OREANDA-NEWS. Fitch Ratings has affirmed Burlington, VT's approximately $40.6 million of outstanding airport revenue bonds at 'BBB-'. The Rating Outlook is Stable.

KEY RATING DRIVERS

The 'BBB-' rating reflects a volatile enplanement base serving a small regional market at Burlington International Airport (BTV) combined with limited operating and financial flexibility. BTV has a history of weak cash flow but recent strides have enhanced their financial profile as seen in recent improvement of net revenue generation, debt service coverage ratio (DSCR) and days cash on hand (DCOH).

Revenue Risk - Volume: Weaker

Primarily O&D Traffic Base with Volatility: BTV is the primary air service provider for the Burlington metropolitan statistical area (MSA) with no domestic competition within 150 miles. Approximately 19% of enplanements are driven by demand from Quebec, Canada due to significantly cheaper fares to U. S. destinations. Enplanements were 600,402 in fiscal year (FY, ended June 30, 2015), reflecting a decline of 19.2% from a peak of 743,000 in FY 2009 while fiscal FY 2016 growth was essentially flat as indicated by management.

Revenue Risk - Price: Weaker

Short-Term Agreement with a Large Subsidy to Airline Carriers: BTV has a month-to-month hybrid use and lease agreement that has historically offered a substantial subsidy of approximately 40% from full recoverable costs towards terminal and landing fees, although the assistance has decreased in recent years. BTV's subsidy to carriers allows the cost per enplaned passenger (CPE) to remain moderate relative to peers at $6.79 for FY 2015 but adverse developments in either traffic activity or non-airline revenues could stress this rate-setting practice.

Infrastructure & Renewal Risk: Stronger

Manageable Infrastructure Plan: The four-year capital improvement plan (CIP) is modest at $66.8 million and is expected to be largely funded through grants.

Debt Structure: Stronger

Conservative Debt Structure: All of BTV's senior debt is fixed rate with a level profile at approximately $3.8 million through 2028, stepping down to $1.5 million for the final two years. The debt also contains sound coverage tests and reserve requirements.

Improving Financial Profile: BTV's net debt-to-cash flow available for debt service (CFADS) is 6.01x, which is elevated for an airport of its size. In FY 2015, BTV's senior lien DSCR per resolution decreased to 1.52x from 1.61x in FY 2014 and on a cashflow basis decreased to 1.44x from 1.52x. Liquidity levels remain low but continue to improve with 176 DCOH at the end of FY 2015.

Peer Group: Similar airports with a 'BBB-' rating include Pensacola. The two exhibit a weaker volume and price score while BTV and Pensacola have comparable leverage and CPE.

RATING SENSITIVITIES

Negative: Material changes to passenger traffic levels, some of which are currently influenced by Canadian-based travellers, may pressure the rating.

Negative: Inability to maintain DSCR or unrestricted fund balances consistent with recent performance may result in a lower rating.

Positive: A developing trend of positive enplanement growth with coverage moving towards 2x and further improved liquidity could result in upward credit migration. In addition, an airline use and lease agreement with strong cost recovery mechanisms would likely contribute to a positive rating action.

CREDIT UPDATE

BTV has maintained a small but reasonably diverse carrier base consisting of U. S. Airways, United Airlines, JetBlue, Porter, and Delta with no single airline representing more than 29% of market share. BTV had over 600 thousand enplanements during FY 2015, representing a 2.7% decline over the previous year, while FY 2016 enplanement growth was essentially flat. Airline service has softened in recent years partially due to weakness in demand from Canada. Stabilization of the current level is projected for FY 2017. While American Airlines began daily service to Charlotte in August 2015, few other service changes have occurred recently.

The main source of revenue for BTV is parking operations, which accounts for 34% of total operating revenue. BTV expanded parking capacity on two occasions in the past to accommodate robust demand. Airline revenues make up only 24% of total revenues, but the airport has been proactive in raising CPE to maintain adequate debt service coverage.

Operating revenues have grown at a 6.6% five-year compounded annual growth rate (CAGR) through fiscal 2015. FY 2015 operating revenue grew 2.5% from the prior year to $16.4 million, driven by an increase in airline fees while fiscal YTD 2016 (11-months through May) operating revenues are down 0.35% primarily due to a decline in parking fees. Operating costs have increased at a CAGR of 3.4% over the same period. FY 2015 operating costs decreased 1.3% to $12.4 million compared with FY 2014 where there were elevated costs relating to the harsh winter. 2016 YTD expenses are up 2.7% primary as a result in a rise in employee benefits and real estate taxes.

Under Fitch's five-year base case forecast, which assumes relatively flat annual enplanement growth and annual cost escalation of 3%, coverage on a cash flow basis averages around 1.5x. Fitch expects CPE levels to increase to the $8 range as the airport increases rates and reduces the subsidy to carriers. Fitch's rating case assumes a multi-year near-term enplanement stress of 5%, with only slight recovery thereafter, and an increase in costs of 3.4% annually. Under this scenario, coverage levels decline to the 1.3x range but still remain above the rate covenant. CPE rises further to around $9-$10 over the five-year period, which is viewed as an appropriate level for the rating category.

Management has taken actions over the past several years to address BTV's most vulnerable issues in its financial profile. Historically, BTV has lacked adequate reserve balances to protect against shortfalls, having only one day of cash on hand in FY 2010. Since then, the airport has steadily improved fund balances, having fully funded an O&M reserve, debt service reserve, and a renewal and replacement fund, generating 176 days cash on hand in FY 2015.