Dépêches

Fitch Affirms El Paso, TX's Airport Revs at 'A+'; Outlook Stable

Dépèche transmise le 23 février 2011 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the underlying 'A+' rating on approximately $7 million in outstanding airport revenue refunding bonds, series 2003, issued by the City of El Paso, Texas (the city). The Rating Outlook is Stable.

RATINGS RATIONALE:

The ratings reflect the following credit strengths:

--El Paso International Airport's (the airport) role as the only viable option for air service for the western Texas region and the airport's strongly origination and destination (O&D) oriented traffic profile (at approximately 90% of enplanements);

--Relatively strong liquidity combined with extremely low levels of financial leverage and a short maturity profile (debt burden of about $4.54 per enplaned passenger or -1.22 times (x) net debt/cash flows available for debt service (CFADS) with level debt service through 2016);

--Comparatively low cost structure with cost per enplaned passenger (CPE) at $5.39 in fiscal 2010 (fiscal year ending Aug. 31);

--Very healthy debt service coverage levels through the economic downturn, with coverage levels of 4.4x or greater over the last four fiscal years (through fiscal 2010);

--Large contributions from non-airline revenue sources (at approximately 60% of operating revenues);

--Moderately scaled capital improvement program (CIP) funded largely by federal grants. Although moderate level of additional debt will accompany the CIP within the next year, modest impact to debt service coverage is expected.

The ratings reflect the following credit concerns:

--Airline concentration with two carriers, Southwest Airlines (52%) and American Airlines (22%), comprising approximately 74% market share;

--Volatile enplanement fluctuations and the risks present at a small hub airport (1.55 million enplanements in fiscal 2010);

--Static revenue growth trend, with revenue declines in fiscal years 2009 linked to capacity reductions and declines in passenger activity at the airport;

--Somewhat weaker demographic profile of the air service area relative to other metropolitan statistical areas (MSA) in Texas.

KEY RATING DRIVERS:

--Downsizing of aircrafts presently serving the airport or substantial reduction in service by Southwest Airlines and American Airlines that would affect the cost structure resulting in rising rates and charges;

--Management's inability to control expenses in the event that enplanement levels assumed by the airport fail to come to fruition;

--Additional leverage that would meaningfully dilute coverage levels;

--Execution of a new use and lease agreement that is sufficient to support the airport's outstanding and future debt service requirements through adequate insulation against potential declines in enplanements and concessions, and that allows management to recover a majority of its fixed and variable costs through increased aeronautical charges.

SECURITY:

The bonds are supported solely by the net revenues of the airport, after the payment of maintenance and operating expenses.

CREDIT SUMMARY:

About one-half of the airport's enplanements are held by Southwest Airlines (Issuer Default Rating [IDR] rated 'BBB'; Outlook Stable by Fitch), representing 52% of total enplanements in fiscal 2010, making the airport especially susceptible to scheduling shifts by that carrier. American Airlines (IDR rated 'CCC' by Fitch) is the next largest carrier at 22%. Given the carrier concentration, any major loss of Southwest or American flights may result in an even lower traffic base with difficult recovery prospects. The concentration risk is tempered to some degree by the carriers' longstanding operating stability at the airport; the airport's long-term stability will be heavily influenced by the two carriers' continued commitment.

The airport's position as a major airport within the western Texas and southern New Mexico region and its high percentage of O&D passengers (90% of the airport's traffic) serve to mitigate the risk presented by the small scale of operations. However, while the airport's O&D traffic base provides a relatively stable base of service, the airport is susceptible to both the changes in passenger demand that are largely based on economic environment and scheduling decisions of individual airlines. The combination of a high O&D base and low leverage are key offset factors that support the 'A+' ratings on the bonds.

The airport's enplanements fell at a compound annual growth rate (CAGR) of 3.4% between fiscal 2007 and 2010, with the largest decline of 10.3% in fiscal 2009 over the previous year. Enplanements were essentially flat (up 0.9%) in fiscal 2010 as compared to fiscal 2009, reflecting some signs of recovery. The airport has forecast a reasonable 0.1% enplanement decline in fiscal 2011 and 0.4% increase for fiscal 2012 and 2013.

