OREANDA-NEWS. Fitch Ratings has affirmed the ratings for Long Beach, CA's approximately $110.2 million of outstanding airport revenue bonds at 'A-'. The Rating Outlook remains Negative.

The rating reflects a relatively small airport facility (Long Beach Airport, LGB) serving Long Beach and the surrounding area as well as a secondary airport for the greater Los Angeles air service area. LGB is acutely susceptible to JetBlue Airways Corp.'s (rated 'BB-' with a Stable Outlook by Fitch) service decisions as they compose 80% of the market. City restrictions exist on the number of flights at the airport resulting in a limited number of air carrier slots. Leverage is moderate at 4.34x while airline costs are competitive for the region at $8.92

The Negative Outlook reflects the historical enplanement declines and their impact on non-airline revenues, leading to debt service coverage ratios (DSCRs) weakening towards the airport's policy of 1.50x in the most recent fiscal year. Although airport management has shown its willingness to raise airline rates to adhere to their policy, an increasing cost per enplanement metric may affect LGB's market attractiveness for carriers to operate in, impacting future service decisions. Without a reversal in traffic trends and some improvement in both operating revenues and coverage levels, much to be derived from new services provided by a nine slot increase this year to 50 slots, the rating will migrate into the 'BBB' category.

KEY RATING DRIVERS

Revenue Risk - Volume: Weaker

Small Hub with a Concentrated Traffic Base: The airport operated with 1.28 million enplanements in fiscal year (FY) 2015 (ending Sept. 30), of which 95% was origination & destination (O&D) traffic. This represents a 10.9% year-over-year decline compared to FY 2014. Enplanements for the first nine months of FY 2016 are slightly up 0.4%, while levels are expected to increase through September and into the next fiscal year due to nine newly granted air carrier slots by the City coming online.

Revenue Risk - Price: Midrange

Moderate Historical Cost Profile: The airport's cost per enplaned passenger (CPE) was low relative to peers at $8.92 for FY 2015. The airport forecasts FY 2016 CPE to be higher in the $10 - $11 range to offset recent enplanement declines and stay at this level through fiscal 2018. The airport utilizes an ordinance like approach for rate setting, which nets some non-airline revenues against annual debt service obligations. To the extent traffic levels were to face adverse developments, the economic capacity to raise airline rates could be limited.

Infrastructure & Renewal Risk: Stronger (Revised from Midrange)

Limited Near-Term Infrastructure Needs: The current capital improvement plan (CIP) totals $101.2 million through FY 2021, consisting primarily of runway and taxiway rehabilitation. The airport has completed a number of major capital projects in recent years and there are currently no anticipated future borrowings expected.

Debt Structure: Stronger

Conservative Debt Structure: All existing long-term debt has a fixed rate, flat debt service profile and benefits from a cash funded debt service reserve.

Stable Financial Profile: The airport maintains adequate financial flexibility, with over 500 days cash on hand. The airport has an internal policy to maintain coverage at 1.50x and liquidity of 365 days cash on hand (DCOH). FY 2015 coverage, without the benefit of transfers, was 1.49x but is expected to improve to above 1.65x in FY 2016. Debt per enplanement is at $86 and leverage is comparable to peers at 4.34x net debt-to-cash flow available for debt service (CFADS).

Peer Group: Similar airports with an 'A-' rating include Ontario, CA and Albany, NY. All three exhibit a weaker volume score, but LGB is leveraged higher than the others with a comparable CPE to Albany and a higher debt service coverage ratio.

RATING SENSITIVITIES

Negative: A continued downward trend in airport traffic may pressure financial metrics resulting in a downgrade.

Negative: Increases in airline costs above current forecasts to maintain adequate coverage metrics would lead to negative rating action.

Negative: Should JetBlue exit or substantially retrench its presence at LGB, it is uncertain how the airport's enplanement base would recover, given that new and/or incumbent carriers could fill slots with smaller gauge aircraft.

Positive: A return to growth and stabilized traffic levels moving towards the historical level of over 1.4 million would return the Outlook to Stable.

CREDIT UPDATE

Noise ordinances currently restrict activity at LGB to 50 commercial air carrier slots while competition for the slots remains high. In February 2016, LGB increased its total available slots for passenger and cargo carriers to 50 from 41, with these additional slots awarded to Southwest Airlines, JetBlue, and Delta. Evidence of slot demand is noted in past periods when airlines relinquished slots in the past (Horizon in 2009, Frontier in April 2011, and Allegiant in September 2011), the airport received significantly more applications for slots than were available.

In recent years, JetBlue repositioned capacity to its growing Caribbean/Latin American service and acquired slots at Reagan National Airport. Enplanements at LGB have subsequently declined 22% since fiscal 2012. As airlines ramp-up in their utility of the newly awarded slots, it is reasonable that traffic volume will pick up in the years ahead, potentially reversing much of the recent declines. Additionally, at the request of JetBlue, the Long Beach City Council is undergoing a feasibility study to review the possible development of a U. S. customs facility at LGB to allow for international flight operations.

Cashflows were relatively depressed while decreasing 5.3% in FY 2015 following heavy enplanement volatility, but management was responsive by raising airline rates to minimize the impact to the debt service coverage ratio (DSCR). The FY 2015 DSCR without transfers decreased to 1.49x from 1.78x in FY 2014 due to the decline in airline revenues. DSCR is expected to rise above 1.65x in FY 2016 as service picks up and a higher CPE is introduced by LGB. Airport management intends to maintain their policy of 1.5x DSCR on a cashflow basis by increasing airline fees to offset other revenue losses. CPE is expected to increase to the $10 - $11 range in FY 2017.

The Fitch base case forecasts enplanements increasing its level over the next two years due to the new slots and stabilizing above 1.4 million, while CPE reaches the $11 - $12 range by FY 2020 to maintain coverages in the1.7x DSCR range throughout the projection. Fitch's rating case assumes traffic remains at the current level of approximately 1.28 million through FY 2020. In this scenario, LGB would need to increase CPE to the mid-$11 range in FY 2020 to maintain the LGB coverage policy of 1.5x. Metrics at the rating case level would be more consistent with a 'BBB+' rating level.

The airport is located between major business and tourist destinations between Los Angeles and Orange Counties, with convenient access to the major freeway links in Southern California. Long Beach Airport is owned by the City of Long Beach. The mayor and the city council of Long Beach serve as the board of directors and set policies for the airport. The airport director and airport staff oversee day-to-day operations.