Large Gateway Airport With Resilient Traffic Base: Extremely strong market economics reflected in its status as the nation’s largest origination and destination (O&D) airport as well as one of the largest (#3 ranking) international gateway airports. The airport handled over 31 million enplanements in fiscal 2012 with service provided by a highly diverse mix of domestic and foreign-flag air carriers. The single largest carrier, United, represents just over 16% of enplanement. While alternate airports are within the Los Angeles metropolitan area, growth constraints at competing facilities allow LAX to capture approximately 75% of the domestic market and 99% of the international market. REVENUE RISK - VOLUME: STRONGER
New Rate Agreements: Effective in 2013, the airport will be implementing a new tariff structure and 10-year rate agreements, that will result in substantive progress towards greater equalization of its rates and charges to its carriers with an enhanced cost recovery framework using both compensatory and revenue sharing methodologies. These agreements will also enhance LAWA’s control of most of the terminal spaces. Airline cost levels, at slightly over $12 per enplanement, remain moderate for an international gateway airport while similarly providing financial flexibility. REVENUE RISK - PRICE: STRONGER
Conservative Debt Structure: All of the existing senior and subordinated long-term airport debt is in fixed rate mode, thus minimizing the risk for fluctuations in debt interest costs. DEBT STRUCTURE: STRONGER
Strong Financial Metrics: Current financial metrics such as debt service coverage (over 2.5x of senior and subordinate debt) and liquidity of 430 days cash on hand remain solid. Leverage metrics are currently moderate at 8.3x net debt to cashflow available for debt service (CFADS), and will evolve to below 6x over the next three years, while debt to enplanements is competitive at $110. As the full costs of the capital program, including an additional $2.3 billion in future debt borrowings, are phased-in over the next five years, the projected coverage and leverage ratios is not expected to be pressured even under conditions of flat to moderate traffic growth. DEBT SERVICE: STRONGER
Continued Progression Of The Airport Capital Program: The airport is undertaking an ambitious $6.9 billion capital program (ending in 2018), up $1.3 billion from prior estimates, with a focus on a rebuilt international terminal and deferred maintenance needs. The capital improvement plan is expected to result in a higher leverage position relative to the historical fiscal position and similarly lead to rising CPE levels above $20 per enplanement. INFRASTRUCTURE DEVELOPMENT/RENEWAL: MIDRANGE
--Higher than expected leverage to fund the extensive capital program.
--Trends that indicate weaker than expected financial metrics including aggregate debt service coverage, leverage, and liquidity.
The senior revenue bonds are secured by the net revenues of the Los Angeles International Airport. The subordinate revenue bonds are secured by subordinate net revenues. The airport expects to utilize both lien levels to address future capital developments.
The series 2012 bonds is expected to be issued as fixed-rate senior lien revenue obligations of the department and net proceeds will be used to refund approximately $240 million of outstanding subordinate commercial paper (CP) notes. The CP notes were previously issued to fund capital improvements for terminals 5 & 6 as well as to defease senior lien series 2002A and 2003B bonds. The final maturity for the series 2012 bonds is in 2037.
Over the past year, LAX has continued to demonstrate solid traffic and financial performance. As is reflective of an international passenger and cargo gateway airport, LAX is served by a diverse mix of more than 80 domestic, foreign-flag and all-cargo carriers. The largest passenger carrier, United Airlines, accounted for just 16.3% of the airport’s total enplanements in fiscal 2012. This level of diversity is a particular strength of the credit.
Traffic levels, currently at 31.5 million enplanements, continued to climb well off the 9% reduction in fiscal 2009. For fiscal years 2011 and 2012, passenger enplanements rebounded by 4.4% and 4.1%, respectively, led by growth in both domestic and international traffic. With three months of fiscal 2013 data reported, the airport continues to see a continued positive direction in its traffic activity, although the pace of growth is likely to abate somewhat given the current economic conditions.
A new terminal rate setting framework for carriers serving at LAX was approved in September 2012 by the airport’s board of commissioners and the new charges will be phased in at the start of calendar year 2013. The key revision is the establishment of an equalized and uniform rate schedule using a commercial compensatory methodology which will measurably enhance the recovery of most of LAX’s operating and capital financing costs at the terminals (other than American’s exclusive-use Terminal 4 facility). Further, those carriers entering into 10-year rate agreements under the revised terminal tariff framework will be entitled to discounted terminal rates over an initial period of years while also receiving revenue sharing credits generated from terminal concessions. The airport will be able to begin funding a new Terminal Renewal and Improvement Fund (TRIF) with deposits up to $125 million per year. This account will enhance LAX’s ability to support internal funding of future maintenance costs. Historically, airport management had little control over a large portion of LAX’s facilities but can do so now due terminal acquisitions that have transpired over recent years.
LAX’s capital program has been resized from $5.6 billion to the current estimate of $6.9 billion. The largest project includes approximately $1.5 billion for the Bradley international terminal facility. The remaining CIP comprises other terminal and airfield projects, including a new central utility plant and the first phase of a midfield satellite concourse that will be constructed over the next five years. Capital expenditures for the entire program that runs through 2018 will be nearly 60% funded with debt (including $2.2 billion of future senior and subordinate bonds) supplemented by LAX funds, grants, and PFC pay-go receipts. Overall, Fitch notes that the management has demonstrated a solid history of executing on its capital plan while controlling costs at budgeted levels. To the extent the program costs migrate higher or necessitate more leverage, the rating could be pressured.
LAX’s recent financial performance has been largely stable with coverage of total debt service reaching 2.61x based on preliminary fiscal 2012 results. Both passenger growth and solid increases in non-aeronautical operating revenues have allowed for financial performance to remain at very high levels over the last three years even with the growing debt burden to support the capital plans underway. LAX leverage metrics currently remain somewhat elevated for the ‘AA’ category at 8.3x net debt-to-CFADS but is expected to evolve to below 6x over the next three years even when factoring planned futures bond issues of up to $2.3 billion. The new rate setting methodology, strong cash balances, as well as growth to airport concession revenues under recently revised agreements should collectively help stabilize the airport’s fiscal and leverage position in the coming years.
LAX’s liquidity position is viewed as strong taking into consideration the substantial unrestricted cash reserves of nearly $690 million that are also supplemented by a high passenger facility charge (PFC) balance of $723 million and a maintenance reserve of $161 million. Financial projections indicate that airline cost per enplanement (CPE) levels could rise from current levels of $12.13 to over $20 by 2017. Taking into account an updated enplanement forecast assuming 2% compounded annual growth through 2018, the airport consultant projects total coverage levels from net revenues to remain above 2.5x.
The ability of the airport to maintain these financial metrics as well as to preserve its very strong market position for Los Angeles regional passenger traffic will be key drivers for the rating maintenance.
The city of Los Angeles owns LAX; the airport is operated and maintained by LAWA, which also manages Ontario International Airport (ONT) and Van Nuys Municipal Airport (VNY). In addition, LAWA maintains Palmdale Regional Airport (PMD), although it is not currently certified by the Federal Aviation Administration. The LAX airport revenue bonds are solely secured by revenues derived from LAX’s operations.