Fitch Rates Love Field Airport Modernization Corp (TX) Senior Revs, Series 2015 'A'; Outlook Stable
The rating reflects DAL's resilient and growing traffic base within a strong Dallas metropolitan region. The rating also incorporates a sharp increase in traffic as the airport transitions to a larger base of enplanements following the October 2014 expiration of the Wright Amendment restrictions. Still, traffic growth beyond this transition period will be limited given the operational constraints of DAL's terminal. While Southwest Airlines dominates service with more than a 90% passenger market share and the larger Dallas-Ft. Worth Airport (DFW) airport serves the metroplex, these risks are adequately mitigated by Southwest's long-term commitment to serving the airport along with the established underlying demand. Further, senior lien leverage is moderate and evolves down relatively quickly given minimal capital needs going forward. Additionally, the airport's solid cost recovery framework should provide for continued stable financial performance.
KEY RATING DRIVERS
Revenue Risk: Volume - Midrange
Carrier Concentration Offsets Service Area Strength: DAL is the second major domestic airport serving the economically strong Dallas-Fort Worth metroplex. The airport served 4.4 million enplanements in fiscal 2014 (ended September 30), of which 77% were origination and destination (O&D) passengers. The elimination of DAL's domestic, nonstop service restrictions has already led to enplanement increases of more than 40% in the first six months of fiscal 2015, reflecting significant increases in nonstop low-fare domestic travel offerings and capacity increases by carriers. Enplanement levels are expected to stabilize at around 7 million by fiscal 2016, with longer term growth at DAL being constrained by the airport's permanent 20-gate terminal capacity. Southwest Airlines (Southwest; Fitch rated 'BBB'/Positive Outlook) accounts for over 90% of enplanements and scheduling decisions could impact operational performance. Air service competition with DFW remains an ongoing concern, although Fitch views DAL as a strong complimentary airport for the air trade service area.
Revenue Risk: Price - Stronger
Solid Cost Recovery Framework: DAL operates under a cost-center residual use and lease agreement (AUL), with a 20-year term lasting through 2028 that provides for sound carrier commitment and stable financial performance, even with the new debt and the expected annual reimbursements for Southwest's non-recourse special facilities bonds. Budgeted fiscal 2015 airline costs are low for a medium-hub airport at approximately \$5 per enplanement but are expected to rise only moderately over the forecast period to about \$9 by fiscal 2024 taking into account the new debt and Southwest reimbursement payments. Fitch notes that this cost per enplanement (CPE) level will be competitive at a national level for medium-hub airports and is projected to be below forecasted costs at DFW. DAL is exposed to operating deficits at the city-owned executive airport and heliport; however, surpluses generated from other non-airline revenues are more than sufficient to offset these cashflow shortfalls. Should there be considerable service reductions, or a Southwest cessation of operations, reimbursement payments for the special facility bonds would terminate in full; thus, ensuring the airport maintains an attractively low CPE for new entrants.
Infrastructure Development/Renewal - Stronger
Manageable Capital Plan: The airport expects to debt-fund approximately \$180 million in costs associated with the construction of a new parking garage with senior lien, parity series 2015 and series 2016 bonds. Separately, its capital improvement plan (CIP) for fiscal 2015-2020 reflects works totalling \$187 million expected to be funded with a combination of federal grants (24%), passenger facility charge (PFC) revenues (51%) and internal liquidity (24%). While there are no assumed debt issuances for the 5-year CIP, the airport's longer term plans include approximately \$36 million in bond proceeds from future issuances in 2022 for airfield related works. Key airport facilities are in good condition following the recent completion of the reconstructed terminal and new concession areas that should well accommodate projected traffic levels.
Debt Structure Risk - Stronger.
Conservative Debt Structure: There are currently no general airport revenue bonds outstanding. Following the proposed 2015 and 2016 bond issuances, the airport system's debt profile will have all fixed-rate debt with level debt service requirements, reaching maximum annual debt service (MADS) of \$17.4 million in fiscal 2033 and a final maturity in fiscal 2036. While the system's sum sufficient rate covenant is more limited than for other airports, all other structural features are satisfactory.
