Fitch Affirms Alaska's International Airport System Rev Bonds at 'A+'; Outlook Stable
Fitch Ratings has affirmed the 'A+' rating on the State of Alaska's Alaska International Airport System's (AIAS) approximately $440.885 million of revenue bonds. The Rating Outlook for all bonds is Stable.
KEY RATING DRIVERS
The rating reflects AIAS' well anchored cargo position and air service monopoly supported by a modestly sized traffic base, conservative debt structure, and a stable financial profile. Cargo activities continue to be volatile in nature which is somewhat mitigated by the airport system's stable passenger enplanement base of over 3 million. AIAS' financial profile is sound with modest operating revenue growth, and controlled operating expenses. Its liquidity position remains strong with over 500 days cash on hand (DCOH) and leverage (net debt to cash flow available for debt service, CFADS) is evolving downward at 5.75x.
ESSENTIAL MARKET POSITION: REVENUE RISK - VOLUME: MIDRANGE
Air travel is essential in Alaska due to a lack of alternatives, which provides a stable origination and destination (O&D) base of 3.2 million. Two major airports, Anchorage (ANC) and Fairbanks (FAI), are strategically located for air cargo along the great circle route, and cargo provides over half of total operating revenues but remains vulnerable to global economic conditions as well as changes in trade policy and fuel costs.
FAVORABLE RATE SETTING APPROACH: REVENUE RISK - PRICE: STRONGER
Carriers operate under a full residual operating agreement that allows AIAS to set and adjust rates to ensure sufficient revenues for operating and maintenance, reserves, and the rate covenant. The operating agreement was renewed in fiscal 2014 for an additional 10 years under similar strong cost recovery terms. Cost per enplanement (CPE) was $10.73 in fiscal 2015 and, while slightly above peers, is expected hold stable.
LARGE CAPITAL PROGRAM: INFRASTRUCTURE DEVELOPMENT & RENEWAL: STRONGER
The airport system has a large $420 million capital program through 2023 funded with grants and internal reserves. No new near-term debt is anticipated to complete the CIP. The largest project is resurfacing the ANC airfield, which is expected to last several years. Relatively new terminal facilities are in good condition.
CONSERVATIVE DEBT STRUCTURE, DEBT STRUCTURE: STRONGER
The system has a reasonable amount of debt outstanding given its size with approximately 90% of debt fixed rate, along with relatively standard covenants and reserve requirements. AIAS has in the past accelerated its leverage reduction actions by using available cash to pay down debt and lower annual debt service.
SOUND FINANCIAL METRICS
AIAS' healthy balance sheet helps manage financial metrics of 5.75x leverage, $153 debt per enplanement, and 535 DCOH. Fiscal 2015 debt service coverage improved to 1.49x, with PFCs included as revenues, reflecting higher airline receipts from activity growth.
Louisville ('A+'/Outlook Stable) and Memphis ('A'/Outlook Stable) are Fitch-rated peers dual dependency on cargo operations and passenger traffic. AIAS has leverage similar to Memphis, however, with more liquidity. Louisville boasts lower leverage and lower CPE than AIAS as well a more diversified passenger market share.
<a href="https://www.fitchratings.com/site/fitch-home/re/876822.html">FACT Tool: U.S. Airports (Opens in an Excel worksheet)</a>
Negative - Significant cargo and passenger enplanement volatility and material changes in internal liquidity could pressure the rating.
Negative - Management's inability to continue to successfully control operating costs causing narrower financial margins could also pressure the rating.
Positive - None considered at this time due to the airport's enplanement size and cargo dependence.
