Fitch Affirms Lee County, FL's Airport Revenue Bonds at 'A'; Outlook Stable
KEY RATING DRIVERS
The airport's rating reflects a well-balanced mix of major carriers serving a leisure-focused service area with an enplanement base that has rebounded following several years of decline. In addition, the rating reflects SWFIA's solid financial metrics with competitive cost per enplanement (CPE) levels, in the $6 range, and moderate leverage. The rating is further supported by a five-year airline use and lease agreement (AUL), as well as manageable capital needs and robust liquidity compared to its peers within the rating category.
Revenue Risk - Volume: Midrange
Tourism-Based Traffic: SWFIA serves an origination and destination (O&D) enplanement base of approximately four million passengers, with considerable dependence on discretionary leisure traffic. The airport enjoys a diverse carrier mix with no airline holding more than a 23% market share and low cost carriers collectively representing nearly half of all enplanements. SWFIA faces little competition in the region with the nearest comparable airport 125 miles away.
Revenue Risk - Price: Midrange
Standard Cost Recovery Framework: The airport is able to recoup a majority of its costs under the current hybrid AUL. However, because 57% of its operating revenue is non-aviation based, SWFIA's financial performance is exposed to enplanement volume and management's ability to contain costs. CPE is expected to remain competitive.
Infrastructure Development and Renewal: Stronger
Manageable Capital Program: The five-year capital improvement plan (CIP) totals $234 million, funded from a mix of grants, passenger facility charges (PFCs), and surplus funds with no additional borrowing anticipated. All projects are demand-driven and could be scaled back or deferred if enplanement growth does not materialize, with some projects having already been deferred over recent years.
Debt Structure: Stronger
Conservative Debt Structure: The airport's debt is fixed rate and fully amortizing, with aggregate level debt service of approximately $24 million annually through 2033.
Moderate Leverage, Strong Liquidity: The airport's net debt-to-cash flow available for debt service (CFADS) of 4.3x, is reasonable for a medium hub airport. Forecast debt service coverage ratios (DSCRs), taking in to account PFC transfers, of 1.5x are supported by relatively strong financial flexibility based on extremely robust balance sheet liquidity of $125 million in unrestricted cash, equating to over 700 days cash on hand (DCOH) as of May 2016.
Peer Group: The airport's peers include Palm Beach County (PBI), Florida (rated 'A'/Outlook Stable by Fitch) and Jacksonville (JAX), Florida ('A'/Outlook Stable). Traffic and pro forma CPE levels are similar among the airports while PBI and JAX have lower leverage and stronger coverage. However, in Fitch's view, SWFIA's high liquidity mitigates this variance.
Negative - Traffic Base: Significant declines or volatility in the enplanement base could pressure the rating if financial flexibility is stressed;
Negative - Operating Performance: An inability to maintain and grow non-aviation related revenue while managing cost escalation;
Negative - Coverage Support: A sustained use of extraordinary coverage to maintain the rate covenant;
Positive: The airport's size and traffic profile, reflecting inherent vulnerabilities related to leisure travel, restrict the likelihood of a higher rating at this time.
SUMMARY OF CREDIT
Enplanement levels at the airport continue to grow from their post-recession low in fiscal 2012 as tourism levels rebound and airlines continue to add or increase route frequencies to various destinations. Total annual enplanements grew 13% from fiscal 2012 - increasing 4.1%, to over 4.1 million, in fiscal 2015 alone. Furthermore, this upward trend has continued in to fiscal 2016, as enplanements are up an additional 6.1% through the first eight months of the year. Moderate enplanement and population growth are projected to continue in the near future; however, the airport remains vulnerable to discretionary spending related to the travel and leisure industry.
The airport's overall operating performance is also experiencing an upward trend. Net operating revenue in fiscal 2015 grew 3.4% while non-aviation revenue grew 2%. Revenue related to the airport's rental cars, rental car facility and parking, which account for 40% of net operating revenue, grew 1.3% in fiscal 2015, and remains a strong revenue generator for the airport. Previously, management phased in various deferred maintenance items in light of stronger revenue performance, which led to 4.6% and 6.3% rises in overall expenses in fiscal years 2013 and 2014 respectively. In fiscal 2015, expenses normalized while realizing a more moderate increase of 1.8%, mainly as a result of upticks in wages and contractual services.
In response to multiple years of annual enplanement growth, SWFIA has added several additional capacity oriented projects to their five-year capital plan, now totalling $234 million. The large items include a $40 million terminal expansion and a $20 million parking garage expansion. Management notes that these items are in the early stage and timing and costs are subject to change. No additional debt is planned at this time and projects are expected to be funded through PFC's, grants and excess cash.
Fitch's base case scenario assumes five-year enplanement, revenue and expense growth rates of 2%, 1.5% and 2.4%, respectively. Coverage levels, with PFC transfers, are maintained at 1.5x, while CPE remains in the low $7 range. Fitch's rating case stresses enplanements by 5% in fiscal 2017 followed by a moderate recovery in fiscal 2018 and a stable traffic base thereafter, resulting in a flat growth rate over the five-year period. The case further assumes that non-aviation revenue follows enplanements and that the airport passes through some additional cost to the airlines in order to compensate for this shortfall, resulting in CPE levels in the high-$7 range. Under this scenario, a small amount of extraordinary coverage would be required in fiscal 2020 to maintain 1.25x coverage. Leverage in both the base and rating case evolves down to the low-3x level.
The bonds are secured by a pledge of the net revenue of SWFIA's operations and certain funds under the bond resolution. PFCs are not pledged under the bond resolution but such receipts can be transferred to reduce debt service requirements and to stabilize rates to airlines. The airport also has the ability to impose an additional airline charge through the extraordinary coverage protection provision to support the rate covenant.