Fitch Affirms Milwaukee County, WI's Airport Revs at 'A+'; Outlook Stable
The rating reflects the airport's modest leverage, strong airline use and lease agreement (AUL) that provides for sound financial performance, and limited capital needs in the near future. Strong liquidity provides additional financial flexibility, supporting the current rating. The Stable Outlook reflects Fitch's view that GMIA's enplanement base has levelled out and that the airport now serves a stable, primarily origin and destination (O&D) traffic base of approximately 3.3 million enplanements.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
STABILIZED ENPLANEMENT BASE: GMIA now serves an almost entirely O&D passenger base following the loss of Frontier's hubbing service at the airport. Enplanements are expected to remain stable at around 3.3 million annually, consistent with historical performance prior to Frontier's expansion. Modest carrier concentration exists with Southwest/Airtran now accounting for nearly 50% of enplanements; furthermore, the airport faces some competition from nearby Chicago O'Hare and Midway airports.
Revenue Risk - Price: Stronger
STRONG COST RECOVERY FRAMEWORK: The airport operates under a fully residual agreement extending through 2020, providing for stable operating results despite historical enplanement volatility. Further, GMIA's strong non-airline revenue stream has historically allowed the airport to maintain a competitive cost per enplanement (CPE). Fitch notes that CPE remained below $9 in 2014 but, given additional operating expenses and a forecasted flat enplanement base, is likely to stabilize in the $10-$12 range through 2019. The current AUL provides for 10% revenue sharing from concessions, providing a modest liquidity benefit to the airport.
Infrastructure Development and Renewal: Stronger
MANAGEABLE CAPITAL PROGRAM: GMIA's current five-year (through 2015) $272 million capital improvement program (CIP) is nearing completion. The 2016-2020 CIP is scaled down to an estimated $148 million, with non-essential projects removed and no expected additional borrowing for projects. Focus will be primarily on maintenance of existing facilities and the creation of operational efficiencies, suggesting the application of capital discipline and rationalization of CIP to maintain a healthy balance sheet and competitive CPE. Airport facilities are in very good condition and have capacity to accommodate traffic growth without expansion.
Debt Structure: Stronger
CONSERVATIVE DEBT STRUCTURE: GMIA maintains a fixed-rate, fully amortizing debt service (DS) structure with a decreasing DS profile beyond maximum annual debt service (MADS) in 2015. Reserves are fully cash-funded and more than 50% of the total outstanding debt will amortize over the next 10 years. Further, management is proactive in seeking out opportunities to lower the DS burden which should incrementally improve airline costs further suggesting their focus on heightening the attractiveness of the airport to its carrier base.
MODEST LEVERAGE WITH AMPLE COVERAGE: The debt service coverage ratio (DSCR), including a 25% coverage account, is sound and has averaged more than 1.7x over the last five years. Coverage is forecasted to remain near 1.6x through the five-year forecast period under a scenario of flat enplanement growth. The recent declining enplanement profile and 2013 issuance have resulted in the airport's GARB debt-per-enplanement rising to $65, although Fitch expects this to decline going forward. The airport's balance sheet liquidity of $74 million, comprising unrestricted cash and operating reserves, is considered strong, equating to 462 days cash on hand (DCOH). GARB leverage, on a net debt-to-cash flow available for debt service (CFADS) basis, decreased to 4.0x in 2014 from 5.0x in 2013 and is expected to continue declining, remaining competitive relative to similarly rated peers.
Peer Analysis: Indianapolis (rated 'A'/Outlook Stable) and San Antonio (rated 'A+'/Outlook Stable) are among Milwaukee's closest peer airports. All serve an enplanement base in excess of 3 million with Southwest as the dominant carrier. Milwaukee has fewer enplanements and greater concentration, but the strongest DSCR profile. Indianapolis has the most liquidity, but also has the highest leverage.
Negative - Traffic Performance: A return to material traffic losses or continued volatility, impacting net revenue generation;
Negative - Increased Costs: Airline costs that substantially exceed forecast levels;
Positive: Given the airport's modest and recently volatile traffic base, coupled with a slightly elevated CPE for its operating profile, upward mobility is not likely at this time.
Following three years of traffic volatility, GMIA's enplanement base has stabilized and now serves an approximately 95% O&D traffic profile. Enplanements were largely stable in 2014, increasing minimally at 0.4%. For the first eight months through 2015, traffic has softened slightly, down 1% over the prior year, but continues to remain relatively flat. Furthermore, these losses may be offset by new services announced by Southwest, Delta, Frontier, and OneJet. Air Canada and Alaska have also become signatory airlines at the airport in 2015.
Some carrier concentration exists with Southwest/Airtran accounting for half of all enplanements, although remaining carriers are relatively diverse and have maintained stable service levels. Fitch expects enplanements to remain flat going forward at approximately 3.3 million enplanements.
The airport's cost-center residual AUL has been extended through 2020. The agreement provides for a continuation of the airport's stable financial position and moderate airline cost levels. Despite flat enplanement growth for 2014, operating revenues grew over 3% to $78.9 million and management decreased operating expenses -0.3% yielding an 11% growth in net revenues. Operating expenses are expected to increase as an additional $2.6 million in fringe benefits comes online in 2015; however, Fitch notes that management has taken strides to mitigate these increased costs by implementing another $0.50 parking rate increase, scaling back its capital program, and prudently managing other operating expenses.
DSCR, including fund balances of up to 25% of annual debt service, was 1.94x in 2014, up from 1.78x in the prior year. Due to flat enplanement growth and expense containment, airline CPE fell slightly to $8.63 in 2014, remaining regionally competitive under $9. Fitch views airport leverage to be moderate as the $213.7 million in outstanding GARBs results in a $65 debt per enplanement and a total net debt-to-CFADS of 4.0x. These metrics, which have trended upward over the last few years, should begin to subside with the airport's principal amortization profile. The airport maintains a robust cash position of 462 DCOH (including unrestricted cash and operating reserves).
Fitch's five-year base case assumes relatively flat enplanement growth of 0.5% per annum coupled with escalating costs of 4% each year. Under this scenario, CPE is estimated to rise to the $10-$12 range and DSCRs are projected to remain healthy, averaging 1.6x with available funds, in line with historical levels. Fitch's rating case, which considers an enplanement stress of 8% in 2016 with slight recovery thereafter and a slightly higher cost profile, results in the same DSCR profile as the base case due to the residual cost agreement though CPE rises as high as $13.
The current five-year capital program totals $272 million and runs through 2015. In response to enplanement volatility and increasing operating expense obligations, management has scaled back its five-year CIP for 2016-2020 to an estimated $148 million with no additional borrowing expected. The airport's capital program seeks to create operational efficiencies to reduce costs and to upgrade and improve the existing facility, with several of the projects to be undertaken on an as-needed basis and deferrable. The airport remains in very good condition with completed and ongoing terminal renovations in 2015.
The bonds are secured by the net revenues of the airport's operations. PFC revenues are not considered net revenues in the Bond Resolution, unless pledged in a supplemental resolution. PFC revenues are not included in the revenues pledged to the series 2009B, 2010B, and 2013B bonds.