropolitan statistical area (MSA) contains 16-counties in Missouri and Illinois. St. Louis has a well developed economic base with industries composing of transportation and distribution, education and health services, and professional and business services. The MSA of St. Louis has an unemployment rate of 9.7% as of October 2010, on par with state and national averages of 9.4% and 9.7% respectively. Wealth and education levels are above national averages.
Additional information is available at 'www.fitchratings.com'
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', Aug. 16, 2010;
--'Airports Rating Criteria Handbook for General Airport Revenue, Passenger Facility Charge, and Letter of Intent Bonds', March 12, 2007.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
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