Fitch Ratings has affirmed the 'AA-' rating on approximately $154 million in outstanding Orange County, CA airport revenue bonds on behalf of John Wayne Airport (JWA). The Rating Outlook is Stable.
The 'AA-' rating is driven by JWA's strong financial profile evidenced by high coverage, minimal net leverage and robust liquidity, and a stable enplanement base supported by a strong origination/destination (O&D) base within the affluent and stable Orange County, CA region. The airport's strong balance sheet and declining debt service provides sufficient liquidity to fund the capital improvement program (CIP) without further debt issuances.
KEY RATING DRIVERS
Diversified O&D Airport [Revenue Risk - Volume: Midrange]:
JWA is the second largest commercial airport within the Greater Los Angeles Area with a predominantly O&D traffic base of 5.2 million enplanements. The airport's unique traffic caps limit growth but also moderates annual volatility. Southwest is the airport's leading carrier at approximately 43% market share and a stable presence at JWA.
Hybrid AUL Competitive CPE [Revenue Risk - Price Stronger]:
JWA operates a hybrid airline use and lease agreement (AUL) that is commercial compensatory on the terminal and residual on the airfield. The combination of airline revenues derived from the agreement and performance of non-airline revenues collectively generate significant sources of operating revenues to meet costs with a high degree of cushion. Moreover, with CPE at approximately $10.00, JWA is competitive with other airports in the region and is not under pressure to rise substantially if traffic stabilizes.
Limited Future Capital Needs [Infrastructure and Renewal Risk: Stronger]:
The airport's three-year CIP is manageable and fully funded without new debt issuances. After completion, JWA will have modest capital needs for the foreseeable future, which management expects to be fully funded with grants and cash.
Conservative Debt Structure [Debt Structure: Stronger]:
JWA's fixed-rate debt benefits from a senior lien and remains relatively flat at approximately $14.3 million through 2030. Bond covenants and reserve requirements are similar to those at many U.S. airports.
Stable Financial Performance:
The airport's financial metrics are very strong with fiscal 2017 Fitch-calculated DSC above 3.0x, negative leverage, and liquidity in excess of 900 DCOH. Financial metrics remain very strong under Fitch's rating case assumptions.
JWA's peers include Raleigh Durham and San Jose, due to similar enplanement volume and hub size. JWA's fiscal 2017 CPE of $10.26 is elevated compared to its peers. DCOH is similar to Raleigh Durham, exceeding 900 days. Overall, JWA's rating is further supported by negative leverage in fiscal 2017 and strong debt service coverage of 3.1x compared to Raleigh Durham's coverage of 1.7x and leverage of 3.4x, and San Jose's leverage of 9.4x.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
- Leverage (net debt/cash flow) above 4x on a sustained basis.
- Management's inability to control costs or a prolonged decline in enplanements given a rising CPE and limited revenue growth.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
- Near-term rating upgrade is unlikely given the regional competition in air traffic and growth limitations under the county's maximum annual passenger (MAP) limit.
Enplanements remained flat in fiscal year (FY) 2017 at 5.2 million. As of year-to-date (YTD) 2018, enplanements have grown 1.6% compared to the year prior. The airport has minimal room for enplanement growth and seeks to manage volumes until MAP restrictions are readjusted in 2021. The airport continues to benefit from a diversified carrier mix with no single airline accounting for greater than 50% of market share and management expects enplanements to grow at 2% for FY 2018. The airport's FY 2017 cargo volumes were 15,600 in tonnage, a 5.2% decrease from FY 2016, but have since increased 3.6% YTD 2018. The airport has only two cargo airlines, and neither airline plans to increase frequency at this time.
The airport nearly reached its maximum annual passenger (MAP) limitation in FY 2017 and consequently reduced capacity in order to comply with passenger restrictions. Total annual passengers remained flat in FY 2017 at 10.4 million, while historically, total annual passengers grew an average 3.7% annually over the last five-year period. Due to MAP restrictions, the airport is limited to a total passenger count of 10.8 million through 2020, increasing to 11.8 million in 2021 and 12.5 million from 2026 through 2030. Absent the MAP constraint, management still believes in the airport's growth possibilities due to the airlines' continued desire for increased flight frequency at the airport.
Since 2017's review, Sun Country, Allegiant, Volaris, Endeavor, JetBlue, Aeromexico, Air Canada and Airbahn have all joined the commercial air carrier waiting list, while Delux and Mokulele have both joined the commuter waiting list. Changes in service include the addition of a new flight by Alaska Airlines as well as three frequency increases, and one cancelled flight from both Southwest and Alaska Airlines.
Stable passenger traffic in fiscal 2017 supported the airport's steady financial performance. Total operating revenues remained flat at $132.5 million in FY 2017 compared to FY 2016. During 2017, approximately 36% of JWA's revenues were from airlines, while 64% were non-airline revenues, which include parking, rental cars, concessions and others. YTD 2018 revenues have increased marginally to $109.1 million vs $109 million.
