Fitch Ratings-Chicago-25 August 2017: Fitch Ratings has affirmed the ‘A-‘ rating on
approximately $176 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 is Stable.
Summary: The 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. Moreover, the
five-year hybrid airline use and lease agreement (AUL) strengthens the airport’s cost recovery
framework and should allow BAA to preserve its healthy liquidity position. Traffic volatility due
to the economic weakness in the service area may pressure the airport’s operational and financial
flexibility, though its current position is supported by solid financial performance with fiscal year
(FY) 2016 coverage of 1.46x.
Established Service Area, Uneven Traffic Performance (Revenue Risk: Volume – Midrange):
The airport serves a market that is essential to the state of Alabama. Its predominantly origin and
destination (O&D) enplanement base; however, it has experienced some softening from peak levels
in 2008, declining 18.7% peak-to-trough. The airport experiences no material airport competition
but is exposed to carrier concentration, with Southwest (‘BBB+’/Outlook Stable) and Delta Air
(‘BBB-‘/Outlook Stable) accounting for 32% and 33% of the airport’s enplanements in FY 2017,
Hybrid Cost Recovery Structure (Revenue Risk: Price – Midrange): 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 costrecovery
framework, however CPE in the $12 to $13 range remains at an elevated level for a small
regional airport.
Modest Capital Program (Infrastructure Development and Renewal – Stronger): The airport’s
current five-year CIP (2018 — 2022) totals $113 million and primarily focuses on construction of
a new CONRAC facility and relocation of an airport taxiway. Funding is expected to come from a
combination of state and federal grants, passenger and customer facility charges and local funds.
BAA has been collecting CFCs since 2013, which should help fund the new CONRAC facility.
There are no plans at this time to issue new debt.
Conservative Debt Structure (Debt Structure – Stronger): 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: Airport leverage continues to devolve, to 6.2x (Net Debt to CFADS) in FY 2016
from over 8.0x in FY 2013, and should continue this trend as existing debt amortizes. Leverage is
projected to average 4.4x over the forecast period in the rating case. Coverage levels remain stable
at 1.46x in FY 2016 while liquidity continues to be a positive attribute, increasing to 588 days cash
on hand (DCOH). Forward looking rating case debt service coverage ratios (DSCRs) average 1.60x
when including fund transfers and PFC receipts as debt service offsets, and 1.42x when including
transfers and PFC receipts as revenue.
Birmingham’s peers include Virginia’s Capital Region Airport (‘A’/Stable Outlook) 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 $5 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.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
–Sustained traffic losses that lead to elevated leverage above 4x for a sustained period of time;
–Sluggish or volatile operating performance, driven by either further enplanement declines, nonairline
revenue growth below expectations, or inability to effectively control costs;
–Stressed financial metrics with DSCRs falling below 1.5x or the need to maintain CPE at higher
levels to support airport costs and maintain stable coverage levels.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
–The airport’s traffic profile and financial metric forecast make positive rating action unlikely in
the near term.
Performance Update
Traffic is beginning to stabilize with 1.3% enplanement growth in FY 2016 and 1.7% growth in
FY 2015, following a 20% peak-to-trough contraction from 1.6 million annual enplanements in
FY 2008 to 1.3 million in FY 2014. However, passenger traffic experienced monthly declines
over FY 2017 except in the latter months, with total year-end enplanements down 1.4% from the
prior year due to the Birmingham area economy lagging behind the national economy with a job
growth rate of -1.0%. The strong enplanement growth of 6.6% for the month of June has carried
over into the 2018 fiscal year, with estimated passenger figures for July exhibiting similar levels of
growth due to the summer holiday peak season. The airport expects 1.5% year-over-year growth in
enplanements over the next five years, as the local economy is projected to grow at an annual rate
of 2.0%.
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 32% and 33% of enplanements, followed by
American Airlines and United Airlines, with 22% and 11% market share.
Revenue performance in FY 2017, with 11-months reported, is expected to end 1.7% below
budget. In FY 2016, total operating revenues remained flat, with the concession revenue increase
of 22.0% offset by a 17.9% decrease in space rentals. Operating expenses increased 10.0% over FY
2016 due to increased pension expense, security and fire protection, and repairs and maintenance.
For FY 2017 11-months year-to-date, costs are down 4.1% from budget and the sponsor forecasts a
moderate 2.0% compound annual growth rate through FY 2022.