Despite historic volatility, air cargo is central to AIAS' operational and financial strength, and Fitch expects AIAS will continue to be actively served by different U.S. and foreign-flag carriers. FedEx continues to use aircraft between the continental U.S. and Asia that can bypass refuelling in Alaska, which caused Fedex's Cargo Certified Maximum Gross Takeoff Weight (CMGTW) market share to drop to 7% fiscal 2015 from 10% fiscal 2014. However, other large cargo carriers rely on refuelling in Alaska, and UPS and Cathay Pacific still processed the most (14% each) of the airport's cargo for fiscal 2015. Furthermore, overall CMGTW increased 6.3% for fiscal 2015 which was driven by generally continued improvement in overall domestic and global economic conditions. The second half of the year also benefitted in a marked increase in cargo airline activity that appeared largely attributable to North American west coast dock disruptions.
AIAS has maintained a stable passenger enplanement base between 2.8 million and 3.2 million over the past decade. Management expects annual enplanements to grow at 2%-3% in the near future, which is reasonable under normal economic conditions and stable operations of its leading carriers. Fiscal 2016 enplanements appear to be rising at a healthy pace due to increased tourism, up almost 5% through eight months year-to-date data results over the same months FY2015.
Alaska Airlines (Alaska Air Group, 'BBB-'/Rating Watch Negative) continues to retain over half (60%) of AIAS' market share, and while carrier concentration is not an immediate credit concern, sustained single-carrier dominance could pose future challenges to pass costs to passenger carriers to cover cargo revenue shortfall in future years. AIAS is historically 100% O&D because while ANC and FAI are hubs, aviation/other alternatives are not present, which is a credit strength.
Carriers are performing within expectations following the U.S. Airways and American merger as well as cessation of Dynamic Airlines service from China, which never met initial modest expectations. Alaska Airlines has recently announced an agreement to acquire Virgin America and the transaction is expected to close in late 2016. The merger impact is expected to be minimal; however, the opportunity for new routes is possible.
FYTD2016 revenues and expenses through March are performing favourably following an 8.4% total operating revenue increase to $134.4 million and a 0.3% total operating expense increase to $80.6 million realized over FY2015. FYTD2016 revenues have increased 1% to $105.5 million following increased passenger traffic and total operating expenses have decreased -4% to $64.7 million because of reduced snow removal costs.
AIAS does not currently plan to issue any additional debt to complete the proposed CIP, but AIAS is considering possible need for a short-term bridge financing credit facility at some point in the future. The facility might be needed to cover effectively manage federal grant reimbursements.
The authority's FY2015 operating results were ahead of Fitch's expectations, posting a 4.4% increase in enplanements to 3.2 million (the Fitch base case expected a 2.2% increase); an 11.7% increase in airfield revenues to $91.4 million ; and a 9.7% increase non-airfield revenues to $46.1 million , which grew total operating revenues 11% to $137.6 million . In contrast, operating expenses only increased 0.3% to $80.5 million (the Fitch base case expected $83 million).
FY2015 financial metrics were largely in line with Fitch's expectations, posting a debt service coverage ratio (DSCR) of 1.49x, 535 DCOH, 5.75x Net Debt to CFADS, $153 debt/enplaned passenger, and $10.73 CPE .
Fitch's current base case assumptions apply enplanement, revenue, and expense growth CAGRs of 2%, 2%, and 1.5%, respectively, through 2020. Under this scenario, net revenues are expected to produce debt coverage in the 1.30x - 1.50x range while leverage evolves to about 4.3x by 2020. Fitch's rating case assumes almost no traffic growth taking into account some losses in 2017 and 2018 followed by recovery in following years. Airline costs remain at or below $11 while leverage is marginally higher at approximately 4.6x by 2020.
For additional information on AIAS, see Fitch's press release 'Fitch Rates Alaska's International Airport System Rev Bonds 'A+'', dated Nov. 19, 2015. Fitch rated the Series 2016 B&D issued via a delayed delivery in November 2015. The remainder closed July 6, 2016.
The bonds are secured by a pledge of net airport system revenues. The state also applies PFC funds to pay debt service.
Additional information is available at 'www.fitchratings.com'.
Rating Criteria for Airports (pub. 25 Feb 2016)
Rating Criteria for Infrastructure and Project Finance (pub. 08 Jul 2016)
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