Fitch Rates Dallas-Fort Worth (TX) Airport Rev Refunding 'A+'; Outlook Stable
RATING RATIONALE:
--The airport is located in a strong primary market area that generates sufficient demand for air service.
--DFW's favorable central geographic location provides for a well-balanced traffic profile for both domestic and international passengers.
--The historically sound financial profile is demonstrated by DFW's competitive cost structure and conservative fixed-rate debt structure.
--DFW relies on its dominant carrier, Fort Worth-based American Airlines (American; Fitch Issuer Default Rating 'CCC'), with approximately 85% market share and a high proportion of connecting traffic.
--Debt per enplanement is expected to approach $200 in fiscal 2015 (ended Sept. 30) or north of $450 per origination and destination enplanements when all of the debt to finance the $1.9 billion (inflated dollars) Terminal Renewal and Improvement Program (TRIP) has been issued.
--While not pledged to bondholders, natural gas revenues were expected to provide the airport with a source of internal liquidity and reduce future borrowing needs, but due to lower production estimates and prices, the revenue projections have been reduced.
KEY RATING DRIVERS:
--The airport's $2.1 billion capital program has been agreed to by the signatory airlines. Should non-airline revenues remain flat after the terminal improvements are completed and the additional borrowing has occurred, DFW's finances could be negatively pressured.
--Beginning in October 2014, all restrictions related to domestic air service to or from a competing airport will be removed and any airline will be allowed to operate non-stop service to all U.S. destinations. Fitch will closely monitor the effects, if any, on air traffic at DFW.
SECURITY:
The bonds are secured by an irrevocable first lien on gross revenues generated by the operation of DFW, as well as passenger facility charge (PFC) revenues to the extent they are specifically pledged to an individual series of bonds. Proceeds of the series 2011A revenue refunding bonds will be used to refund the airport's rental car facility charge revenue bonds, series 1998 and 1999, which financed the construction of the airport's rental car facilities.
CREDIT SUMMARY:
DFW is one of only four airports averaging more than 800 departures per day and ranks eighth in the world for passengers with more than 56 million annually. The airport's most recent enplanement peak of 30.1 million occurred in 2006, with enplanements declining in each of fiscal years 2007-2009. Traffic declines have eased, as fiscal 2010 enplanements were up nearly 1% and fiscal 2011 year to date (through March) are up 2.5%. While American's level of concentration at 85% poses a credit concern, it is Fitch's view that the airport's sizeable local market combined with its favorable geographical location would prompt other carriers to enter the market - albeit over a period of time - should American significantly reduce its operations at DFW.
The series 2011A refunding bonds will be secured by gross revenues of the airport; however, the rental car companies will continue to collect customer facility charge (CFC) revenues and per an agreement, will transfer the amount necessary to pay debt service in each year. The CFC revenues will not be legally pledged to the bonds and excess CFCs can be used for other DFW projects, such as bus purchases and maintenance of the rental car facilities. Since fiscal 2002 (the first year of the $4 CFC charge), CFC revenues have ranged between $16.1 million to $20.4 million with flat annual debt service of approximately $14.7 million. Since debt service coverage from CFC revenues alone has ranged from 1.11 times (x) (fiscal 2003) to a high of 1.39x (fiscal 2007), Fitch believes future CFC revenues will be sufficient to pay the debt service on the series 2011A refunding bonds through maturity in fiscal 2021 (shortened from fiscal 2024).
DFW's new use and lease agreement (use agreement) with the airlines was signed effective Oct. 1, 2010 and has a 10-year term, expiring Sept. 30, 2020. Importantly, as part of the agreement's execution, the airlines have approved the TRIP and an additional $220 million of non-TRIP capital projects (net of grants). Further, the new agreement provides for preferential gate use, DFW will retain all non-airline revenues up to $60 million for future capital which increases with inflation in future years, and introduces rolling coverage.
DFW has historically produced consistently sound financial operations. In fiscal years 2007-2010, the airport had close to two years of unrestricted cash to pay for operating expenses, more than half of revenues were generated by non-airline sources, and cost per enplanement (CPE) for fiscal 2010 equaled a competitive $6.74, down from $7.17 in fiscal 2009 and down from management's estimate of $7.29. In fiscal 2010 the airport has 630 days cash on hand (DCOH) and it expects to maintain at least one year's worth of operating expenses going forward. Debt service coverage equaled 1.25x annually for fiscal years 2002-2010, which is in accordance with the requirement of the prior use agreement.
The TRIP represents the largest component of DFW's airport improvement program and it consists of the renovation and renewal of four older terminals (A, B, C, and E) that were constructed between 35 and 40 years ago. Approximately two-thirds of the $1.9 billion budget will be used for the replacement of aging systems such as electrical, plumbing, heating and cooling, security, fire safety, lighting, and information technology systems. The remainder will be used to upgrade ticket halls, security areas, certain baggage systems, and the creation of concession villages. Construction of each terminal is scheduled to be completed in three phases, since each terminal has three sections, with each phase lasting approximately one year. Initial construction for Terminal A began in late February 2011. Phased renovations for Terminal A are expected to be completed by early 2014 and the remaining terminals (B, C, and E) will follow with completion in 2017. The airport expects to fund 90%-100% of the TRIP with the issuance of debt but various factors could affect the amount of issuance, such as future natural gas revenues; incremental PFC revenues, if enacted into law; other capital needs of the airport; or interest rates on the proposed new debt.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2010);
--'Rating Criteria for Airports' (Nov. 29, 2010).
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745
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Fitch Ratings Primary Analyst Emari Wydick, +1-312-606-2308 Director Fitch, Inc. 70 W. Madison Street Chicago, IL 60602 or Secondary Analyst Seth Lehman, +1-212-908-0755 Senior Director or Committee Chairperson Michael McDermott, +1-212-908-0605 Managing Director or Media Relations: Brian Bertsch, +1-212-908-0549 Email: [email protected]
Source: Fitch Ratings