Fitch Ratings has affirmed the ‘A+’ rating on the Kenton County Airport Board (the airport) Cincinnati/Northern Kentucky International Airport (CVG)‘s approximately $46.5 million of series 2016 revenue bonds. KEY RATING DRIVERS Summary: The ‘A+’ rating reflects the airport’s transition to a predominantly origination/destination (O&D) traffic base of over 3.0 million serving the Cincinnati market, benefitting from increased presence of low cost carriers and diversifying cargo services. The rating also reflects the new hybrid compensatory airline use agreement (AUA), allowing future coverage to average over 4.5x in the rating case. Very low leverage as measured by both the airport traffic base and net cash flow, coupled with robust liquidity, provide a strong fiscal position. Shift to O&D Traffic Base (Revenue Risk: Volume - Midrange): O&D enplanements have increased by approximately 42% over the past four years, to over 3.0 million in 2016, despite regional competition, and represent nearly 89% of FY 2016 total traffic. Delta retains significant carrier concentration (51% of 2016 enplanements) although this market share is lower than previous years as a result of its dehubbing. The airport has also realized increased service from low-cost carriers which held approximately 25% of seats as of July 2017. Large cargo services from DHL also diversify CVG’s aviation activity. Sound Cost-Recovery Structure (Revenue Risk: Price Risk - Stronger): A new five-year hybrid compensatory airline agreement started in January 2016 provides for continued strong cost recovery terms and higher airport net revenue generation. Terms include surplus revenue sharing with a terminal concession credit as well as an extraordinary coverage protection clause. Passenger facility charges (PFC) collections are eligible for all debt service payments, and annual receipts of nearly $12 million comfortably exceed debt service obligations. Average cost per enplanement (CPE) decreased over FY 2016 to $6.90 and should remain stable going forward. Modern Facilities and Manageable Requirements (Infrastructure Development & Renewal - Stronger): The $345.9 million capital program through 2021 is well defined. Funding is expected to come from a mix of federal grants, customer facility charge-backed bonds and PFCs as well as other airport funds. Management recently consolidated passenger carrier terminal operations into one modern facility and has allotted approximately $150 million of capex for a CFC-funded consolidated rental car (CONRAC) facility. Capital funding needs are currently being evaluated given that the demand for terminal facilities has grown faster than anticipated (with passengers now above the 2021 projected levels), alongside the unanticipated growth in cargo operations, which may result in additional GARB debt prior to the end of 2021. Favorable Debt Profile (Debt Structure - Stronger): All airport debt is fixed-rate and amortizing through final maturity in 2033. All covenants and reserves are established at standard levels for U.S. airports. Debt service payments remain flat at approximately $4.3 million per annum through maturity. Financial Metrics: Under the new hybrid agreement, coverage increased to 4.16x in FY 2016. Debt to enplanement is very low for an airport of this size, at $14.12 per enplanement, while net debt-to-cash flow available for debt service (CFADS) for FY 2016 was negative. Fitch expects leverage to remain minimal given the cash flow projected to be generated under the airline agreement and the continued debt amortization. Sound cash balances are evidenced by multiple reserve accounts, providing 689 days cash on-hand (DCOH) in FY 2016. PEER GROUP Relevant peers include Memphis (A/Stable) and Louisville (A+/Stable Outlook) airports. Memphis also experienced a significant loss of connecting traffic. However, CVG’s liquidity and leverage metrics compare favorably to Memphis’s (4.6x leverage). Louisville has a smaller traffic base relative to CVG but is similar in its cargo presence. Louisville has modestly higher leverage at 3.1x but a lower airline CPE. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
  • Issuance of new debt that leads to sustained leverage above 5.0x;
  • Though unlikely, a material loss of enplanements that leads to softer coverage and a CPE above historical levels.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
  • Enplanement stability combined with strong coverage and continued negative leverage under the new hybrid AUL.
CREDIT UPDATE Performance Update Enplanements continued a positive trajectory with FY 2016 enplanements increasing 7.1% over FY 2015 to approximately 3.4 million due to increased service by low-cost carriers Allegiant and Frontier. Increased frequency and air service additions by airlines have helped stabilize previous declines in the traffic base. A diversifying carrier mix and growing O&D base continue into FY 2017, with year-to-date (YTD) enplanements through seven months up approximately 14.3% from the same period in FY 2016. Southwest commenced operations at CVG on June 4, 2017, driving the 20.8% and 24.2% increases in June and July, respectively, from the previous year. Though significant carrier concentration risk remains with Delta accounting for approximately half of all enplanements, CVG is benefiting from both legacy and low cost carriers’ increased operations, which have offset Delta’s restructuring of its CVG operations and added diversity to the carrier mix. The overall market has increased and Delta has experienced positive O&D growth each month since October 2015. In June 2017, coinciding with Southwest’s new service, Delta experienced year-over-year growth in local traffic of 17.3% and an overall growth in enplanements of 5.0%. Amazon announced plans in January 2017 to invest approximately $1.49 billion dollars in facilities at the airport, after selecting CVG to service as the principal hub for Amazon’s Prime Air cargo operations. Amazon Prime Air aircraft began operating at CVG in May 2017, utilizing DHL’s CVG hub facility. Cargo at the airport increased 1.8% in FY 2016 and is currently up 30.7% YTD through May 2017 from the same period in FY 2016 as a result of increased DHL operations and the start of Amazon Prime Air operations. Coverage in FY 2016 was strong at 4.16x, primarily as a result of lower than expected expenses. While FY 2016 operating revenues were 2.0% lower than budgeted due to the year-end rates and charges settlement adjustment, expenses were approximately 6.2% lower than budgeted, resulting in robust coverage that exceeded the 3.54x Fitch base case projection. Non-airline revenues increased 9.4% in comparison to budget, primarily attributed to increases in parking and ground transportation revenues. Fitch Cases Fitch’s base case scenario assumes a conservative 8.0% growth rate in enplanements for FY 2017 which reflects YTD 2017 performance and average growth of 1.8% per annum thereafter through FY 2022. The base case also assumes 1.5% average annual airline revenue growth and 2.7% average annual non-airline revenue growth. Meanwhile operating expenses are projected to grow annually at 3.0%. Under such assumptions, coverage ratios average 5.6x in the near term and leverage remains negative. CPE also remains in the competitive mid-$6 level, averaging $6.44 through the forecast period. Fitch’s rating case assumes a near-term enplanement stress of 5.6% in FY 2018, with recovery of 1.8% growth per annum thereafter. The rating case also assumes 2.0% average annual airline growth starting in FY 2019 and a lower 0.7% average annual non-airline revenue growth to reflect the stress to enplanements. Operating expenses are assumed to grow 1.0% in 2018, given the enplanement drop, followed by a higher 3.5% growth per annum thereafter. Under the rating case scenario, coverage averages 4.5x with a minimum of 3.8x in FY 2022, while resulting CPE exceeds $7.00 by FY 2020 and averages $6.92. Leverage remains at negative levels through the forecast period. SECURITY The bonds are secured by a pledge of net airport revenues, and PFC monies can be applied to the full amount of debt service on the 2016 bonds through FYE 2021.