- A material reduction in, or elimination of, American's hubbing activity, which reduces financial flexibility;
- Inability to maintain a minimum of 1x net revenue debt service coverage;
- Inability to maintain leverage levels at or below 10x to 11x on a sustained basis.
Fitch Rates Philadelphia International Airport Revs ‘A’; Outlook Stable
posted by AJOT | Dec 07 2017 at 07:08 AM | Air Cargo
Fitch Ratings has assigned an 'A' rating to the City of Philadelphia's approximately $722 million series 2017A and 2017B airport revenue and refunding bonds issued on behalf of Philadelphia International Airport (PHL). Fitch has also affirmed the 'A' rating on the airport's outstanding parity bonds, excluding its privately placed 2017 taxable bond, which Fitch does not rate. The Rating Outlook is Stable.
KEY RATING DRIVERS
The rating reflects PHL's role as the main air service provider to a large and stable service area that generates a solid base of origination and destination (O&D) traffic, offset by a high degree of concentration in American Airlines (BB-/Stable) and some connecting traffic exposure. The rating also reflects PHL's strong residual airline agreement, which provides for full recovery of operating expenses and debt service costs, though the agreement also results in narrow coverage and liquidity levels. Fitch expects PHL's leverage levels to remain elevated in the medium term, as additional capital-related borrowing comes on line. Fitch views the airport's levered position as consistent with the current rating level given PHL's franchise strength. Although airline costs are expected to continue to rise, signatory carriers have approved the airport's capital plan, signalling their ongoing commitment.
Sizable, Stable American Airlines Hub: Revenue Risk - Volume: Midrange.
PHL's service area is the large and stable Philadelphia MSA, which provided around 10 million O&D enplanements in FY2017 (10-year CAGR of 0.1%). PHL is a leading connecting hub for American Airlines, which lends to sizable carrier concentration of 70% and connecting traffic exposure of 33%. Service reduction risk is partially mitigated by American's long-standing presence at the airport, which Fitch expects to persist. Fitch views favorably PHL's low historical peak-to-trough traffic volatility, reflecting the stability of American Airlines and the Philadelphia MSA.
Strong Cost-Recovery Framework: Revenue Risk - Price: Stronger.
The airport benefits from a five-year, fully residual airline use and lease agreement (AUL) through fiscal year 2020, which effectively provides for 100% recovery of operating expenses and debt service costs. PHL's rising cost per enplaned passenger (CPE) level, which increases from the current $15 range to $20 by FY2022 under Fitch's rating case, is mitigated in part by the airport's franchise strength and airline support for the capital program.
Largely Debt-Funded Capital Plan - Infrastructure Development and Renewal: Midrange
The airport's seven- to 10-year Capital Development Program (CDP) is sizable at $2 billion and focuses primarily on airfield improvements, terminal redevelopment and expansion, and ground transportation enhancements. Around 62% of the CDP will be funded with commercial paper or long-term debt, including the 2017 bonds. Notably, the capital program's projects and funding sources are subject to change over time based on the operational needs of the airport.
Sound Debt Structure - Debt Structure: Stronger
PHL benefits from all senior, fully amortizing debt with no material exposure to variable interest rates as all debt is either fix rate or synthetically fixed. Structural features are considered adequate, with a portion of 2017 bond proceeds expected to be used to fully cash-fund the debt service reserve fund. Over the intermediate term, additional debt will cause PHL's leverage to remain elevated but manageable, while annual debt service will increase but remain generally front-loaded.
Financial Profile
The airport has historically managed to debt service coverage levels of around 1x (excluding fund balances) and liquidity of around 100-150 days cash on hand (including interdepartmental charges). These metrics are considered narrow relative to large hub peers yet adequate for airports with residual AULs, as the agreements limit bottom-line cash flow volatility. These narrow levels also limit PHL's ability to fund its capital plan without affecting the airline rate base. Fitch's rating case expects leverage to decline from the current 10x-11x level to below 9x by FY2022, reflecting the increased cash-funding of the airport's reserve fund and slightly improved unrestricted cash compared to historical levels.
PEER GROUP
Philadelphia's similarly sized hub airport peers include Miami (A/Stable) and Charlotte (AA-/Stable), which both serve as American Airlines hubs and exhibit carrier concentration and connecting traffic exposure. Charlotte's higher rating reflects significantly lower CPE and leverage, and stronger liquidity and debt service coverage, despite higher exposure to connecting traffic and American Airlines concentration. Miami is able to achieve the same rating as Philadelphia despite slightly higher leverage and CPE due to its stronger traffic base as a leading international gateway hub.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: