Fitch Rates Capital Region Airport Commission (VA) Airport Revs 'A-'; Outlook Revised to Positive
OREANDA-NEWS. Fitch Ratings has assigned an 'A-' rating on approximately $38.5 million of airport revenue bonds series 2016A, issued by Capital Region Airport Commission (Commission) on behalf of the Richmond International Airport (RIC). Fitch has also affirmed its 'A-' rating on approximately $91.6 million outstanding airport revenue bonds.
The Rating Outlook is revised to Positive from Stable.
The Rating Outlook is revised to Positive from Stable, reflecting a developing trend of improving financial metrics evidenced by rising debt service coverage ratios (DSCRs) and declining leverage. Airport enplanement trends remain largely stable and the capital program indicates very limited borrowing needs. Positive rating migration will be driven by a continuation of strong financial metrics such as coverage above the 2x level while traffic performance remains stable to positive.
The rating reflects the airport's small, predominantly origination/destination (O&D) market within a growing metropolitan capital area. The enplanement base of 1.7 million has recovered in recent years, but still susceptible to some volatility and competition risks. The airport's financial profile remains strong but is significantly supported by non-aviation revenues. Balance sheet strength is supported by moderate debt levels and rising liquidity which provides the ability to sustain some weakness in operational performance. Additionally, the airport's low cost per enplanement (CPE) at under $6 with limited risk for increases serves as a strength within the rating category.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Essential Service Area, Small Enplanement Base: RIC serves a relatively small, but primarily O&D, traffic base of approximately 1.7 million enplanements. After experiencing some erosion that began in 2009, enplanements have since recovered to fiscal 2010 levels. Richmond, Virginia (general obligation debt rated 'AA+'/Stable Outlook by Fitch) has a stable and diverse economic base, supported by a well-educated labor force. Consistent employment growth has resulted in improved unemployment rates. The airport's traffic is favorably balanced with business passengers and a diverse carrier mix. Two airports in the Washington D.C. region are within 90 miles of RIC but the competition risk appears limited.
Revenue Risk - Price: Midrange
Airline Agreement Provides Stability: RIC operates with a competitive and generally stable cost structure under its compensatory rate-setting airline agreement expiring in 2020. With strong non-airline revenue generation (at approximately 67% of pledged revenue), airline costs are very stable in the upper $5 CPE range. Still, the high degree of non-airline revenue could expose the airport's revenue generation to some risk from enplanement volatility or economic cyclicality.
Infrastructure Development and Renewal: Stronger
Manageable Capital Plan: The capital improvement plan is robust at $156 million through 2021; however, management does not expect to issue additional parity debt in the near term. The terminal was expanded in 2007 and a major taxiway reconstruction is set to commence in March. Remaining airside projects will be predominantly grant-funded.
Debt Structure: Stronger
Conservative Debt Structure: The airport's debt is entirely fixed rate with a flat-to-declining amortization profile. Bond reserves are cash funded.
Stable Coverage, Moderate Leverage: Debt service coverage improved to slightly above 2x in fiscal 2015, furthering a positive trend after dropping to a low of 1.6x in fiscal 2010. Leverage is manageable at 3.5x net debt-to-cash flow available for debt service (CFADS) while the airport's 393 days cash on hand (DCOH) provides additional financial cushion.
Peers: RIC's peer group consists of similarly sized enplanement base airports such as Albany, NY ('A-'/Stable Outlook), Reno, NV ('A'/ Stable Outlook), and Tucson, AZ ('A'/Stable Outlook). RIC benefits from better diversification of carriers than these peers as well as lower CPE levels. However, RIC's leverage and liquidity levels fall in between Albany and Reno.
Positive - Financial Metrics: Continued positive financial flexibility evidenced by leverage evolving below 3x with DSCR above the 2x range, combined with stable enplanement levels.
Negative - Traffic Performance: Heightened traffic or economic volatility leading to lower than forecast non-aviation revenue or debt service coverage.
Negative - Service Changes: Material service changes that diminish aviation revenue or severely impact enplanement levels.
SUMMARY OF CREDIT
The issuance of series 2016A airport revenue refunding bonds will be used to refund $41.9 million of its 2008A airport revenue bonds, generating debt service savings. The bonds are expected to be issued in fixed-rate mode with final maturity in 2038.
While overall traffic growth has been tepid over the past five years, the airport has gained positive momentum during the past 18 months. Possibly reversing a six-year downtrend, enplanements increased 5.2% to approximately 1.7 million in fiscal 2015 while fiscal year-to-date (YTD) traffic levels have further increased approximately 4% through May 2016. Since peak traffic levels occur during summer months, Fitch expects this momentum to continue through fiscal 2016. Furthermore, the economy, which has traditionally been dominated by the government sector, has gained additional strength from education and health services, anchored by Virginia Commonwealth University and eight other higher education institutions, as well as consistent employment growth supported by a well-educated labor force.
Destination and frequency changes continually impact RIC, e.g. with flights to Cleveland being eliminated, while Boston-Logan remains a growing market. In April 2016, United launched daily service to Denver and Allegiant has launched twice-weekly flights to both Orlando and Jacksonville. Other airlines, such as American and Southwest, reduced frequency but up-gauged to larger-capacity equipment.
The airport's airline agreement employs a rate-setting approach that is compensatory. Under the current agreement, management has maintained a stable and competitive cost structure by proactively managing operating expenses and diversifying its revenue stream. As a result, CPE has maintained its $5 level over the last eight years.
Total operating revenue increased 2.1% to $41.5 million in fiscal 2015, driven by increases in enplanements volumes, parking and concession revenue. The airport is exposed to discretionary spending risk with parking and concession revenues contributing 45% and 20% of pledged operating revenue, respectively. The airport's operating costs increased 4.1% in fiscal 2015. Expenses were driven by an increase in professional services, but offset by decreases in parking and maintenance costs.
Management does not expect to issue additional parity debt in the near term as the capital improvement plan will be funded from a combination of state and federal grants, passenger facility charges and local funds. The airport recently finished an apron expansion on Concourse B, allowing for the addition of new gates, and has begun reconstruction on Taxiway which is currently 50% complete. Additionally, the airport is considering a standalone customer facility charge-backed bond issue later this year to finance a quick-turnaround car rental facility.
In Fitch's five-year base case forecast, Fitch assumes 1.6% compound annual enplanement growth through fiscal 2020 and moderate airline revenue and cost growth. In this scenario, debt service coverage per the bond resolution hovers around 2.3x while CPE remains under $6. Accounting for the resolution-required fund deposits, coverage averages 1.5x. In Fitch's five-year rating case in which Fitch assumes an enplanement stress of 5% with moderate recovery thereafter, and further cost escalation, debt service coverage is in the 1.95x range, and an average of 1.25x with the required deposits, while CPE levels are in the upper range of $5. In both cases, leverage migrates down to the 2x range within five years. These financial metrics are approximately in line with Fitch's previous expectations.
The bonds are secured by the net revenue of RIC's operations and certain funds per the bond resolution.