Fitch Downgrades Alaska International Airport System Rev Bonds to 'A+'; Outlook StableNEW YORK--(BUSINESS WIRE)--Fitch Ratings downgrades the Alaska International Airport System (AIAS, or the System) approximately $562 million revenue refunding bonds series to 'A+' from 'AA-'. The bonds are secured by a net pledge of general airport revenues. The Rating Outlook on all System bonds is Stable.
The downgrade reflects AIAS's heightened sensitivity to the apparently increasing volatile nature of cargo operations which contribute to a majority of the System's $95 million of operating revenues. In fiscal 2009, cargo throughput declined by a steep 24.5% and demonstrates that AIAS, despite its uniqueness as a strategic hub for many leading all-cargo carriers, is subject to business related risks in economic downturns that Fitch views to be more consistent with 'A' category airport credits. Fitch notes that the unprecedented one-year decline in activity resulted in a commensurate 20% decline in operating revenue as well as a nearly $24 million drop in pledged net revenues from operations. Fitch recognizes that AIAS had taken steps in this environment to draw on its existing strong levels of cash reserves to effectively reduce the debt service requirements in order to both satisfy the rate covenant requirement and maintain low landing fees to carriers at the airport. The use of such funds totaled $25 million in fiscal 2009 and is expected to similarly draw on reserves in fiscals 2010 and 2011. While the system's current liquidity, particularly from excess balances in AIAS construction funds, allowed for the use of funds to offset the loss in revenue, it is uncertain whether this is sustainable in the long term given the volatile nature of the cargo business. Fitch views the cargo business as demonstrating more volatility than the passenger traffic component of airport operations, thus exposing AIAS to higher than average growth during expansions and potentially sharp declines during economic contractions. The above mentioned attributes are not consistent with an 'AA' category profile.
While 2010 cargo operations are up 14.4% year-to-date on an annualized basis, they are higher relative to a lower base and currently consistent with activity seen in the period 2003 and 2004. The sustained level of growth remains uncertain given the continued challenges facing the U.S. economy although Fitch does expect volumes to slowly return to levels seen prior to the downturn. That said, airport management will need to prudently manage its options to maintain competitive airline charges while preserving its otherwise healthy financial position.
The 'A+' rating reflects positive credit attributes including the airport's strategic positioning for air cargo activities along the great circle routes, the essentiality of air travel due to the lack of alternative travel methods into and within the state, stable airline passenger traffic and O&D nature of the market, and the System's adequate liquidity position. Principal credit concerns include the recent sharp declines and future uncertainty in cargo activity. As Fitch notes, AIAS's debt service reserve fund is partially cash funded - about $17 million - while the remainder is held in the form of surety bonds provided by MBIA and AMBAC.
Air cargo operations are central to AIAS's operational and financial strength. Cargo activity, the main revenue engine of the airport system, has seen an upward trend in activity, growing at an average of 5.5% from 1999 to 2007. However, fiscal 2008 and 2009 experienced sharp drops in activity, declining 6% and 24.5%, respectively, as a result of the sharp contraction in global trade.
Passenger enplanements have been stable over time showing very little volatility. Over the period 1999 to 2009, the airport system has seen a growth rate of 1.4%. Fiscal 2009 enplanements dropped by 3.8%, the first decline in six years. Two large dips in the last two months (May and June) of the fiscal year saw enplanements plunge 19.5% and 11.6%, respectively. A slow summer tourism season in the state and the global economic slowdown are primary underlying reasons for this dip. The System also has increasing carrier concentration risk with Alaska Airlines servicing 64% of traffic at the airports, up from 44% in fiscal 2006. While air carrier concentration is not a meaningful credit concern at this time, a sustained level of single carrier dominance could pose future challenges for the System to pass on costs to passenger carriers to cover the reduction in cargo revenues in future years. Year-to-date (11 months as of May 2010) enplanements are down 4.9% compared to fiscal 2009.
Historically, System finances have been healthy, particularly characterized by its strong generation of revenues over the period 2005 to 2008, growing at a compounded annual growth rate (CAGR) of 4.6%. However, fiscal 2009 revenues dropped by 20% due to the 24.5% decline in cargo activity. The airport's cargo component accounts for approximately 65%-70% of total operating revenues. Unrestricted cash (excluding construction funds) stood at $126 million or 641 days cash on hand at the close of fiscal 2009. As of May 2010, the AIAS holds $111 million in unrestricted funds. However, preserving high levels of internal liquidity will be an important rating consideration as management has set a precedent to apply funds for debt service in lieu of adjusting landing fees under the airline's residual based operating agreement. The airport generated coverage results ranging from 1.59 times (x) to 1.30x over the past five-year period with coverage of 1.52x in 2009 using $25 million in cash (0.76x coverage without the draw on cash balances). AIAS budgets operating revenues to remain flat and expenses to fall by 4.1% for fiscal 2010.
Fitch forecast scenarios contemplate conservative growth in cargo activity and enplanements and an upcoming bridge financing of $25 million-$30 million to complete a runway rehabilitation project that will have federal grant reimbursements. Fitch believes that in the near term, meeting the minimum 1.25x debt service coverage ratio under the rate covenant could depend on the continued use of reserves absent a boost in operating revenues driven by growth in cargo and enplanement activities or through upward adjustments in airline fees and charges.
The airport's current five-year capital improvement plan totals $177 million through to fiscal 2013 and will fund a mix of airfield and terminal side rehabilitation projects. These capital projects are being or will be funded from federal airport improvement program grants (AIP), passenger facility charges (PFCs), bond issuance, and other available funds of the System.
Despite the state's more narrow-based economy, it is a diversifying market with the largest concentration of employment - about 23% - in local, state or federal government. The state's unemployment rate for June 2010 was 7.9% compared to the national average of 9.5%. Alaska's strategic positioning on the Great Circle Route illustrates the geographic advantage of the System in serving principal passenger and cargo destinations of the national and international aviation systems.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:
--'Rating Criteria for Infrastructure and Project Finance' (Sept. 29, 2009);
--'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds' (March 12, 2007).
Additional information is available at www.fitchratings.com.
Posted: July 22, 2010
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