Fitch Affirms Birmingham Airport Authority, AL’s Revs at ‘A-‘; Outlook Revised to Stable
Fitch Ratings-New York-26 August 2016: Fitch Ratings has affirmed the ‘A-‘ rating on approximately $182.9 million of outstanding airport revenue bonds issued by the Birmingham Airport Authority, AL (BAA) on behalf of the Birmingham-Shuttlesworth International Airport. The Rating Outlook has been revised to Stable from Negative.
The Outlook revision to Stable reflects signs of traffic level stabilization with BAA experiencing combined 3.1% enplanement growth in fiscal years 2015 and 2016, following years of traffic contraction. Moreover, a new five-year hybrid airline use and lease agreement (AUL) strengthens the airport’s cost recovery framework and should also allow BAA to preserve its healthy liquidity position.
The ‘A-‘ rating reflects the small regional airport’s established service area with a recent history of traffic contraction, elevated airline costs to support prior debt-funded capital investments, manageable future infrastructure needs and solid financial results. The rating further reflects solid financial performance with preliminary fiscal 2016 coverage ratios are indenture-based 1.8x and Fitch-based 1.6x, respectively depending on whether PFCs are applied as a debt service offset or as revenue.
KEY RATING DRIVERS
Revenue Risk – Volume: Midrange
Established Service Area, Uneven Traffic Performance: The airport serves a market that is essential to the state of Alabama. Its predominantly origin and destination (O&D) enplanement base, however, has experienced some softening since peak levels in 2008, declining 20% peak-to-trough. The airport experiences no material airport competition but is exposed to carrier concentration; with Southwest (‘BBB+’/Outlook Stable) and Delta Air Lines (‘BBB-‘/Outlook Stable) accounting for 34% and 33% of the airport’s enplanements, respectively.
Revenue Risk – Price: Midrange
Hybrid Cost Recovery Structure: A new airfield residual and terminal compensatory AUL went into effect in July 2016 with a five-year term and five-year option to extend. Replacing the older compensatory agreement, BAA has strengthened its cost-recovery framework, however CPE in the $12-$13 range remains at an elevated level for a small regional airport.
Infrastructure Development and Renewal: Stronger
Modest Capital Program: The airport assumed additional leverage with the 2010 bond issuance to help fund modernization of the airport’s aging terminal facility. With the project completed in August 2014, the five-year CIP is down to just $82 million and primarily focused on construction of a new CONRAC facility and relocation of an airport taxiway. BAA has been collecting CFCs since 2013, which should help fund the new CONRAC facility. Further funding for capex is expected to come from free cash-flow, grants, and local funds. There are no plans at this time to issue new debt.
Debt Structure: Stronger
Conservative Debt Structure: The airport benefits from a fixed-rate debt structure with passenger facility charge (PFC) revenue irrevocably committed to a portion of the 2010 debt service. The debt service reserve is 92% cash-funded, and coverage and borrowing covenants are set at a 1.25x requirement.
Financial Metrics Stabilizing:
Airport leverage continues to devolve, to 5.3x Net Debt to CFADS in fiscal 2016 from over 8x in fiscal 2013, and should continue this trend as existing debt amortizes Coverage levels are stable in the 1.5x range (including transfers and treating PFCs as revenues) while liquidity continues to be a positive attribute, increasing to over 725 days cash on hand (DCOH) in fiscal 2016. Forward looking rating case five-year average debt service coverage ratios (DSCRs) should be stable at 1.6x, including fund transfers and PFC receipts as debt service offsets, and 1.4x including transfers and PFC receipts as revenue.
Peer Group: Birmingham’s peers include Virginia’s Capital Region Airport (‘A-‘/Outlook Positive) and Jackson, Mississippi (‘BBB+’/Stable Outlook). All three airports have experienced softening traffic levels but still maintain sufficient liquidity and leverage levels. Capital Region’s CPE, in the $6 range, is more favorable than its peers at the $11 to $12 level. Jackson is rated one-notch lower due to its weaker volume profile.
