Fitch Ratings has affirmed the 'A-' rating on Ontario International Airport Authority's (OIAA) approximately $34.7 million of outstanding airport revenue bonds. The Rating Outlook is Stable.
The rating reflects Ontario International Airport's (ONT) position as a secondary airport in the highly competitive Los Angeles air trade region, with a history of traffic declines and elevated airline concentration. While ONT's traffic base is primarily origin and destination (O&D), its elevated cost per enplanement (CPE) may challenge its competitive position to attract new air service.
KEY RATING DRIVERS
Secondary Airport in Competitive Region - Revenue Risk (Volume): Weaker
ONT acts as a secondary airport in the highly competitive southern California air service market, primarily drawing passengers from the Inland Empire region. The airport's traffic profile has shown considerable volatility and declines in the past decade; however, traffic has steadily recovered in recent years and enplaned passenger levels remain above 2 million. Carrier services are focused mainly on western region markets, with Southwest dominating ONT's market share, accounting for more than 50% of total enplanements.
Strong Airline Agreement Constrained by Elevated Costs - Revenue Risk (Price): Midrange
The airport operates under a long-term residual airline use and lease agreement (AUL) expiring in 2024, which provides the basis for strong cost recovery. All primary passenger and cargo airlines are participants to the agreement. Although the airport has the ability to pass costs on to the airlines, increasing CPE above its currently elevated level could put the airport at a competitive disadvantage to competing airports in the region.
Manageable Capital Plan - Infrastructure Development & Renewal: Midrange
ONT's infrastructure is in adequate condition with several near-term projects totaling $57 million in progress or soon to be initiated. A comprehensive five-year capital plan is currently in development and expected by fiscal year (FY) 2020. Projects are anticipated to be funded by grants, airport cash flow and potentially some additional new debt, subject to OIAA's passenger facility charge (PFC) funded Settlement Payment obligation to LAWA.
Conservative Debt Structure - Debt Structure: Stronger
The authority's rated debt profile consists entirely of senior, fixed-rate and fully amortizing bonds with final maturity in 2026. Annual debt service is flat between $6 million and $7 million per year. Reserves are surety-funded at 10% of the original par amount. Unless otherwise approved, no additional senior parity debt may be issued until all settlement payments owed to LAWA are repaid. In early 2019, the airport procured $34 million in short-term bank anticipation notes (BANs) to help fund capital projects. Although still preliminary, the airport may utilize a mix of revenue bonds and/or PFC bonds in 2020 to concurrently repay the LAWA settlement amount, refund the BANs and pay for capital projects.
Financial Profile
Due to the residual nature of the AUL, the airport's five-year coverage is expected to average 1.5x (includes additional 25% coverage provided by airport fund transfers) in Fitch's rating case. Net debt-to-cash flow available for debt service (CFADS) remains negative in the rating case, reflecting relatively low debt and sufficient liquidity, though leverage may increase should ONT issue additional debt in 2020. Fitch anticipates OIAA's cash and reserves to remain adequate, supporting a liquidity position averaging 341 days cash on hand (DCOH).
PEER GROUP
ONT's peers include Burbank, CA (Burbank; A/Stable) and Long Beach, CA (Long Beach; A-/Stable). All three airports are secondary airports located in the Los Angeles air trade area. Compared with ONT, Burbank shares similar enplanement levels over 2 million, a residual AUL with full cost recovery, and negative rating case leverage, but has significantly lower CPE around $2.00. Long Beach has much higher rating case leverage of 3.4x on average compared with ONT but shares similar coverage levels below 2x and exhibits comparable liquidity averaging 365 DCOH.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
- Rating case leverage increasing above 4x, on an ongoing basis;
- A return to traffic declines or elevated volatility resulting in reduced enplanement and/or inability to manage costs, which leads to unsustainable CPE levels;
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
- Positive action is unlikely in the near term given the current airport profile and the transitions associated with the ownership transfer.
CREDIT UPDATE
Performance Update
Fiscal 2018 traffic increased 9.6% to 2.4 million, growing for the fourth consecutive year due to the continued addition of new routes, increased flight frequency, and aircraft up-gauging. Nine months fiscal year-to-date (YTD) 2019 traffic growth is robust at 9.4% above the prior period. Management conservatively projects enplanements to grow 2% annually over the next five years.
FY2018 revenues were strong, increasing 11.4% due to higher airport activity and enplanements resulting in increased airline charges, parking revenue and concessions.
2018 expenses were relatively high and increased 18% over FY2017 due to growth in personnel, law enforcement, and fire and dispatch expenses associated with the airport transfer and staff augmentation plan. Management does not expect this growth to be recurring, and anticipates costs to decline and become stable as expenses normalize. Fitch will continue to evaluate the airport's post-transfer performance and expense growth associated with the transition.
FY2018 DSCR was higher than previously expected at 1.8x due to the strong growth in revenues. With the residual agreement, Fitch expects future coverage to remain stable at no less than 1.5x. FY2018 leverage remained negative at -3.0x, while DCOH totaled 339 days. CPE remained elevated at $11.28 due to the increase in aviation revenues, but is still expected to stay below $12 on average.
ONT's capital plan is still under review and a five-year plan is currently anticipated in FY2020. OIAA has started or will start the remainder of its currently approved capital projects, totalling approximately $57 million; roughly $23 million of which is expected to be paid for with grants and the remainder by a short-term bond anticipation note of $34 million. The airport recently completed a major rehabilitation of taxiway S&W in September 2018. Other projects include terminal redesign and modernization, airfield painting and pavement improvements, taxiway design and rehabilitation, new runway lighting, and relocation of cargo operations. ONT intends to refund the short-term note with long-term senior bonds in 2020. However, the airport may not issue additional parity airport revenue bonds until the LAWA settlement is repaid. Though details are still preliminary and subject to change, ONT may potentially utilize a mix of revenue and PFC bonds in 2020 to concurrently repay the LAWA settlement amount, refund the BANs, and pay for additional capital needs. The airport maintains sufficient financial flexibility given its negative leverage position, adequate liquidity levels, full cost recovery and growing enplanement base.
Fitch Cases
Fitch's base case assumes a 9.4% enplanement increase in FY2019 based on YTD performance, followed by a conservative forecast of 2.0% annual growth thereafter. Operating revenues and expenses are assumed to increase at a five-year compound annual growth rate (CAGR) of 4.1% and 3.5%, respectively. DSCR levels are expected to remain near 1.5x under this scenario, while CPE reaches over $12 by 2023.
Fitch's rating case assumes an 8% aggregate traffic stress between 2020 and 2021, followed by zero growth. Operating revenues and expenses are assumed to increase at a five-year CAGR of 3.0% and 2.4%, respectively, giving credit to ONT's cost management during years of declining enplanements. DSCR is again expected to remain around 1.5x given the residual nature of the AUL, while CPE increases to just over $15 by 2023. In both the base and rating cases, ONT should be able to maintain a negative net leverage position as preservation of cash reserves and amortization of outstanding debt continue.
Security
The bonds are payable from net revenues generated by the airport, excluding PFC and CFC revenues. The bonds are additionally secured by a surety sized to 10% of the original par.
