Fitch Ratings has affirmed the 'BBB+' rating on $104.5 million outstanding airport revenue bonds issued by the Rhode Island Commerce Corporation on behalf of the Rhode Island Airport Corporation (RIAC or the airport).  The Rating Outlook for all bonds is Stable.  The airport also has approximately $147.1 million in the form of parity private placement loans and series 2013A revenue bonds which are not rated by Fitch. KEY RATING DRIVERS Summary: The 'BBB+' rating reflects a small market airport that is trending towards more stable traffic levels although historical performance includes a weakening traffic base caused by carrier route rationalization and competition in the greater New England air trade service area. The airport has maintained stable financial performance in terms of coverage and liquidity despite its previously declining enplanements. The airport is supported by its hybrid use and lease agreement, which provides extraordinary coverage protection when necessary. In addition, the rating reflects RIAC's relatively high debt levels and a higher than average cost per enplanement (CPE) in a competitive market. Small Market with Competition (Revenue Risk - Volume: Weaker) RIAC manages T.F. Green Airport, which is a medium hub that serves a predominantly origination and destination (O&D) traffic base. As a result of the competitive New England airport environment, the airport experienced enplanement declines from 2006 through 2015, though declines slowed in recent years and enplanement growth occurred in fiscal 2016 and is expected to continue. Moderate concentration risk exists with Southwest Airlines (rated 'BBB+'/Outlook Stable) representing approximately half of enplanements. Rate-Setting Flexibility Elevates Costs (Revenue Risk - Price: Midrange) The airport's hybrid use and lease agreement (expiring in fiscal 2020) includes both a revenue sharing component and extraordinary coverage protection. Fitch notes that the strong cost recovery terms have led to a rising CPE level, which is currently almost $13. Price flexibility is somewhat constrained by current airline cost levels and nearby competition. Sizable Capital Plan (Infrastructure Development & Renewal: Stronger, revised from Midrange) RIAC's capital improvement program (CIP), excluding the recently completed on time and under budget runway extension project, is moderately sized and a decrease from previous years CIPs. Funding is well-defined and will primarily be supported by grants (67% of fiscal 2017-2021 CIP), followed by outstanding bond proceeds and passenger facility charges (PFCs). The CIP will focus on maintenance and demand-drive capex, with the ability to defer projects if needed.  Conservative Debt Structure (Debt Structure: Stronger) All of the airport's outstanding debt is fixed-rate with a level-to-declining amortization profile. Covenants and additional bond test levels are typical as compared to most U.S. airports, although not all parity debt is supported by debt service reserves. Financial Metrics The airport's financial metrics are sound evidenced by an indenture-based fiscal 2016 debt service coverage ratio (DSCR), which includes the rolling coverage account and fund transfers derived from net revenue sharing with the carriers, at 2.1x, its highest level in the past decade. Without the coverage account and general fund transfers, coverage was 1.7x. Leverage has increased in recent years, due to debt funding a portion of the capital plan, and is viewed to be elevated at 6.5x fiscal year-end 2016 as compared to its overall revenue risk profile. However, no additional debt is anticipated over the medium term unless demand driven and leverage should decline to near 4x in several years based on Fitch's rating case scenario. Operations are supported by $35.9 million in available reserves, equivalent to 418 days cash on hand (DCOH). PEER GROUP Airports that provide secondary service or experience competition from larger nearby airports serve as comparable peers to RIAC, including Long Beach (rated 'A-'/Outlook Stable) and Dayton (rated 'BBB+'/Outlook Negative), respectively. Amongst these peers, RIAC's CPE level and leverage are on the higher end while its underlying service area would be viewed as stronger than Dayton. RATING SENSITIVITIES Future Developments that May, Individually or Collectively, Lead to Negative Rating Action:
  • A return to declining enplanement levels for a sustained period or a material reduction in service from RIAC's leading carrier, either of which reduces financial flexibility;
  • A change to RIAC's financial profile through decreased cash flows or additional borrowings that results in higher than projected leverage above 4.0x on a sustained basis.
Future Developments that May, Individually or Collectively, Lead to Positive Rating Action:
  • While not anticipated in the near term given the regional air service competition, a demonstrated trend of robust traffic growth which also enhances RIAC's leverage and coverage metrics. 
CREDIT UPDATE RIAC's financial and operational performance has remained stable despite persistent weakness in traffic levels. However, traffic levels appear to be stabilizing as evidenced by 2.5% growth in enplanements in fiscal 2016 and expected 0.4% growth in fiscal 2017. The increases come after a 3.8% decline in fiscal 2015 and annual traffic declines since fiscal 2006.  Operating revenue increased 4.2% in fiscal 2016 (compared to a 3.8% increase in fiscal 2015) and was driven by a rise in enplanements, increased airport parking revenues from rate increases and rental car revenues. RIAC implemented parking rate increases in May (fiscal 2015) and October (fiscal 2016) of $1 per lot, or approximately 5% on average. The rate increase has not had a material affect on demand. Fiscal 2016 operating revenues exceeded budget by 2.2%, driven by parking revenues. Operating expenses came in under budget for fiscal 2016 across the board, resulting in a 1.4% increase in operating expenses, as opposed to the budgeted 6% increase, due to RIAC's effort to manage expenses. The indenture-based DSCR, which includes the rolling coverage account and fund transfers derived from net revenue sharing with the carriers, increased from 1.8x in fiscal 2015 to a robust 2.1x in fiscal 2016, RIAC's highest DSCR in over a decade. Without the coverage account and general fund transfers, coverage was a still ample 1.7x. Leverage, at fiscal year-end 2016, as calculated by net-debt-to-CFADS, was 5.2x. The airport had $35.9 million in available reserves at fiscal year-end 2016, equivalent to 418 DCOH. The airport's fiscal 2017 through 2021 CIP totals a moderate $247.4 million. Funding is predominantly from grants (65%), followed by outstanding bond proceeds (19%). The CIP consists of 80% T.F. Green Airport projects and 20% general aviation projects. RIAC's runway extension project is substantially complete and is on time and slightly under the budgeted. The 5/23 Runway Extension involved extending Runway 5 to the south by approximately 1,530 feet for a total length of 8,700 feet. The project opened on Aug. 15th. With the runway extension now complete, the remaining fiscal 2017-2021 CIP totals approximately $154.9 million and is focused on demand driven and grant funded projects.  Fitch Cases In Fitch's five-year base case, Fitch assumes a 0.4% increase in enplanements for fiscal 2017, supported by year-to-date growth, followed by modest growth thereafter, moderate airline revenue and cost growth and no additional debt issuances. In this scenario, debt service coverage per the bond indenture stays in the 1.8x-2.0x range. Without the coverage account and general fund transfers, coverage averages 1.6x. As outstanding debt amortizes, leverage migrates down to 3.2x by fiscal year-end 2022. In Fitch's five-year rating case, which assumes enplanement stress in fiscal 2019 and fiscal 2020 followed by flat enplanements through fiscal 2022, in addition to cost escalation, debt service coverage hovers around 1.8x. DSCR remains above 1.4x without the coverage account and general fund transfers. Leverage migrates down to 4.0x by fiscal year-end 2022. SECURITY The bonds are payable from net revenue of the airport's operations. PFCs are excluded from the definition of 'Revenue,' but have been pledged to the payment of a portion of outstanding debt service and the 2016 series D bonds.