Fitch Affirms Alaska's International Airport System Rev Bonds at 'A+; Outlook Stable
NEW YORK--()--Fitch Ratings affirms the 'A+' rating on the State of Alaska's Alaska International Airport System (AIAS, or the system) approximately $553 million revenue bonds. The Rating Outlook on the bonds is Stable.
KEY RATING DRIVERS
--Strong Market Position: Air travel is essential in Alaska due to lack of alternative forms of transportation, which provides a stable origination & destination (O&D) base. AIAS operates the state's two major airports, Anchorage International (ANC) and Fairbanks International (FAI), both of which are strategically located for air cargo activities along the great circle routes. As a result, cargo revenue comprises the majority of AIAS's revenue but is vulnerable to global economic conditions as well as changes in trade policy and fuel costs. Revenue Risk - Resilience: Midrange
--Favorable Rate-Setting Approach: Carriers operate under a full airport system residual operating agreement enabling AIAS to set and adjust rates to ensure sufficient revenues to pay operating and maintenance expenses, fund reserves, and satisfy the rate covenant. The current operating agreement that was set to expire at the end of fiscal 2013 has been renewed under similar cost recovery terms. The cost per enplanement (CPE) was approximately $9.50 in fiscal 2012, which puts AIAS slightly above its peers. Revenue Risk - Price: Stronger
--Conservative Debt Structure: The system has a reasonable amount of debt outstanding given its size with no additional debt currently anticipated. Over 90% of AIAS's outstanding debt is fixed rate. In recent years AIAS has used available cash to pay-down debt thereby lowering annual debt service, and AIAS maintains this option in the future. Debt Structure: Stronger
--Sound Financial Metrics: AIAS's healthy balance sheet helps to manage the financial metrics: net debt/cash flow available for debt service: 9.9; debt per enplanement: $191; days cash on hand: 600. Fiscal 2012 debt service coverage was 1.33x with the debt pay-down. Without factoring in the debt pay down coverage would have been just over 1x. Debt Service and Counterparty Risk: Stronger
--Modest Capital Program: The airport has a modest $197 million capital program through 2017 with no major projects planned due to the relatively new terminal facilities. The current capital plan is funded via a combination of grants and paygo, and no additional debt is currently anticipated. The program is primarily focused on routine maintenance of the ANC airfield and equipment between ANC and FAI. Infrastructure Development/Renewal: Stronger
--Significant volatility in cargo and passenger enplanement activity and material changes in the system's internal liquidity could pressure the rating.
--Management's ability to continue to successfully control operating costs and to complete its capital program within current forecast parameters will be important to rating maintenance.
--The continued presence of an operating agreement utilizing a strong cost recovery framework for both the passenger and cargo carriers will also be important to rating maintenance.
The bonds are secured by a net pledge of general airport revenues.
Air cargo operations are central to AIAS's operational and financial strength and though performance can be volatile, Fitch expects AIAS's strategic location will result in continued significant activity. Cargo activity rebounded strongly following the economic downturn, with gross takeoff weight growing 15.6% and 5.9% in fiscal 2010 and 2011, respectively. Cargo activity pulled back by 10.9% in fiscal 2012 due to higher fuel costs, increased marine competition, and the global economic slowdown, though a more modest decline is expected for fiscal 2013. AIAS expects relatively modest annual cargo growth at approximately 2% over the next several years.
Passenger enplanements have been stable over time, showing very minimal volatility. Over the period 2002 to 2012, the airport system grew at a rate of 1.2%. Fiscal 2012 enplanements grew at 1.2% to slightly more than 2.96 million following relatively strong growth of 4.3% in fiscal 2011. Enplanements had grown for six straight years prior to downturn-driven declines in fiscal years 2009 and 2010. Through 11 months of fiscal 2013, enplanements are down just under 1% as compared to the same period in the prior year.
Carrier concentration remains high with Alaska Airlines servicing 62% of traffic at the airports in fiscal 2012, 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 any adverse developments related to cargo revenues in future years.
Fiscal 2012 revenue performance was relatively flat to fiscal 2011 primarily due to the softness in cargo activity at the airport. The airport's cargo component accounted for approximately 53% of total operating revenues in fiscal 2012. Operating expenditures rose considerably in fiscal 2012 due in part to increased costs related to airfield de-icing. Fiscal 2012 audited financials show unrestricted cash of $131 million, representing a solid 600 days cash on hand.
The airport generated coverage results ranging from 1.30x to 2x from 2002-2009. Coverage in fiscal 2010 was 2.09x due largely to management's decision to use available cash to pay down debt. Without the use of cash toward debt, 2010 coverage would have been closer to 1x. In fiscals 2011 and 2012, coverage was 1.4x and 1.33x, respectively, though absent the use of excess cash to pay down debt in each of these years, coverage in these years would also have been at or slightly below 1x. Given its large cash balance AIAS retains the option to use available cash to lower future-year debt service. Given the rising annual debt service requirements on a gross basis, Fitch expects that meeting the minimum 1.25x debt service coverage ratio under the rate covenant in future years 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 modest capital improvement plan spanning fiscal years 2013-2017 totals $197 million and is primarily focused on airfield pavement reconstruction at ANC and equipment needs at the two airports. The projects are funded through increased rates and charges, federal airport improvement program grants (AIP), and available cash. No future borrowing is currently anticipated.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance,' (Jul. 12, 2012);
--'Rating Criteria for Airports' (Nov. 27, 2012)
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports
Posted: June 27, 2013