Although total operating revenues remained flat in FY 2017, parking revenues decreased $3 million due to the increased popularity of TNCs (transportation network companies), such as Uber and Lyft. Although there is no plan to increase parking rates, JWA's management team has decided to repurpose some of the parking facilities for additional rental car "Ready Car" parking areas to offset declining parking revenues; the repurpose is scheduled for completion in June 2018. The airport has also proposed an update to the ground transportation trip fee, which will be considered by the County Board of Supervisors in late November 2018. If approved as proposed, this will increase annual revenues by an estimated $3.2 million or more. The updated GT (ground transportation) trip fee will apply to TNCs and all GT modes (shuttle, courtesy, limos and others) for both pick-up and drop-off trips.
Operating expenses increased 7.5% in FY 2017, primarily due to an increase in professional and specialized services related to the General Aviation Improvement Program and an increase in other services and supplies related to the Terminal Improvement Project.
The airport's 2017-2019 CIP totals $217.1 million. The airport recently completed a common use passenger processing system (CUPPS) upgrade. The airport's current focus is the completion of upgrading Terminals A & B, which includes aesthetic, electrical and structural improvements. The terminal improvement project is slated for completion in December 2018. Within the next year, JWA plans to execute additional concession enhancements to Terminals A, B, and C, which will consist of additional dining options and a new gift shop. Other large projects in the CIP include the reconstruction of taxiways (80% grant funded), airport power generation/distribution upgrades, and improvements to exterior lighting.
JWA's ability to maintain a strong balance sheet provides the airport with a stable source of funding for capital improvement projects. The airport does not plan to issue additional debt at this time to fund their CIP.
Flat 2017's revenue growth and elevated operating expenses translated to cash flow available for debt service (CFADS) of $54.7 million, down from $60.8 million in 2016 and consequently, a decrease in debt service coverage (DSC) to 3.1x from 3.4x the year prior. Fitch-calculated DCOH fell to 915 from 1,205 the year prior, but remains robust and well above historical averages and management's policy minimum of 500 DCOH.
The Fitch Base Case assumes 1.6% enplanement growth in FY 2018, which is based on year-to-date enplanement growth through February 2018, followed by a 1.5% increase in fiscal 2019, and flat growth through fiscal 2020 due to MAP restrictions. Enplanements are increased by 4.5% in fiscal 2021 to adjust for the increase in the MAP constraint that year followed by no growth in fiscal 2022.
All revenues for 2018 are based on the airports' 2018 budgeted expectations. Thereafter, aeronautical revenues are assumed to rise based on a combination of residual and compensatory elements as reflected in the airport's AUL. Non-airline revenue increases are assumed to mirror the movement in enplanements. Operating expenses increase by 3.3% in 2018 to reflect sponsor projections, followed by an annual increase of 2.8% through fiscal 2022 based on the five-year historical compound annual growth rate (CAGR). DSC averages 3.1x using PFCs as revenue and 6.6x when PFCs are used to offset debt service. Leverage remains negative throughout the projected period, and CPE averages $9.3, congruent with management policy to maintain CPE below $10.00.
The Fitch Rating Case assumptions for 2018 remain the same as the base case. In 2019, Fitch assumed a recessionary scenario leading to a 5.1% enplanement decline followed by a 1.2% loss in 2020. Enplanements recover with 2.7% growth thereafter. Aeronautical and non-aeronautical revenues are calculated as described in the base case. Operating expenses rise 3.3% in FY 2018 to reflect management projections. The expense stress of 3.3% is held in 2019-2022 to reflect a 50 bps increase from the expense five-year historical growth rate of 2.8%. DSC averages 2.6x when PFCs are treated as revenue, and 5.3x when PFCs are treated as an offset to debt service. Leverage remains negative due to JWA's strong cash position and CPE averages $9.57.
JWA is owned and operated by Orange County, CA under the direct control of the county board of supervisors. JWA operates under a settlement agreement between various groups within the county and the city of Newport Beach, CA. The settlement agreement limits the average daily departures and millions of annual passengers, which include both enplaned and deplaned passengers. An amended agreement was approved in October 2014 extending the expiration to Dec. 31, 2030. Current total passenger limits of 10.8 million annually will remain in effect through 2020, and then increase to 11.8 million in 2021 and either 12.2 MAP or 12.5 MAP in 2026 depending upon performance.
A January 2018 district court ruling that dismissed claims regarding payment of Puerto Rico Highways and Transportation Authority debt has raised questions about the scope of protections provided by Chapter 9 of the U.S. bankruptcy code to bonds secured by pledged special revenues. Fitch's rating criteria treat special revenue obligations as independent from the related municipality's general credit quality. The outcome of the litigation could result in modifications to Fitch's approach.