Fitch Rates Alaska International Airport System's $174MM Revs 'A+'; Outlook StableNEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an 'A+' rating to Alaska International Airport System's (AIAS) approximately $174 million revenue refunding bonds series 2010 issued on parity with the system's outstanding debt. The issue consists of about $142 million for refunding outstanding bonds and about $32.5 million for financing the completion of a runway rehabilitation project that will have federal grant reimbursements.
Fitch also affirms the 'A+' rating on the system's approximately $561 million outstanding revenue refunding bonds.
The Rating Outlook on all bonds is Stable.
On July 22, 2010, Fitch downgraded AIAS to 'A+' from 'AA-'.
The 'A+' rating reflects the following:
--The airport's strategic geographic location along the great circle route for air cargo activities;
--The essentiality of air travel into and within the state;
--The diverse presence of cargo operators serving out of AIAS and significant infrastructure investments and commitment by UPS and Fedex;
--Stable airline passenger traffic and O&D nature of the market;
--The system's strong liquidity;
--The residual nature of the operating agreement which provides the airport some degree of flexibility in managing its operations and debt requirements in the face of shifting cargo activity and passenger traffic.
Principal credit concerns include the system'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. 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. However, 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. AIAS' debt service reserve fund is partially cash funded - about $18.6 million - while the remainder is held in the form of surety bonds provided by MBIA and AMBAC.
While fiscal 2010 cargo operations are up 15.6% compared to 2009, 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. However, airport management will need to prudently manage its options to maintain competitive airline charges while preserving its otherwise healthy financial position.
KEY RATING DRIVERS:
Future rating actions are likely to be influenced by the following:
--Shifting trends in cargo and passenger enplanement activity;
--Material changes to the system's internal liquidity profile;
--Higher than expected airport cost structure and large debt issuances;
--Changes in the region's economic conditions.
The bonds are secured by a net pledge of general airport net revenues
Air cargo operations are central to AIAS' 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. Fiscal 2010 saw a rebound in cargo activity ending 15.6% higher than the previous year. The airport's cargo component accounts for approximately 65%-70% of total operating revenues.
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. Fiscal 2010 enplanements are down 4.7% compared to fiscal 2009.
Prior to the current recessionary period, the system's finances have been healthy, particularly characterized by its strong generation of revenues over the period from 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. 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, 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.
As part of the series 2010 debt structure, management plans for possible optional early redemption of bonds and contribution of cash to the debt service reserve account to reduce dependence on surety bond policies, all from surplus cash over time. AIAS has already drawn on surplus funds to defease $25 million of debt service in each of fiscal 2009 and 2010 and set aside $15 million to pay a portion of fiscal 2011 debt service. 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's forecast scenarios contemplate conservative growth in cargo activity and enplanements. 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 internal liquidity absent a boost in operating revenue driven by cargo and enplanement activities or through upward adjustments in airline fees and charges.
The airport's current five-year capital improvement plan totals approximately $200 million through to fiscal 2013 and will fund a mix of airfield and terminal side rehabilitation projects. The capital projects are funded from federal airport improvement program grants (AIP), passenger facility charges (PFCs), bond issuance, and other available funds of the system.
The State of Alaska's economy continues to diversify with the largest concentration of employment in local, state and federal government. The state's 7.9% unemployment rate for June 2010 outperformed the national average of 9.5%. The Anchorage and Fairbanks Regions comprise more than two-thirds of Alaska's population having grown at 1.75% and 1.97% respectively in the period from 2000 to 2009.
Additional information is available at 'www.fitchratings.com'.
Applicable criteria available on Fitch's web site at 'www.fitchratings.com' include:
--'Rating Criteria for Infrastructure and Project Finance' (Aug. 13, 2010);
--'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds' (March 12, 2007).
Rating Criteria for Infrastructure and Project Finance
Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds
Posted: September 7, 2010
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