Fitch Affirms Charlotte (NC) General Airport Rev Bonds at 'A '; Outlook Stable
Fitch does not rate the airport's 2014C bond anticipation note (BAN) which ranks on parity with the senior GARBs.
The rating reflects the large hub airport's stable traffic performance, ample liquidity, and low cost per enplanement (CPE), offset by the risks posed by a high degree of single-carrier concentration in American Airlines ('B+'/Stable Outlook) and high degree of connecting traffic, as well as a potentially large capital program after 2016 that would call for sizeable additional debt funding.
KEY RATING DRIVERS
Large and Concentrated Connecting Hub [Revenue Risk-Volume: Midrange]: The airport enjoys a stable-to-growing travel base of 22.2 million enplanements due primarily to its strategic location and status as a primary American Airlines / US Airways hub. CLT is exposed to the carrier's dominant market share and potential volatility with scheduling decisions, as over 75% of traffic consists of connecting passengers.
Strong Revenue Profile [Revenue Risk-Price: Stronger] : The airline use agreement (AUA), coupled with solid contributions from non-aeronautical revenues, allows for strong debt service coverage metrics, well above those achievable with a traditional residual framework, and the ability to accumulate exceptional liquidity, while still translating into a highly competitive CPE, currently in the \\$1.40 range (unaudited FY2015). The current AUA expires at the end of FY2016 and Fitch anticipates a new AUA with at least as favorable terms.
Flexible but Potentially Large Capital Program [Infrastructure Development & Renewal: Midrange]: . The full CIP calls for \\$1.5 billion in projects over the next five years, with just a portion currently under way. Future projects are flexible, require airline approval and a renewed airline use agreement post FY2016, and may call for sizeable debt issuance if pursued.
Conservative Amortization but Variable-rate Exposure [Debt Structure: Midrange]: The airport's GARB profile is flat-to-declining and fully amortizing with standard strong structural features. However, an estimated 26% of par floats at unhedged variable rates following the 2014 issuances.
Very Strong Financial Metrics: Though FY2015 revenues are still estimates, net debt-to-cash flow available for debt service (CFADS) is approximately 1.98x, with liquidity estimated to be close to last year's nearly 1,500 days cash on hand (DCOH), and debt per enplanement of \\$24.00, excluding the 2014 Bond Anticipation Notes, which compares favorably to other large connecting hub peers. Coverage has been historically healthy in the 3.0x range and is anticipated to remain at or near this level through the medium term.
Peers: An airport of similar profile is Atlanta Hartsfield ('A+'), given its percentage of connecting traffic and concentration risk from Delta Air Lines ('BB+'/Outlook Positive). CLT's financial profile is arguably stronger, but Atlanta's origin and destination (O&D) base is more substantial.
Positive/Negative: Negotiation of a new AUA that provides for either a materially stronger or weaker financial and operational profile in light of a potentially sizable capital improvement plan could lead to rating migration.
Negative: A reduction or elimination of American Airlines' hubbing activity.
Negative: The initiation of significant debt-funded capital projects without an increase in air traffic and revenue sufficient to support new facilities.
Positive: Capital improvement plan financing that preserves the airport's robust financial risk metrics and continued strong commitment to the airport by American Airlines in conjunction with the continued growth in its O&D travel base.
The current AUA, previously a 30-year agreement, expires at the end of fiscal 2016. Fitch will monitor progress towards a new agreement and the airport's ability to preserve its current capacity to generate healthy non-airline revenues to maintain liquidity and keep CPEs competitive even with the assumption of a large capital program.
Presently, just a portion of the larger CIP is under way. The full 2015-19 capital plan calls for \\$1.5 billion in projects, with the majority assumed following the expiration of the AUA. The plan requires majority-in-interest (MII) approval from the airlines and would not proceed in full unless approval is granted through the negotiation of a new AUA. Major potential projects include a new 24-gate domestic concourse, a new runway and associated airside and taxiway projects, roadway improvements, and other terminal improvements.
Since the merger of American Airlines and US Airways, American Airlines has continued to optimize the route network, implementing numerous new service enhancements in fiscal 2015 in both the continental U.S. and into the Caribbean. Fitch expects American to continue to emphasize CLT as a primary connecting hub. Still, should enplanements significantly lag forecast and the financial profile begin to deteriorate, the airport should be well positioned to deal with such challenge given CLT's ample internal liquidity, its flexibility to increase the passenger facility charge (PFC) rate to the \\$4.50 cap (it currently levies only a \\$3.00 PFC), and its current low cost structure position.
