CHICAGO--(BUSINESS WIRE)--Sept. 9, 2005--Fitch Ratings does not expect the schedule reductions announced by Delta Air Lines (Delta, Fitch Issuer Default Rating of 'C') on Sept. 7, 2005 to have an immediate effect on the financial operations or bond rating of Cincinnati/Northern Kentucky International Airport, which is owned and operated by the Kenton County Airport Board (revenue bonds rated 'A' by Fitch). This largely reflects the fact the schedule changes do not go into force until December 2005, providing airport management ample time to review its budget and take appropriate measures to preserve its financial position, as well as Cincinnati/Northern Kentucky International Airport's (the airport) residual lease agreement and low debt levels.
Delta, which accounted for approximately 95% of total enplanements at the airport through July of 2005, announced that effective Dec. 1, 2005 it will reduce total capacity offered in the Cincinnati market by 26%. Included in this action is the elimination of non-stop service to nine domestic destinations operated by its regional affiliates. Still, the airline will offer 440 daily flights to 122 worldwide destinations from the airport, which will remain Delta's second largest hub behind Atlanta Hartsfield-Jackson International Airport (senior lien airport revenue bonds rated 'A+').
Through July 2005, enplanement activity at the airport increased 9.8% over the comparable period in 2004. Some of this increase reflects Delta's earlier decision to close its hub at Dallas Fort Worth International Airport (senior lien revenue bonds rated 'A+'), with the airline shifting some resources and connecting traffic to Cincinnati. Also, Delta's Simplifares program served to increase originating traffic at the airport by addressing a pricing imbalance that had seen other regional airports gain market share at Cincinnati's expense. While Fitch expects passenger levels to decline from the recent highs experienced by the airport, Delta's new schedule partially offsets these earlier actions, thus future enplanement levels are likely to remain in line with historical averages.
As the airport operates under a residual use and lease agreement, airline revenues should remain stable despite the expected decline in enplanements. However, with Delta reducing its level of activity, airport expenses will now be spread over a smaller base with other carriers likely to see increased costs. The airport boasts a low cost operating environment, with a cost per enplaned passenger of $3.52 in 2004, compared to Fitch's 2003 median of $6.07. The airport had $360 million of bonds outstanding, equaling a modest $32.53 per enplaned passenger.
As Delta indicates its plan should better balance originating and connecting passengers at the airport, where connecting traffic currently represents a high 72% of total enplanements, there should be little change in non-airline revenues generated at the airport. Concession revenues may decline due to lower connecting volume, while revenues driven by local passengers, such as parking and rental car receipts, should remain stable.
Delta continues to face a challenging economic environment, which may ultimately force the airline to file for protection under Chapter 11 of the United States Bankruptcy Code. As the airport maintains a cash balance of $38.5 million, and Delta remains current on payments due under the use and lease agreement, Fitch does not expect such a filing to immediately affect the financial operations of the airport. Furthermore, Fitch does not expect additional schedule adjustments at the onset of any bankruptcy proceedings. However, further rationalization of the carrier's operations may occur during the course of bankruptcy reorganization, particularly if Delta decides to adjust its regional jet fleet, where it reportedly has excess capacity. As the airport remains dependent on Delta for a significant amount of its revenue base, rating action may result should the airline eventually decide to implement another substantial reduction of service at the airport or be forced into liquidation as a result of its current economic circumstances.