Fitch rates Chicago O'Hare International Airport revs A-minus
Sept 25 - (The following statement was released by the rating agency) Sept 25 - Fitch Ratings has assigned its 'A-' rating to the city of Chicago (the city), O'Hare International Airport's (O'Hare, or the airport) proposed $900 million general airport senior lien revenue bonds (GARBs) series 2013A, B, C, & D bonds (series 2013). Fitch has also affirmed its 'A-' rating to the $6.28 billion parity GARBs and its 'A' rating to the approximately $700.1 million passenger facility charge (PFC) revenue bonds. The Rating Outlook on the general airport senior lien bonds remains Negative, while the Rating Outlook for the PFC bonds remains Stable. The Rating Outlook for the GARBs remains Negative reflecting continued weakness in traffic performance in the context of increasing enplanements at the national level and at other international gateway hubs over the past 2-3 years. It also reflects uncertainty that still remains regarding the future status of American Airlines with respect to its proposed merger with US Airways. These considerations remain a concern for the airport as O'Hare's financial metrics, including leverage and coverage, are weaker than the indicative range for a large-hub 'A' category airport. However, Fitch considers the strong local market, the strategic location of Chicago as a hub, and the demonstrated importance of the airport to both United and American Airlines, to somewhat mitigate these current concerns. KEY RATING DRIVERS SIZABLE TRAFFIC BASE SUBJECT TO CONCENTRATION AND CONNECTING EXPOSURES: O'Hare is the primary airport within the Chicago metropolitan area and is well positioned to serve as a major domestic connecting hub and international gateway. The airport relies heavily on its two dominant carriers, United Airlines and American Airlines with a combined 81% market share and connecting traffic accounts for approximately half of the total 33.2 million enplanements. Traffic performance has been uneven in recent years, with both United and American Airlines bringing about modest capacity reductions at the airport. Overall, American has maintained much of its scale of operations since its November 2011 bankruptcy filing, however, uncertainty remains with regards to future service levels, either as part of a larger airline following merger with US Airways or as a smaller, standalone airline if the proposed merger is unsuccessful. However, Chicago O'Hare is viewed as a prime connecting hub for both carriers. Revenue Risk - Volume: Stronger STRONG RATE SETTING MECHANISMS: The existing residual agreement runs through 2018 and provides for timely recovery of airport costs including funding requirements for reserve maintenance. Airline cost per enplanement (CPE) are currently moderate for a large-hub airport at $13.55 but are expected to rise above $20 over the next five years as airport capital spending is captured in the airline rate base. Revenue Risk - Price: Stronger LARGE SCALE CAPITAL PROGRAM UNDERWAY: Much of the airport improvements are focused on airfield improvements to enhance capacity for hubbing operations. To date, the airport has been successful on project delivery while maintaining costs within its $2.3 billion budget. Infrastructure Development and Renewal: Midrange CONSOLIDATED CAPITAL STRUCUTRE: Much of O'Hare's airport revenue and PFC debt is issued in fixed rate mode with conservative debt amortization. Since the series 2012 refunding transaction, all of airport's general revenue long-term debt is at a single lien. Debt Structure: Stronger STABLE FINANCIAL METRICS BUT VERY HIGH LEVERAGE: Debt service coverage and liquidity metrics have historically been sound. Taking into account rollover fund balance transfers, debt service coverage was 1.21x in fiscal 2012. Liquidity from unrestricted reserves is adequate based on 181 days cash on hand. High leverage remains a concern with a 17.4x net debt to cash flow available for debt service (CFADS). This leverage will take a number of years to evolve closer to the 10x range. Debt Service and Counterparty: Weaker PFC COVERAGE PROVIDES CUSHION. A sizable air traffic market supports a large annual pledged PFC revenue level of nearly $125 million. The stand-alone PFC lien has moderate leverage of 5.4x and PFC debt service coverage has improved to 1.89x in fiscal 2012 as compared to 1.65x level in the prior year. Projections indicate coverage levels to remain over 1.7x. RATING SENSITIVITIES --Significantly higher costs borne by carriers above the current projection line of around $20-$22 per enplanement over the next five years could affect the cost competitiveness of the airport and have a negative impact on the airport credit. --Further countercyclical traffic contractions or a changing profile of the traffic base could impact credit quality; --A higher reliance on debt to fund identified capital programs resulting in sustained high leverage would likely impact the airport's ratings; --Developments at American Airlines, positive or negative, that impact planned operations