Dépêches

Fitch Rates Cleveland, Ohio's 2009C-D Airport System Revs 'A'; Outlook Negative

Dépèche transmise le 29 juillet 2009 par Business Wire

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A' underlying long-term rating to approximately $206 million of the City of Cleveland, Ohio's airport system revenue refunding bonds, series 2009C and 2009D, scheduled for negotiated sale the week of Aug. 24, 2009. Fitch also affirms its 'A' rating on the airport's outstanding parity debt. Following issuance of the series 2009C and 2009D bonds and the redemption of the series 2008A-C and 2008E bonds, the total outstanding debt will be $898.7 million. The Rating Outlook is Negative.

The bonds are secured by the net revenues of the City of Cleveland's airport system, which consists of Cleveland-Hopkins International Airport (the airport) and Burke Lakefront Airport. Proceeds of the transaction will refinance the airport's series 2008A-C and series 2008E bonds and pay for related costs associated with terminating certain swap positions.

The Negative Rating Outlook reflects concerns that the airport's cost competitiveness and financial profile continue to be dependent on continued hubbing activity at the airport; relatively optimistic passenger recovery rates; and the ability to realize the anticipated increases in non-airline revenue sources. Any material deviation from these assumptions or the forecast within the outlook period may lead to a less competitive cost per enplanement (CPE) and more narrow financial operations, possibly warranting a lower rating.

Fitch views the forecasted enplanement growth rates starting in fiscal 2011, averaging 3.3% through 2013, as somewhat optimistic given the uncertainties in recovery of both the area economy and the aviation industry. Assuming these enplanement forecasts, CPE is expected to increase from its current level of $10.13 to $17 or higher by 2011. These cost levels would not be consistent with the current rating level. Furthermore, should these assumptions not be realized, and enplanements are even lower than forecast, the CPE will face additional upward pressure in those years.

The 'A' rating reflects the high origin and destination (O&D) passenger base (73% in 2008), strong liquidity for an airport with a residual rate-making methodology, stable operating margin, and minimal airport competition within the metropolitan area. Offsetting credit factors include the airport's higher than average cost structure, market share concentration (67% in 2008) of Continental Airlines (Continental, Fitch Issuer Default Rating of 'B-' with a Stable Outlook), Continental's potential to continue to make service changes at the airport, continuing enplanement declines in every month since August 2008, and a higher than average debt burden when compared to similarly sized airports.

In addition, the composition of the outstanding debt, while improved since Fitch's February review, now includes approximately 11.9% in un-hedged variable-rate bonds and 7.5% in synthetically fixed variable-rate bonds which exposes the airport to renewal risk as 19.4% of the portfolio is enhanced by letter of credits (LOCs). Proceeds from the series 2009C bonds will pay termination costs of approximately $8 million associated with swaps on existing series 2008A and 2008B bonds, while the series 2009D bonds will refund outstanding series 2008E bonds with two years remaining on its existing LOC.

The airport system serves Northeast Ohio and the Cleveland Metropolitan Statistical Area (MSA). Its 16-county air service region has a population of 4.1 million. The airport recorded 5.55 million enplanements in fiscal year 2008, a 3.1% decrease over the prior year, largely due to reduced seat capacity from many airline carriers. Scheduled seat capacity was up 3.7% from January 2008 to August 2008 over the same period in 2007 but was down sharply by 11.3% from September to December over the same months in 2007. However, pursuant to recent announcements, the airport is scheduled for approximately 14% in capacity reductions for 2009. Enplanement levels for the last quarter of 2008 were at or below levels seen in 2004 and for the first five months of 2009, enplanements were down approximately 17.3% compared to the same period in 2008.

Continental, which utilizes the airport as one of three major domestic hubs, and its affiliated code-share commuter partners (Continental Express and Continental Connection) maintained the largest market share at approximately 67% of the airport's total enplanements during 2008, a 2% increase over 2007, followed by Southwest Airlines (Southwest, senior unsecured debt rated 'BBB+' by Fitch) at 10%.

The airport's finances at year end 2008 (fiscal year Dec. 31) were strong, with 380 days of cash on hand, 50% of revenues were generated by non-airline sources, and the airport's healthy operating margin was 33%. Coverage of annual debt service was 1.49 times (x) the last two fiscal years and is expected to be at least 1.46x or higher through fiscal 2013. The airport has increased its use of passenger facility charge (PFC) and letter of intent (LOI) monies as an offset to debt service in 2009. As a result, Fitch expects the airport will have less PFC and LOI money available as an offset in the future, creating further pressure on costs in order to maintain stable debt service coverage levels.

Hopkins' cost structure is considerably higher than average with a 2008 CPE of $10.13, up from $9.56 in 2007 by 6%. The airport's base case assumes a 13.6% decline in enplanements in 2009 (up from 7.2% projected in the February 2009 forecast) and growth of 0.8%, 2.8%, 3.5%, and 3.8% in 2010-2013, respectively. This results in a peak CPE of $17.28 in 2011, up from the prior forecast of $14.09 in 2012. Fitch views the growth projection for enplanements as somewhat optimistic since enplanements have only averaged a 1% average annual growth rate in the past five years. Should continued economic pressures and unemployment increases lead to a decline in regional air travel demand, enplanement growth at the airport could be challenged in the near-term.

Fitch evaluated two alternative enplanement scenarios to assess the impact of the current economic environment on enplanements. One scenario assumed a 15% decline in traffic in 2009, no growth in 2010 and 2011, a modest 1% growth in 2012, and 2% growth thereafter. The second scenario contemplated a higher 19% traffic decline in 2009, a 2% decline in 2010, no growth in 2011, and the same assumptions for 2012 and beyond. The results indicate the CPE in 2009 dollars peaks at $17.61 and $19.46 in 2011, respectively, for scenario one and two. While these alternative cases do not include any operational changes the airport could implement, they do include some non-airline revenue from efforts related to parking, rental cars, and food and beverage that are already underway or planned.

While the airport operates on a cost center residual basis, management's response to the current and expected enplanement reductions is to impose a hiring freeze and implement non-airline revenue initiatives. While Fitch recognizes the initiatives will likely result in increases in revenues over time, the forecast increases of between 9%-18% by 2013 for each of rental cars, concessions, and parking could be a challenge to achieve given the capacity reductions and current economic environment.

The airport's capital improvement program (CIP) totals a modest $162 million over the next several years, with minimal additional debt planned. The CIP is discretionary, allowing the airport to undertake projects as demand warrants.

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.