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Negative – Continued service reductions by the airport’s major carriers that cause enplanements to become more volatile or fall below 1.3 million for a sustained basis;
Negative – Sluggish or volatile operating performance, driven by either further enplanement declines, non-airline revenue growth below expectations, or inability to effectively control costs;
Negative – Stressed financial metrics with DSCRs falling below 1.5x, or CPE stabilizing above $13, on a sustained basis;
Positive: The airport’s traffic profile and financial metric forecast make positive rating action unlikely in the near term.
Traffic is beginning to stabilize with 1.3% enplanement growth in FY2016 following a 1.7% growth in FY2015. Past weakness in traffic activity is evidenced by a 20% peak-to-trough contraction from 1.6 million annual enplanements in FY2008 to 1.3 million in FY2014. Current annual enplanements as of FY16 total 1.35 million. BAA is the main airport in the state of Alabama and faces little in-state competition. The vast majority of traffic is O&D, providing a relatively stable traffic base with moderate exposure to underlying economic conditions, offset by some vulnerability to service change decisions by its carriers. Airline market share remains diversified with Southwest Airlines and Delta Airlines each comprising approximately 33% of enplanements, followed by American Airlines and United Airlines, with 22% and 11% market share, respectively.
A new five-year AUL went into effect in July 2016. The hybrid agreement is terminal compensatory and airfield residual, which gives BAA the flexibility to pass through costs to airlines in order to meet minimum 1.25x indenture debt service requirements. Fitch views the hybrid agreement as a credit positive as it provides a more predictable cost-recovery framework and fund balance preservation, replacing an older rolling compensatory structure with uncertain rate-setting strategies.
Revenue performance in fiscal 2016, with 11-months reported, is expected to end just over budget, though slightly decreased from fiscal 2015 levels. In fiscal 2015, airline user revenues increased 15% and concessions increased 8% yielding a year-over-year total operating revenue increase of 8%, following a 9% increase in fiscal 2014 as portions of the new terminal opened.
Revising preliminary data indicating flat expense growth, per audited fiscal 2015 financials operating expenses increased 5.8% due to an increase in personnel costs, utilities, and maintenance. In line with forecasts, costs also increased 12% in fiscal 2014 related to the terminal modernization project. For fiscal 2016 11-months YTD, costs are down 11% and the sponsor forecasts a moderate 3% compound annual growth rate through fiscal 2021.
With the new terminal now open, the airport’s five-year CIP is manageable at $82 million with funding plans from a combination of state and federal grants, passenger and customer facility charges and local funds. The primary focus of new airport construction is development of a new CONRAC facility and relocation of a taxiway. The full scope of the CONRAC remains under development, but construction is expected to begin in late 2017. At this time there are no plans to issue additional debt.
Fitch’s five-year base case assumes mostly flat annual enplanement growth with an additional 3.5% growth over current levels by fiscal 2021. Airline fees track the sponsor provided forecast and operating expenses average 3% annually following a budgeted increase in fiscal 2017. Under these conditions, debt service coverage ratios average 1.7x with PFCs applied as a debt service offset and 1.5x with PFCs applied as revenue. The airport continues to quickly deleverage and costs per enplanement remain elevated averaging $12.75.
Under Fitch rating case, an aggregate 7% traffic stress is applied across fiscal years 2017 and 2018, mirroring the total contraction the airport experienced in fiscal 2014. Operating expenses are subdued during stress years but then stressed above base case assumptions at 4% per year. The impact to coverage ratios is 1.6x DSCR with PFCs as a debt service offset and 1.4x DSCR with PFCs as revenues. BAA more gradually deleverages and average CPE climbs above $13.60. CPE stabilizing at this level could trigger rating action.
The bonds are secured by a net revenue pledge and certain funds under the bond indenture. A portion of the series 2010 bonds includes an irrevocable commitment of approximately $5 million in PFC funds annually. However, the PFC account is not subject to the lien of the indenture, and any amounts held therein are not included within the meaning of net revenue or otherwise pledged as security for any outstanding bonds.
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