Financial Metrics:
Moderate Leverage and Robust Coverage: The airport system's initial senior lien leverage is estimated at a moderate 6.2x in fiscal 2016, evolving down to a low 3.8x in fiscal 2018 after capitalized interest period ends and debt service costs start being recovered through airline rates and charges. Senior lien debt burden is lower than peers at approximately \$29 debt per enplanement (\$36 per O&D enplanement). Liquidity is expected to remain modest at \$30 million (adjusted for inflation) or 164 days cash on hand given the requirements of the airline agreement. Fitch's base case senior coverage averages about 2.7x between fiscal 2019 and 2024. Under Fitch's rating case that incorporates a 20% decline in enplanements in 2018 followed by steady recovery, debt service coverage ratios and leverage do not materially vary from the base case, while CPE is also projected to remain under \$10.
Peers:
Comparable rated peers include airports with material exposure to a single carrier, including Chicago's Midway Airport (Southwest accounts for more than 90% of enplanements) and Long Beach (Jet Blue at 80% of enplanements). Midway currently has higher overall leverage and airline costs. Long Beach has limitations for service growth and while its leverage and CPE levels are similar to DAL, it also has a narrower operating profile as a small hub airport and somewhat limited ratemaking flexibility.
RATING SENSITIVITIES
Negative: A material downshift or volatility in the traffic profile given the Southwest concentration could lead to negative rating action;
Negative: Significant increases to DAL's current plans for borrowings or airline costs as a result of underperforming trends in non-aviation revenues or higher operating expenses could pressure the current ratings.
Positive: Not likely given the traffic limitations and the service exposure to Southwest.
SUMMARY OF CREDIT
The series 2015 bonds are expected to be the first of the two new money issuances planned for the airport that, collectively, are expected to fund approximately \$180 million in costs associated with the design and construction of a new 5,000 space public parking garage (Garage C) at DAL. Proceeds of the series 2015 bonds will be used to fund approximately \$100 million of Garage C costs and issued in a fixed-rate mode amortizing through fiscal 2035. Under the current plan of finance, the Corp plans to issue another \$92.8 million in 2016 to fund the remaining estimated \$79.9 million of Garage C project costs. Both series of bonds will have funded debt service reserve accounts.
DAL is a medium hub airport located approximately seven miles northwest of the city's business district serving the economically vibrant Dallas metropolitan region and the Dallas Fort Worth metro area. The airport, together with Dallas Executive Airport the Heliport, are managed and operated as an airport system by the city's aviation department. Southwest's headquarters are adjacent to the airport; Southwest has operated at DAL since 1971, capturing more than 90% of the airport's market share since then. DAL has a unique history for a U.S. airport as Wright Amendment restrictions have been imposed on DAL since 1979, limiting permitted service to destinations within Texas and to four neighboring states. Later amendments allowed four additional states for service as well as one-stop and through-ticketing to other markets. Starting in October 2014, all restrictions for domestic service have been lifted.
DAL's enplanements grew at a 1.6% compound annual growth rate (CAGR) between fiscal 2000 and 2014. The airport suffered a 20% drop in enplanements in fiscal 2002 following the September 11 terror attacks which negatively impacted air travel throughout the country. Following a period of recovery, enplanements rose significantly (up 20%) in fiscal 2007 driven by an elimination of the through-ticketing restriction. The airport's steady growth was interrupted once again in fiscal 2009 when enplanements declined by nearly 5% due to the economic recession after which they grew at a 2.4% CAGR between fiscal 2009 and 2014 reaching peak enplanement levels of \$4.3 million. The pace of connecting traffic growth slightly decreased over this period, resulting in 23% of volumes in fiscal 2014 compared to 25% in fiscal 2010.