The airport's airline agreement employs a cost-center residual approach for landing fees and a compensatory terminal. The agreement previously expired in 2007, has been repeatedly extended under similar rate setting terms, and now expires in August 2011. The airport is currently renegotiating the terms of a new signatory carrier agreement; the new proposed agreement is expected to maintain the existing hybrid rate-setting structure with no substantial differences. Managing the future airline agreement to provide for continued financial flexibility will be key to rating maintenance. The airport's cost per enplaned passenger (CPE) was $6.13 in fiscal 2009 and declined to $5.39 in fiscal 2010. Management's cost saving initiatives resulted in flat growth in operating expenses in fiscal 2009 and 2010. CPE is budgeted to slightly increase to $5.65 in fiscal 2011. Relative to other airports of similar size and scope of operations, this CPE is still competitive. Although the airport's traffic profile and carrier concentration are generally more comparable to lower-rated airport credits, Fitch believes the airport's financial strengths and competitive cost profile are key drivers to maintaining the rating at the current 'A+' level.

The airport's finances in fiscal 2010 were stable, with approximately $15 million in unrestricted reserves (197 days of unrestricted cash on hand) and 60% of operating revenues generated by non-airline sources. Operating revenues have grown at a CAGR of 1.1% from fiscal 2007 to fiscal 2010, while costs have grown at a rate of 4.5% over the same period. According to preliminary estimated fiscal 2010 results, operating revenues increased by approximately 3.1% while operating costs were held flat compared with fiscal 2009. Fitch notes that the airport's strong liquidity position, low cost base, minimal debt burden and sizable non-airline revenue generation, serve to relieve some pressure due to reduced enplanement levels. Management has bolstered non-aviation revenue growth by developing the airport's property to add industrial parks, hotels, and other assets. Non-aviation revenues have comprised at least 56% of total operating revenues since fiscal 2006.

The airport has not issued new money revenue bonds since 1996 and as a result has an extremely low debt burden of approximately $7 million, well below the average of peer small-hub airports. Debt service coverage has been strong, ranging from 10.96x to 4.40x between fiscal 2007 and 2010. Debt service coverage was estimated at 4.97x in fiscal 2010 and is expected to decline to 3.74x in fiscal 2011. The outstanding series 2003 refunding bonds are scheduled to mature in August 2016, with consistent annual debt service costs of $1.37 million through maturity. When anticipated future borrowings are included, fiscal 2011 combined debt service coverage is estimated at 3.16x. Fitch expects that coverage level will decline in the medium term with expected $15 million debt financing for the pavement rehabilitation and landscaping of the Butterfield Trail Industrial Park. Should the airport move forward with a plan that results in a deterioration of financial margins and coverage of debt, negative rating action would likely result.

Airport terminal and airfield capacity is estimated to be adequate through the near- to medium-term. The airport's total CIP is estimated at $63 million through fiscal 2015. Projects will be funded through a combination of federal grants (50%), revenue bonds (24%), PFC revenues (14%) and airport cash (12%). PFC revenues are collected at a rate of $4.50 per eligible enplanement, and are used for pay-go project funding. These revenues are not pledged to the repayment of the outstanding bonds.

The airport is owned by the city of El Paso and it is operated as a self-sufficient enterprise. The airport opened for commercial air service in 1928 and is the principal airport for the greater El Paso area, other parts of western Texas, northern Mexico, and southern New Mexico. The airport is located on about 6,800 acres approximately six miles east of the city and 10 miles from Mexico border, and plays an important role in the area's commercial and air cargo network. The airport's nearest potential U.S. competitors are located at least 250 miles away.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 16, 2010,

--'Rating Criteria for Airports' dated Nov. 29, 2010.

Applicable Criteria and Related Research:

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345

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