Fitch Affirms Broward County's (FL) Airport Revs at 'A'; Positive Outlook Maintained
The Positive Outlook reflects the continued progression of FLL's $2.4 billion capital program in terms of budget management and project delivery, which will position the airport for long-term growth. A higher rating can be supported in the near term by consistent increases in traffic and non-airline revenue, which together will allow FLL to manage its higher debt burden with stable coverage levels and low-to-moderate airline costs.
The 'A' rating reflects Fort Lauderdale-Hollywood International Airport's strong traffic base and demand that is supported by high carrier diversification and expanding domestic and international services. Though FLL faces moderate competition from airports in nearby Miami and Palm Beach, the airport commands more than half the region's domestic O&D market. The airport's cost structure is under a fully residual agreement, which expires in 2026, and remains favourable both regionally and nationally. Airport leverage has increased in recent years to support a large capital program but is not expected to greatly exceed 12x over the next several years, while coverage remains at an average of 1.4x. Cost per enplanement (CPE) is expected to rise in the near term with new debt, but remain under $8. Peers include Miami ('A'/Outlook Stable) and Tampa (TPA; 'AA-' senior/'A+' sub/Outlook Stable), where FLL is projected to maintain more favorable CPE and leverage relative to Miami. Tampa is expected to have similar CPE levels but stronger coverage ratios and lower leverage over time.
KEY RATING DRIVERS
Revenue Risk - Volume: Stronger
Growing Traffic Base, Carrier Diversification: FLL is the leading domestic O&D airport for south Florida with over 13 million enplanements in fiscal 2015. Carrier service is well-diversified across many low-cost carriers. Some vulnerability to traffic volatility is evident given the leisure-oriented market FLL serves; however, passenger trends are largely positive particularly with international destinations going through a major expansionary phase. Competition exists from both Miami and Palm Beach airports, though FLL controls over half of the region's domestic O&D market.
Revenue Risk - Price: Stronger
Fully Residual Rate-Setting Structure: The airport currently utilizes a residual use agreement which expires in 2026. This contract period demonstrates the commitment from carriers, as fixed costs for the airport are rising in conjunction with the capital program borrowings. Current airline costs are relatively low at $5.84 per enplanement, and while they may rise to the $7.00 range under Fitch's base case, Fitch believes that the airport has sufficient economic flexibility to pass costs to carriers despite the large presence of low-cost carriers.
Infrastructure Development & Renewal: Midrange
Significant Capital Spending Underway: The extension of the airport's second runway, noise mitigation program, as well as terminal expansion and redevelopment will come at a cost of $2.4 billion. Taking into account the series 2015 bonds, much of these costs will have already been funded. While passenger facility charges (PFCs), grants and additional commercial revenues are expected to fund much of these added debt-related costs, traffic declines could translate to higher than expected airline charges.
Debt Structure: Stronger
Conservative Debt Structure: The airport's debt is fixed rate with a flat-to-declining amortization profile, secured by a first lien on general airport revenue.
Adequate Metrics: Because of the residual agreement, the airport maintains stable debt coverage levels. Historical liquidity levels have been adequate at close to one year of operating costs, while airport leverage is expected to rise in the near term to over 12x in conjunction with the capital program. With growth in passenger traffic and operating revenues, leverage should evolve below 8x within the next five years.
Among its Florida peers are Miami ('A'/Outlook Stable) and Tampa ('AA-' senior/'A+' sub/Outlook Stable). FLL is projected to maintain more favorable CPE and leverage relative to Miami. On the other hand, Tampa is expected to have similar CPE levels but stronger coverage (over 1.7x) and lower leverage (4x-5x) over time.
FACT Tool: U. S. Airports (Opens in an Excel worksheet)
Positive: Successful completion of the airport's current capital program, coupled with commensurate enplanement growth and revenue generation, which leads to still competitive CPE levels ($5 - $7) and stabilizing debt service coverage.
Significant additional borrowing beyond the airport's current plan leading to leverage well above 12x and CPE higher (above $8 - $9) than anticipated under the airport's current forecasts;
Material and sustained declines in enplanement levels, due to competition or service changes, that pressure non-airline revenue generation and CPE levels;
Material declines in liquidity (under 300 DCOH) or debt service coverage levels below the required 1.25x that adversely affect the airport's financial or operating profile.
SUMMARY OF CREDIT
Enplanements and carrier service at the airport have shown positive performance over the last five years through fiscal 2015, growing at a compound annual growth rate (CAGR) of 3.9%. 10-month year to date 2016 traffic is up by 8.3%. A combination of notably strong new service levels on international routes, as well as jetBlue's ongoing expansions at FLL are primary drivers for these demand trends. Carrier diversification at FLL still remains a positive attribute with the leading carrier, jetBlue, representing about 22% of enplanements. Overall, low-cost carriers still account for a majority of total enplanements.
The airport's airline use & lease (AUL) agreement runs through to 2026 and Fitch views the 10 year contract period as a credit positive trait, as it demonstrates a strong commitment to the airport as higher debt costs will be embedded in airline rates and charges. CPE levels are relatively low and even with increases expected over the next five-year period, FLL will still compare quite favorably to nearby Miami where airline costs average above $20.
Revenue generation remains strong and diverse in Fitch's opinion. Operating revenue was $230.7 million in FY2015, a strong increase of 18.2% over the prior year. Non-airline revenue, which represents approximately 72% of total operating revenue, increased 9% in FY2015. The main categories of non-airline revenue - rental car, parking and concessions - have been steadily increasing over the last couple of years due to enplanement growth, and these increases have allowed the airport to maintain a relatively low CPE.
The county is well underway to completing its $2.4 billion capital improvement plan (CIP) by 2018 or 2019. Major elements include re-building Terminal Four's concourse which will add four new gates, the construction of a new five-gate Concourse A in Terminal One, interior renovations at all four terminals, a new in-line baggage system, and a noise mitigation program. Terminal redevelopment and renovations in 2018 will be a catalyst for both carrier expansion and additional concession revenue generation.
Although portions of the CIP will include both federal and state grants and PFC pay-go utilization, a portion of overall funding will be provided through prior and future bond issues through FY2017. PFC receipts are over $55 million based on current traffic levels and this revenue stream is intended to cover a substantial portion of the future financing costs as a means to reduce airline rates and charges. This approach will effectively leverage most of the future PFC receipts and put some reliance on enplanement activity in cash flow forecasts.
Fitch's base case incorporates moderate enplanement growth averaging 2% through 2021, rising operating revenues and expenses averaging 7.2% and 4.1%, respectively, and an additional $279 million debt issuance in FY2017 to support the capital program. Indenture-based debt service coverage averages 1.40x while net debt-to - cash flow available for debt service peaks at just over 12x in 2017 and rapidly moves to under 8x, while CPE reaches a maximum of $7.32.
In Fitch's rating case, enplanements are stressed by a 6% loss in FY2017, and to counter depressed non-aeronautical revenues, additional airline charges per the residual AUL would be necessary. Operating revenues grow at a CAGR of 8%, as operating expenses are stressed an additional 1% above base case levels. Coverage remains at an average of 1.38x, again due to the residual AUL, and leverage peaks at 15x before rapidly stepping down. CPE grows to just under $10 within five years, but remains competitive relative to peers.
The bonds are payable from the net revenue of the airport's operations. PFCs are not pledged by the bond resolution as a source of security of or payment for the bonds, but have been irrevocably committed as available revenue to the payment of debt service on various issues.