Passenger traffic growth at the airport has continued to remain strong in recent years and has outperformed prior traffic forecasts. Charlotte's traffic base, which achieved a record of nearly 22 million enplaned passengers in fiscal 2014, has grown to 22.2 million in fiscal 2015. The positive trend is due to the growth in connecting passengers as American Airlines / US Airways has continued to focus on hubbing through the airport. O&D traffic also grew solidly by 3.1% to over 5 million in 2014 and by another 2.0% in 2015. Continued strong performance is expected in connecting traffic, even though the airport conservatively forecasts overall enplanements.
Though revenues and expenses are not yet fully available for fiscal 2015, Fitch expects to receive updated financials and forecasts in first quarter 2016 (1Q16), along with the outcome of the negotiations concerning the new AUA. Based on forecasts and fiscal 2015 growth in enplanements, Fitch expects the debt service coverage ratio (DSCR) to remain in the 2.7x range, using the airport's indenture-based coverage calculation. In Fitch's more conservative calculation, excluding revenue carried over from prior years and treating PFCs as an addition to revenue rather than a debt service offset, coverage is expected in the 1.6x range. Under the same formulation, DSCR in fiscal 2014 was 1.9x. Going forward, the airport expects to generate coverage levels in line with historical performance, remaining at or near 3.0x on an indenture basis (1.6x using the Fitch approach).
The airport's low debt burden results in extremely competitive CPE levels. Historically, the airport's net CPE has been consistently under \\$1.00, ranging from \\$0.76 to \\$0.96 during the period from 2010 to 2012. Based on corresponding 16.7% and 19.3% increases in operating expenses in fiscals 2013 and 2014, respectively, CPE rose to \\$1.13 and \\$1.16 these same years. The increases in operating expenses were the result of the airport addressing deferred maintenance needs and also enhancements that the tenant airlines requested. The airport projects expenses to substantially increase through 2017 as it continues to address these deferred needs, but stabilizing thereafter. However, the airport still expects CPE to remain below \\$2.00 through 2017. Internal liquidity remains a key credit strength, with the airport maintaining nearly 1,500 DCOH as of fiscal 2014.
Fitch felt that the airport sponsor's assumptions were reasonable given historical performance at the airport as well as its own view on the aviation industry and Charlotte market and adopted the airport sponsor's case from CLT's 2014 issuance as the Fitch base case through 2017. Fitch tested relatively flat enplanement growth resulting in CPE reaching the \\$2.10 range by FY2020 with leverage remaining in the 2x range and coverage dropping off slightly under Fitch's assumption of a new AUA maintaining a similar financial framework and without the issuance of additional debt for the CIP. Fitch will re-evaluate its forecast beyond FY2017 as additional information is provided by the airport.
Given CLT's heavy reliance on a single carrier with a largely connecting-based traffic profile, Fitch's rating case tests a permanent 25% loss of connecting traffic along with a 5.5% loss to O&D traffic that partially recovers thereafter. Resulting CPE reaches a maximum of \\$2.74 by 2020, with indenture-based DSCR remaining above 2.3x and leverage staying below 3x. Again, Fitch assumed continuation of a financial framework consistent with the current AUA and no additional debt through 2020. These will be revisited as the airport provides additional information.
Under a high-stress sensitivity scenario reviewed by Fitch that assumes a 100% reduction in Charlotte's connecting traffic, CPE would remain moderate compared to peers at around \\$6.70. This stress scenario also indicates that coverage would fall only marginally below 2.0x, reflecting the assumption that management would take steps to increase the airport PFC rate to \\$4.50 and apply unspent PFC balances to reduce annual debt service requirements. Lower passenger levels would likely affect the revenue sharing benefits with the signatory airlines, but overall solid 'A' category credit metrics would likely be maintained. This sensitivity scenario assumes the connecting traffic cuts occur in 2016. Were the airport to proceed with its large capital program upon the negotiation of a new AUA and experience a significant loss of connecting traffic thereafter, credit metrics could be more constrained than currently envisioned.
The airport is owned by the city of Charlotte and operated as a self-supporting enterprise fund. An appointed aviation director manages airport operations and capital improvements. In July of 2013, the North Carolina General Assembly enacted Senate Bill 380 into law, creating the Charlotte Regional Airport Authority. Subsequently, the city challenged the legislation and was granted an injunction blocking transfer of control of the airport to the new commission. It is not known at this time what impact, if any, this change would have on the airport's management and operations.