With the ending of the Wright Amendment, the number of non-stop destinations at the airport immediately increased to 44 from 14 and the number of daily departures increased to 172 from 130. Increasing seat capacity and destinations by Southwest and new mainline service from Delta Air Lines and Virgin America airlines resulted in a 40% increase in enplanements during fiscal 2015 year-to-date, through March. While Southwest remains the main air carrier at DAL, operating on 16 of the 20 gates (in addition to the one gate it shares with Delta), its market share decreased to approximately 91% of enplanements in the first six months of this fiscal year from 96.5% in fiscal 2014. Delta has operated at the airport since fiscal 2009 and began mainline service in October 2014, currently operating on two gates (including the one it shares with Southwest) and capturing just about 2% of total enplanements. Virgin America began its operations at DAL in October 2014, operating on two remaining gates and now makes up about 6% of the airport's enplanements. Based on the current schedules, the airport's traffic consultant expects enplanements to grow by 43% in fiscal 2015 and another 12.6% in fiscal 2016, nearing the maximum level of operations at the 20-gate terminal. Following this transition period, Fitch believes growth will taper to minimal increases of less than 1% per year, reflecting the service area's travel demand and the terminal constraints at the airport.
Demonstrating its long-term commitment to DAL, Southwest (and the other signatory carriers) executed a 20-year renewal of the residual AUL in fiscal 2008. This airline agreement approach has provided for stable airline costs and financial performance, and is expected to continue to do so through the forecast period. While Southwest secures the payments on the Corp.'s series 2010 and 2012 special facility bonds, issued for the reconstruction of the terminal building, the city and Southwest also entered into a revenue credit agreement which provides for a mechanism to credit back to Southwest the annual net facility payments subject to Southwest making their payments obligations and maintaining a material presence at DAL. The AUL includes provides rate setting terms that are sufficient to cover these facility payment reimbursements, net of other eligible revenues. Currently, the airport applies \$10 million in PFCs and roughly \$7 million in letter of intent (LOI) revenues to facility payments prior to making revenue credit reimbursements payments to Southwest; however, the LOI funds will expire in 2018.
The airport system's five-year CIP is currently manageable at \$187 million and does not require new bond issuances (net of \$180 million for the new parking garage funded with debt proceeds). The city's future airfield needs for the period between fiscal 2021 and 2024 are currently estimated at \$143 million and the city contemplates funding approximately \$36 million of these costs with future bonds.
The sponsor forecast reasonably considers operational constraints of a reasonable 10 turns per day for each of the 20 gates. Traffic is projected to grow to a little over 7 million by fiscal 2016 and increase at a 0.5% CAGR thereafter through fiscal 2024. Non-airline revenues track enplanement and inflationary growth, while airline revenues start rising in fiscal 2018 to support the new debt service requirement of the 2015 and 2016 bond issuances. Operating expenses are assumed to grow at above inflationary growth rates (3.7% CAGR between fiscal 2016 and 2024), including a bump in expenses when Garage C opens in fiscal 2018. Incorporated in the forecast is the issuance of additional debt in 2022 for future airfield projects.
These assumptions are consistent with Fitch's view of the airport's medium-to-long term growth and operating environment. Under this scenario, CPE increases to a maximum of \$9.06 in fiscal 2024 and airport revenue bond debt service coverage (DSCR) ranges from 2.53x to 2.85x (net, without any rolling coverage or revenue accounts). Leverage, calculated as net airport revenue bond debt/cash flow available for debt service, is 6.24x in fiscal 2016, decreasing to 2.96x in fiscal 2019. When considering all costs and obligations, including in the leverage calculation all special facility bond debt and treating PFCs and LOI as revenues to cash flow available for debt service, initial aggregate leverage is high at 13.88x in fiscal 2016 but quickly declines to 9.47x in fiscal 2019. Total DSCR averages 1.31x (net of PFCs and LOI grants applied to Southwest's debt service).
Under a Fitch rating case scenario that assumes a 20% decline in enplanement in fiscal 2018, followed by a four-year growth recovery to fiscal 2017 levels, CPE is projected to reach a very moderate \$9.21 in fiscal 2024. Under this scenario, debt service coverage remains robust with a minimum of 2.38x in fiscal 2024 providing ample financial cushion. Fitch notes that annual net remaining revenues, after the payment of all operating and debt service costs as well as revenue reimbursements to Southwest, range between \$8.5 million and \$12 million, providing for a buffer in the event that operating costs, including those of the Executive Airport, exceed projections.
SECURITY
The senior lien general airport revenue bonds are secured by a pledge of the net revenues generated at the airport on a senior basis.
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