could impact the ratings and/or outlook on the general revenue bonds. SECURITY: The airport general revenue bonds are secured by a first lien on airport net revenues. The PFC bonds are secured by a first lien on the PFC receipts. TRANSACTION SUMMARY The city intends to issue up to $900 million in senior lien revenue and revenue refunding bonds for the purposes of funding both its airfield modernization and ongoing capital programs, to refund existing debt to generate debt service savings, and to cash supplement the balances in the debt service reserve fund. The underlying strength of the airport comes from the passenger base that ranks among the nation's largest for both origination and destination (O&D) traffic and international services. Approximately 50 carriers operate out of O'Hare to 149 domestic and 56 international non-stop destinations. In 2012, the airport handled over 33.2 million enplaned passengers with about half being connecting traffic. Still, Fitch notes that the economic downturn affected overall traffic activity, with enplaned passengers dropping more than 12% below 2007 levels. Both O&D and connecting traffic were affected due to lower overall traffic demand and carrier rationalization of capacity and service levels. Operating data in recent months indicates continued softness in traffic volumes, with traffic down 2% over the first seven months of 2013, although some modest positive rebound is projected for the remainder of the year. Both United (Issuer Default Rating IDR of 'B', Outlook Positive) and American (IDR 'D') contribute the largest shares of O'Hare's enplanements with approximately 46% and 35%, respectively. American's emergence from bankruptcy is not clear at this time, with timing appearing dependent on the outcome of the U.S. Department of Justice's lawsuit to block the merger with US Airways. Given the uncertainty of this situation, Fitch will continue to assess the airport's cost and financial position based on a continuation of both existing and reduced activity. To date, both the American bankruptcy and merger developments have not led to any material operational changes. Still, there could be potential credit implications given American's size and role at O'Hare which heavily influences traffic performance during a period of significant capital investment and leveraging. O'Hare is close to completion of the first phase of the $3.3 billion OMP that includes new runways and runway extensions. Costs related to the completion phases of the OMP, which will cover the additional airfield projects, are also anticipated to be close to $3.3 billion. The phase 2A component, smaller at $1.03 billion, has already been approved by signatory carriers and all of its funding sources have been secured, following the issuance of the series 2013 bonds. A future phase 2B component is much larger in scale at over $2 billion, and additional airline approvals would be needed to move forward. Fitch will consider the financial plans to support the entire capital program, including the timing and degree of future leverage on either the GARB or PFC credit. The airport's overall debt levels are already significant on a combined basis at nearly $7 billion. Fitch estimates that net debt to CFADS is currently 17.4x for the GARBs but could fall to the 10x-11x range over the next five years. The overall airline cost and financial profile is reflective of both the residual operating agreement and growing fixed costs associated with debt issuances that supported past capital programs. Historically, O'Hare's financial operations have produced stable debt service coverage, at or exceeding 1.1x, and the estimated CPE was $13.55 in 2012. Going forward, coverage levels on overall airport debt are expected to remain largely at the minimum required 1.10x level specified under bond documents, but will require substantial increases in airline fees to cover higher debt costs. The latest sponsor traffic and financial forecasts assume both the full leveraging under the 2A and 2B capital programs and a positive direction in traffic performance that averages nearly 2% annual growth through 2022, indicate that CPE levels will peak at about $25 after 2020. Fitch views the traffic growth assumptions to be optimistic given the recent performance in traffic, even in the context of post-recession recovery, and the risk of market share loss to the faster growing Midway airport, located nearby. Underperformance in traffic would likely translate in even higher airline charges that may risk its ability to attract more services. The PFC credit has historically maintained healthy coverage cushions. In 2012, debt service coverage derived from $125 million in total PFC revenues was 1.89x. Coverage of future maximum annual debt service is projected to remain over 1.70x based on current traffic levels. Fitch's rating on the PFC debt considers the risks that projected coverage ratios could be reduced due to some loss in the connecting portion of the airport's traffic and only modest potential borrowings to support the capital program.