Fitch Ratings assigns an 'A+' rating to Charlotte, North Carolina's (the city) $52 million airport revenue and refunding bonds series 2008B, and affirms the outstanding rating of A+ on the city's approximately $506 million in airport revenue bonds. The Rating Outlook is Stable.
The series 2008D bonds are expected to price on or around Dec. 4, 2008 and will be used to refund all of the Charlotte/Douglas International Airport's (the airport) series 1993A variable rate airport refunding revenue bonds. The city subsequently expects to issue approximately $286 million in series 2008A revenue bonds to fund capital improvements at the airport and approximately $39 million in series 2008C revenue refunding bonds. The bonds are secured by a pledge of airport net revenues.
The 'A+' rating reflects the solid growth within the service area, the airport's extremely low and stable operating costs, its history of strong financial performance, and its healthy financial position characterized by its extremely low cost structure, low leverage levels, strong balance sheet liquidity, and strong debt service coverage levels. Credit concerns center on the volatile state of the airline industry and potential impacts on service, the airport's exposure to US Airways (87% of enplanements), the very high percentage of connecting traffic at the airport (71%), and some degree of airport competition stemming from the proximity of Southwest Airlines out of Raleigh-Durham.
Passenger traffic growth at the airport has been strong in recent years, with the airport achieving a record 17 million enplaned passengers in fiscal 2008. The number of origination and destination (O&D) passengers reached 5.2 million in fiscal 2008, an 8% increase over 2007. Fitch believes that the airport has benefited from US Airways' decision to close its connecting hub at Pittsburg International Airport (Pittsburg) and route some of that traffic through Charlotte. Total enplanements have increased at a 9% average annual growth rate (AAGR) from fiscal 2004 to fiscal 2008, with an O&D AAGR growth of 14% outpacing a 7% AAGR growth in connecting passengers.
US Airways' decision to close its Pittsburgh hub illustrates the primary credit risk, that the airport is gravely exposed to the routing decisions of a single carrier. While there have been several new entrants to the market, including AirTran Airways in fiscal 2005 and jetBlue Airways in fiscal 2006, the airport is expected to remain a US Airways stronghold for the foreseeable future, as no other airline holds more than a 4% share of the market. If US Airways were to restructure its route network and de-emphasize the airport as a connecting hub, it would have an immediate effect on the airport, with some recovery expected in the medium term. However, Fitch recognizes the airport's strong internal liquidity, modest capital demands, flexibility to increase PFC charges, and low cost structure would likely make the airport a prime candidate to be serviced by another carrier should US Airways retrench.
Under a stress case scenario reviewed by Fitch which assumes a 100% reduction in US Airways' connecting activity, airline costs would be significantly higher, near $4.00 per passenger range when Passenger Facility Charges (PFCs) are used to offset debt service. The stress scenario also indicates that coverage would fall to near the low 2 times (x) range as management would increase its PFC collection to $4.50 and use unspent PFC collection to offset debt service, to continue to maintain a low airline cost base. In this scenario, the airport relies heavily on PFC collections in order to maintain a low cost structure, and long-term traffic depressions could substantially affect the airport's ability to continue offsetting debt service as well as negatively affect revenue sharing agreements with the signatory airlines. Mitigants in this scenario include the airport's strong unrestricted cash position of $449 million in 2008 as well as the capacity of the current terminal to handle the airport's existing passenger growth through fiscal 2015 without significant expansion.
In addition to exceptional liquidity, the airport continues to post strong financial results, generating a 53% operating margin and 2.08x debt service coverage in fiscal 2007 when PFC revenues are added to the airport's revenue base. Factoring in approximately $286 million in anticipated series 2008A revenue bonds, the airport forecasts debt service coverage will remain near or above 3.0x through 2013. The high percentage of non-airline revenues (75% in fiscal 2008) from sources such as parking and concessions, combined with provisions for revenue sharing and the airport's continued use of its 1982 terminal, has allowed the airport's cost per enplaned passenger to range between $.66 and $2.12 over the past five fiscal years, although this number does not reflect the special facility bonds issued at the airport.
Financial forecasts through fiscal 2014 call for a 2% reduction in seat capacity in 2009 and subsequently 0.9% growth in enplaned passengers through 2013. Through the financial forecast, the airport's CPE reaches a high of $1.11 in 2010, slowly dropping to $1.02 in 2013. With the issuance of the series 2008 A-D bonds, the airport's capital plan will be fully funded. Other discretionary items in the capital plan call for runway resurfacing and terminal improvements, at approximately $175 million. The airport forecasts these improvements will be primarily debt-financed undertaken after the completion of the third parallel runway in 2010.
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.
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