CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Cleveland, Ohio's approximately $805.8 million of outstanding airport system revenue bonds at 'A-'. The Rating Outlook is revised to Negative from Stable. Cleveland also has $58 million in series 2013A bonds purchased by U.S. Bank National Association that are not Fitch rated.
The airport system consists of Cleveland-Hopkins International Airport (the airport) and Burke Lakefront Airport.
The Negative Outlook reflects concerns over the current declining direction in passenger traffic coupled with potential uncertainties with regard to United Airlines' (UAL, Fitch IDR 'B', Positive Outlook) commitment to the Cleveland market as the existing airline use agreement approaches expiration in 2015. A material reduction in connecting services, as seen in other secondary hub airports for network carriers, could leave Cleveland exposed to very high airline costs due to the debt service profile. Cost per enplanement (CPE) is above the $15 level and would be driven much higher should the airport's traffic be limited to its origination/destination (O&D) component. A renewal of a similar airline agreement and stabilization of traffic based on a sound commitment from United (representing 68% of total enplanements in 2012) should allow for cost and financial flexibility, and support the airport's credit at the current rating level. Adverse developments in traffic leading to a less competitive position in airline costs to maintain minimum coverage levels would likely result in a downgrade to the 'BBB' category.
KEY RATING DRIVERS
DECLINING TRAFFIC WITH VOLATILITY AND SOME HUB RISKS: High dependence on sustained operational service from UAL is somewhat offset by minimal competition for air service within the Cleveland metropolitan area. Enplanements continued to decline in calendar 2012 by 2.2% and are 21% below 2007 levels. Traffic has recovered slightly through the first five months of 2013, increasing 1.6% over 2012. While the settlement agreement between UAL and the State of Ohio Attorney General is intended to offer some protection of United's services, the airport remains at risk over time for a reduction in hubbing operations, which is not likely to be replaced by another carrier.
Revenue Risk - Volume: Midrange
ABOVE-AVERAGE COST PROFILE: Airline revenues represent a relatively high share of airport operating revenues. The above-average airline cost structure ($16.26 CPE in 2012) is highly sensitive to changes in traffic volumes. The existing airline agreement is residual-based rate setting and provides near-term service and revenue protections through contractual minimum flight level commitments through 2015.
Revenue Risk - Price: Midrange
STABLE DEBT STRUCTURE: The system has a relatively conservative debt structure consisting of approximately 86% fixed-rate debt and 14% unhedged variable-rate bonds, with reduced exposure to counterparty performance and basis risks as a result of swap terminations.
Debt Structure: Stronger
HIGH DEBT AND STRONG LIQUIDITY: The airport's total net debt-to-cash flow available for debt service (CFADS) is elevated at 9.39x but will evolve downward as the existing debt amortizes. A strong balance sheet with reserves equating to 778 days cash on hand helps mitigate potential traffic and operating revenue volatility. In 2012, the airport's debt service coverage with other available funds increased to 1.66x from 1.58x in 2011. Management anticipates coverage to remain at historical levels over 1.50x.
Debt Service and Counterparty Risk: Midrange
MODERATE INFRASTRUCTURE PLAN: The airport's five-year capital improvement program (CIP) is estimated at $116 million with approximately $22 million currently unfunded. It is possible the unfunded portion could be new debt but airlines would have to approve through the Majority-in-Interest (MII) process.
Infrastructure Renewal & Development: Stronger
RATING SENSITIVITIES
--Significant changes in United's operations at the airport, particularly a reduction in or elimination of connecting traffic, would likely result in a rating downgrade;
--Increases in the airport's cost structure resulting in both a less competitive CPE and a similar deterioration of financial flexibility and coverage of debt would pressure the credit;
--Material changes in the airport's future debt needs.
SECURITY
The bonds are secured by a first lien on the net revenues of the city of Cleveland's airport system.
CREDIT UPDATE
Enplanement declines continued in 2012 for the fifth consecutive year. Traffic seems to be leveling out as the airport has seen minor growth of 1.6% through the first five months of 2013. Rating risks are centered on the continued uncertainty regarding UAL's operational commitment at the airport. UAL has largely kept a sizable base of operations to cover its O&D and connecting services, and daily departure levels currently exceed the minimum requirement level under the settlement agreement.
The airport's finances continue to perform well, with no material changes in the airport's liquidity position from 2011. Operating expenses in 2012 came in 6.1% lower than 2011. The airport expects operating expenses to decline by an additional 8.5% in 2013. CPE remains elevated at $16.26 in 2012, but management expects 2013 CPE to decline to $15.05 as a result of significant cost cutting. Should connecting traffic face reductions or elimination, the airport would see impacts to both passenger facility charge (PFC) and non-airline revenue generation. To maintain a comparable level of coverage ratios, CPE levels would likely be raised.
Despite the decline in enplanements, debt service coverage increased in 2012 to 1.66x (including other available funds). The airport expects to use all annual PFC collections to support annual debt service payments through 2021. Going forward, the airport expects to generate coverage levels above 1.50x.
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=797650
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