Fitch Affirms Charlotte (NC) General Airport Rev Bonds at 'A+'; Outlook Stable
The 'A+' rating reflects the large hub airport's stable traffic performance, strong cost-recovery framework, which is extended under a new airline agreement, ample liquidity, and low cost per enplanement (CPE), offset by the risks posed by a high degree of single-carrier concentration in American Airlines ('BB-'/Stable Outlook) and high degree of connecting traffic, as well as a potentially large capital program after 2016 that could call for sizeable additional debt funding. Coverages remain very strong in the rating case, which helps mitigates volume risk.
KEY RATING DRIVERS
Large, Concentrated Connecting Hub [Revenue Risk-Volume: Midrange] The airport enjoys a stable-to-growing traffic base of 22.2 million enplanements due primarily to its strategic location and status as a primary American Airlines ('BB-'/Outlook Stable) hub. CLT is currently exposed to the carrier's 92% dominant market share and potential volatility with scheduling decisions, as 74% of traffic consists of connecting passengers. CLT is currently also exposed to capacity constraints, which may inhibit its ability to continue to grow connecting traffic in the short term.
Strong Revenue Profile [Revenue Risk-Price: Stronger] A new 10-year airline use agreement (AUA) went into effect in July 2016 with an enhanced cost-recovery framework. Coupled with solid contributions from non-aeronautical revenues, it allows for strong debt service coverage metrics, well above those achievable with a traditional residual framework, and the ability to accumulate exceptional liquidity, while still translating into a highly competitive CPE, just $1.33 in FY2015.
Flexible, Potentially Large Capital Program [Infrastructure Development & Renewal: Midrange]
The CIP calls for $1.6 billion in projects over the next five years, with a nine-gate concourse A expansion as the current top priority. Terminal and runway projects account for approximately half of capex spending. With the extension of the AUL, CLT has also received pre-approval of approximately $500 million in capex. Funding is expected to come from a variety of sources, including the airport's ample liquidity and expected new debt issuances.
Conservative Debt Service Profile [Debt Structure: Stronger]
The debt service profile is senior, fully amortizing, and flat-to-declining, with standard strong structural features. The score was altered to Stronger from Midrange as variable rate debt is now limited to minimal unhedged exposure of approximately 11%, backed by LOCs and mitigated by CLT's significant cash-on-hand.
Strong Financial Metrics: Net debt to cash flow available for debt service (CFADS) is currently under 1.0x, but leverage could increase depending on how CLT funds its capital program. The airport benefits from having over 1400 days cash on hand (DCOH), and debt per enplanement of $25.00, which compares favorably to other large connecting hub peers. Indenture-based coverage, which utilizes PFCs as a debt service offset, has been historically healthy at above 3.0x and is anticipated to approach 4.0x through the medium term. Fitch-based coverage, which treats PFCs as revenue, is expected to average 2.3x in the medium term.
Peers: Airports of similar profile include Atlanta Hartsfield ('A+'/Outlook Stable) and Chicago Midway ('A'/Outlook Stable), given the percentage of connecting traffic and concentration risk from Delta Air Lines ('BB+'/Outlook Positive) and Southwest Airlines ('BBB+'/Outlook Stable), respectively. CLT's financial profile is stronger, but Atlanta's origin and destination (O&D) base is more substantial, whereas Chicago is stronger in terms of its infrastructure development and renewal.
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RATING SENSITIVITIES
Negative: A reduction or elimination of American Airlines' hubbing activity.
Negative: The initiation of significant debt-funded capital projects without an increase in air traffic and revenue sufficient to support new facilities.
Positive: Capital improvement plan financing that preserves the airport's robust financial risk metrics, coupled with continued strong commitment to the airport by American Airlines in conjunction with the continued growth in its O&D travel base.
SUMMARY OF CREDIT
The airport benefits from a new AUL, which went into effect in July 2016, that supports an enhanced cost-recovery framework, pre-approval of a portion of the airport's 10-year CIP, and a long-term commitment by the airlines with the agreement effective through July 2026. Cost-recovery has been strengthened by the requirement of airlines to pay upfront 25% of debt service included on airline rates and charges and by the explicit mention within the agreement of extraordinary coverage protection to meet financial covenants. Cost sharing with the airlines continues to operate in the same fashion, sharing 40% of non-airline parking and terminal fees. Expanded Majority-in-Interest (MII) exceptions and enhanced airport property rights give CLT management more autonomy and flexibility with regards to managing its capex as it moves to increase airport capacity.
