Dépêches

Fitch Revises Los Angeles/Ontario Intl's (California) Outlook to Negative; Affirms $80MM Revs

Dépèche transmise le 10 mars 2009 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings affirms the 'A' rating on the outstanding $80 million Department of Airports of the City of Los Angeles, Ontario International Airport (LA/Ontario, or the Airport) revenue bonds. The bonds are secured by a net revenue pledge of the airport with a final maturity on all bonds by 2026. The Rating Outlook on all bonds is revised to Negative from Stable.

The Negative Rating Outlook reflects the 13.5% decline in enplanements during calendar year 2008 combined with the continued weakening of the economy in the Greater Los Angeles Area and the potential for further declines. The pace of monthly enplanement declines picked up dramatically in the fourth quarter of calendar 2008, with month over month reductions recorded at 24%, 31% and 27% for October, November and December, respectively, resulting in revenue pressures on airport financial operations. The month over month reductions continued with a 31% decline in January 2009 and should the airport experience this pace of decline through calendar 2009, enplanement levels would be roughly equivalent to those in 1990 and 1991 levels. Management has responded quickly to its changing operating profile, by adjusting terminal rates and charges up by 15%, reducing the workforce by about 75-100 positions, and by reducing utility expenses by moving carriers to the core of the terminal and by limiting airfield use to one of two runways for evening and night operations. As a result of these adjustments, Fitch expects debt service coverage to remain solidly between 1.50 times (x) and 2.00x over the next three years, slightly down from 2.09x in fiscal 2008. If enplanements continue to decline, management would likely need to use the airport's strong balance sheet to stabilize the operating profile.

The 'A' rating reflects the airport's solid liquidity position and low debt levels (unrestricted cash representing 45% of total outstanding debt in fiscal 2008), a very modest and level debt profile (with debt service payments representing only 8% of total operating revenues in fiscal 2008), with no counterparty or interest rate risk, diverse revenues from airline, non-airline, and cargo operators, a high origination and destination (O&D) market (above 90% O&D traffic); and cargo activity that balances and helps to stabilize airport operations and finances. LA/Ontario operates as part of a larger system, owned and operated by the Los Angeles World Airports (LAWA), and thus benefits from experienced management and diverse revenues that can be transferred interagency, subject to the discretion of management. The airport has no major capital projects over the next 5-10 years and intends to fund maintenance capital projects from airport cash and from passenger facility charge revenues and grants.

Credit concerns are primarily focused on airport competition, being located in a multi-airport region, passenger and cargo service concentration risk, as well as on the significant decline in passenger traffic in early fiscal 2009 (down 23% between July 2008 and December 2008, over the same period the year prior). The overall macro and regional economic trends are forcing airlines to adjust schedules as demand softens. The airport may end fiscal 2009 with a decline in traffic between 20%-30% lower than fiscal 2008 results. Both passenger and cargo service face some market share concentration risk with Southwest Airlines representing about 51% of the market and United Parcel Service (UPS) representing about 73% of the air cargo market.

Since Fitch's last review in 2006, the airport demonstrated a stable to declining passenger base, while maintaining a relatively stable balance sheet and operating statement through calendar year 2007 and the first three months of 2008. The month over month reductions in passenger enplanements began in April of 2008 declining to 11% by June and then accelerating to 31% in January 2009. The declines reflect the volatile fuel prices which impacted airline service, a deepening national recession and the impact of the regional housing market on disposable income in the airport's service area. Despite the declining passenger base, airport management made corresponding adjustments to the LA/Ontario operation that produced a debt service coverage ratio in 2007 and 2008 of 1.72x and 2.09x, respectively. While operating expenses grew by 11% in fiscal 2007, management made significant adjustments to bring down expenses by 1% in 2008. Associated operating revenues in 2007 and 2008 grew at 6% and 3%, respectively. The airport's balance sheet is relatively strong and the entire airport operation does benefit greatly from its relationship to LAX.

Southwest comprises roughly 51% of the market, while US Airways, American Airlines, Delta Airways, and United Airlines each have all operated in a range of 5%-7% of the market since 2002, all providing the core group of air carriers serving LA/Ontario. Over the recent history of the airport, Express Jet Airlines, ATA Airlines, and Aloha Airlines all provided service to LA/Ontario, but have subsequently filed for bankruptcy and dissolved. Jet Blue Airways and Frontier Airlines have tried to serve this market in the past, but ultimately decided to withdraw service. Given the current economy and the average cost per enplanement rising to approximately $14.00-$15.00 in 2009 and beyond, up from $9.70 in 2008, it is unlikely that any new carriers will enter this market and ramp up service to any meaningful level within the next three years.

The LA/Ontario International Airport is located 35 miles east of downtown Los Angeles and serves the Inland Empire, including the counties of San Bernardino, Riverside, and eastern portions of Los Angeles and Orange Counties. The airport's service area has historically been a warehousing hub for national trade being throughput the region from the Ports of Los Angeles and Long Beach to other parts of the country. The service area is also home to several tourist destinations that include Palm Springs, Palm Desert, Big Bear, Lake Arrowhead, and Lake Perris. The economy is being negatively impacted by the construction and finance industry as well as the collapse of the housing and credit markets. Current unemployment numbers are relatively higher than average and could lead to further softening in demand for air service. Fitch will continue to monitor how the economy impacts passenger traffic.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.