Fitch Affirms Sunport’s Senior Lien Revenue Bonds at ‘A+’, Subordinate Lien Revenue Bonds at ‘A’; Outlook Stable – 5/12/16
Fitch Ratings-Chicago-11 May 2016: Fitch Ratings has affirmed its ‘A+’ rating on the $8.86 million outstanding senior lien airport revenue bonds and the ‘A’ rating on the $5.66 million outstanding subordinate lien airport revenue bonds issued by the city of Albuquerque, New Mexico on behalf of the Albuquerque International Sunport (ABQ). Fitch does not rate the airport’s privately-placed $30.03 million senior lien parity airport revenue bonds. The Rating Outlook is Stable.
The ratings reflect ABQ’s monopoly within the state combined with competitive costs per enplanement (CPE), extremely low leverage and declining debt service profile. The traffic outlook remains a primary concern as enplanements have steadily declined since 2008 due to the recession and have continued through fiscal year 2015. Near-term traffic stresses were thought to be likely in light of the recent expiration of the Wright Amendment at Dallas Love Field. However, these stresses were less severe than expected for fiscal year 2015, and the airport’s stable financial performance, rapid deleveraging and strong liquidity position mitigate the operational challenges facing the airport.
KEY RATING DRIVERS Revenue Risk – Volume: Weaker Limited Competition, Negative Traffic Trend: The airport provides primary commercial service for the State of New Mexico, with limited competition. A degree of concentration risk exists with Southwest Airlines (‘BBB’/Stable Outlook) representing 56% of the 2.4 million enplanements in fiscal 2015 (ending June 30); however, this risk is partially mitigated by a high O&D traffic profile, at approximately 93% of enplanements. Nonetheless, traffic has fallen 30% since the peak in 2008 and more losses are expected until2017.
Revenue Risk – Price: Midrange Hybrid Agreement, Manageable Costs: The hybrid airline use and lease agreement, which expires June 30, 2016, provides relatively stable financial and operating results and airline CPE levels. Management’s effort to contain costs and maximize non-airline revenue has resulted in a relatively competitive airline cost profile, which should keep CPE levels under $9 over the next five years.
Infrastructure Development & Renewal: Stronger Affordable Capital Improvement Plan: No additional debt needs are expected over the next five years to support the airport’s $201 million capital program. Additional revenue from an increased passenger facility charge (PFC) rate (raised to the maximum rate of $4.50) provides further financial flexibility to support the airport’s capital improvement needs on pay-as-you-go basis.
Debt Structure: Stronger (Senior Lien); Midrange (Subordinate Lien) Conservative Debt Profile: All outstanding debt is fixed rate with a remaining weighted average life of 1.3 years.
Financial Metrics Low Leverage, Robust Liquidity: The airport maintains sufficient balance sheet liquidity, at 417 days cash on hand (DCOH), and a low level of leverage, at $19 per enplaned passenger or 0.5x net debt-to-cash flow available for debt service. Strong debt service coverage levels, at 2.75x on the senior lien and 2.5x at the aggregate level in fiscal 2015, are expected to be maintained given the airport’s declining amortization profile.
Peer Group: The airport’s peer group includes Boise, Idaho (‘A+’/Outlook Stable) and El Paso, Texas (‘A’/Outlook Stable). El Paso is rated one notch lower than ABQ due to its smaller size and less defined CIP and infrastructure needs. The airports each feature high debt service coverage, low leverage and a moderate CPE level commensurate with their respective carrier base. Additionally, Albuquerque and El Paso are both experiencing effects from the Wright Amendment expiration, which may result in additional traffic weakness in the near term.
RATING SENSITIVITIES Negative – Enplanement declines greater than moderate single digit reductions currently anticipated by management;
Negative – Additional debt for capital projects, not currently expected, leading to either higher leverage metrics or a dilution in debt service coverage;
Positive: The airport’s size and traffic profile limit positive rating movement.
SUMMARY OF CREDIT The airport’s traffic base continues to experience a downward trend as enplanements in fiscal 2015 fell 4.4%, but have recovered 0.5% in fiscal 2016 through January. Historically, connecting Southwest passengers accounted for approximately 11% of total enplaned passengers. This number was predicted to drastically decrease to about 1.5% as Southwest is no longer required to stop in Albuquerque when flying from Dallas Love Field, but is now expected to remain around 4%. Including the merger with AirTran, Southwest enplanements, reflecting 57% market share at ABQ, have fallen 17% since fiscal 2012. Looking forward, Southwest enplanements are expected to stabilize at 1.24 million through 2019 – resulting in 2.4 million total enplanements.
Alaska Airlines began daily nonstop service between ABQ and Seattle in September 2014, and expects to join as a full signatory beginning fiscal 2016. Boutique Air, a commuter airline, commenced service to Silver City in January 2015, in addition to non-stop service to Carlsbad and Los Alamos, NM. US Airways introduced seasonal nonstop service to Charlotte, NC in June 2015. Allegiant Air will begin non-stop services from ABQ to Austin and Las Vegas in June 2016. Frontier Airlines ceased operations in 2014, but will honor its contractual obligations until fiscal 2016.
The weakening enplanement profile has affected the airport’s operating margin moderately, as it has recently fallen below its historical average. Due to passenger level effects on non-airline revenue, total operating revenue decreased 7.2% in fiscal 2015 while operating expenses decreased 2.4% due to a drop in fuel, maintenance, and contractual services costs. The airport’s operating margin fell below its five year average.
Fitch’s base case assumes a 0.5% traffic increase in fiscal 2016 based on January year-to-date (YTD) performance, followed by a 0.2% drop in 2017, based on the airport’s traffic projections (on a percentage basis). Traffic begins recovering from recessionary effects by 0.4% in fiscal year (FY) 2018 and consistently grows approximately 1.3%-1.5% annually starting in FY2019. Airline revenues will increase 0.5%-1% each year beginning 2018, while expenses are set to grow 3.5% compound annual growth rate (CAGR). Non-airline revenue for the most part tracks airport management’s enplanement expectations except in the near term where the CFC rate has been reduced from $3.75 to $2.25. As a result, operating revenue decreases 0.6% CAGR, and CFADS falls 9.9% CAGR. Total debt service coverage ratio (DSCR) minimum is 1.51x in FY2016 before increasing henceforth above 2x in 2017. Max total leverage is 0.16x and gradually decreases, while CPE remains in the $7-$8 range, and DCOH over 400.
Fitch assumed a 5% traffic decrease in fiscal 2016 based on criteria, followed by another 4% drop in 2017 based on stresses added to the airport’s traffic projections (on an absolute enplanement basis). Traffic dips another 1.2% before recovering approximately 1.3%-1.4% annually starting in 2019. Airline revenues will remain flat after 2017, while operating expenses are set to grow 4.3% CAGR. Non-airline revenue for the most part tracks Fitch’s stressed enplanements even in the near term. As a result, total operating revenue decreases 2.6 % CAGR while CFADS fall 16.6% CAGR. Still, the lowest DSCR on total debt is 1.43x before recovering to 1.53x and above. Max total leverage is 0.17x or less while CPE peaks at $8.77, and DCOH remains above 400.
SECURITY The bonds are secured by the airport’s pledge of net revenues from operations
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Applicable Criteria Rating Criteria for Airports (pub. 25 Feb 2016) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=877676 Rating Criteria for Infrastructure and Project Finance (pub. 28 Sep 2015) https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=870967
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