Passenger traffic growth at the airport remains strong with a 10-year CAGR of 6.1%, but CLT has experienced recent slow-down due to airport capacity constraints. Total enplanements are up just 0.63% in FY2016, with 11 months reported, following 1% growth in FY2015. Notwithstanding flat total enplanement growth, the O&D market has continued to expand with 6.8% growth in FY2015 and 8% combined growth in FY2014 and FY2013, as a reflection of the strength of the local Charlotte economy. Connecting traffic, which comprises three-quarters of total traffic, has remained flat, with additional added services limited by capacity constraints.
Pledged operating revenue continues a high growth trend with an increase of 8.7% to $163.7 million in FY2015, in connection with the growth in O&D passengers. Further driving growth was an increase in parking rates and new parking options, with the opening of a new hourly parking deck in 2015 that is fully integrated with the rental car facility. Year-over-year, parking and rental car revenues were up 16.7% and 6.7%, respectively, together comprising 37% of total pledged operating revenues. On the expense side, the airport has experienced elevated growth in recent years due to efforts to address its deferred maintenance needs, which are exacerbated by high asset utilization. Included operating expenses impacting CFADS increased 11.3% in FY2015, driven by an increase in cost of services, maintenance, various airline requested investments in facilities, and an uptick in parking expenses impacted by inclement weather. Though expenses are expected to further rise in FY2016 due to an increase in full-time staff to address maintenance needs, management expects maintenance-related costs to stabilize in the near term.
The airport's current 5-year CIP details $1.6 billion in projects, with the top priority being the nine-gate concourse A expansion, which is expected to be completed by early 2019. Other major projects include terminal renovations, roadway improvements, east terminal expansion, and a new runway. Funding is expected to come from a variety of sources including new debt, pay-go PFCs, grants, and cash-on-hand. The airport benefits from ample liquidity with a strong PFC fund balance of over $300 million, excess annual PFC capacity, and over 1400 DCOH. Moreover, CLT has flexibility to increase its PFC rate to the $4.50 cap from its current rate of $3.00. A financial feasibility consultant has been engaged to provide the airport a pro forma revenue and expenses outlook in connection with its anticipated debt issuance. Signatory carriers have pre-approved $465 million in capex in the newly signed AUL and have unanimously approved an additional $200 million capex as of April 2016, signalling airline demand to continue to expand at CLT.
In the Fitch base case, flat connecting traffic and marginal O&D growth are assumed through 2018, after which an uptick is assumed in connection with additional gate capacity. Expenses are expected to be elevated in the near term, due to the airport addressing deferred maintenance needs, but stabilize thereafter growing in proportion to enplanement growth and inflation. Based on these assumptions the airport's CPE is expected to average at a still low $2.30 range. Indenture-based DSCR, which treats PFCs as a debt service offset, approaches 4.0x whereas Fitch-based DSCR, which treats PFCs as revenue, averages 2.3x.
Fitch rating case applies a 2.5% stress to O&D traffic and a 4% stress to connecting traffic in 2017, followed by a full recovery though 2020. Expenses are compressed in 2017, but elevated above the base case thereafter. The impact is a higher average CPE of $2.40, with indenture - and Fitch-based DSCR averaging 3.75x and 2.2x, respectively. In conjunction with an expected new debt issuance, leverage is expected to climb, though given the airport's sizeable liquidity it is not anticipated to be a material rating constraint.
Fitch expects American to continue to emphasize CLT as a primary connecting hub, but given CLT's heavy reliance on a single carrier with a largely connecting-based traffic profile, a further high-stress case is applied which tests a permanent 35% loss of connecting traffic along with a 5% reduction in O&D traffic, with partial recovery. It is also assumed that management would take steps to increase the airport PFC rate to $4.50 from $3.00 currently. Resulting CPE reaches a maximum of $3.65 by 2020, with indenture-based DSCR remaining above 3.35x and Fitch-based DSCR above 2.10x. CLT would be well positioned to handle such a scenario given its ample internal liquidity, as it would likely apply unspent PFC balances to reduce annual debt service requirements. Lower passenger levels would also likely affect the revenue sharing benefits with the signatory airlines, but overall solid 'A' category credit metrics would be maintained.
The airport is owned by the city of Charlotte and operated as a self-supporting enterprise fund. An appointed aviation director manages airport operations and capital improvements. In July of 2013, the North Carolina General Assembly enacted Senate Bill 380 into law, creating the Charlotte Regional Airport Authority. Subsequently, the city challenged the legislation and was granted an injunction blocking transfer of control of the airport to the new commission. In 2016, the Federal Aviation Authority indicated it would not engage in resolution of the dispute, and, as such, the injunction remains. It is not known at this time what impact, if any, this change would have on the airport's management and operations.
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