OREANDA-NEWS. Fitch Ratings has affirmed the ratings for Burlington, VT's (BTV) approximately $42.7 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 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 30% of enplanements are driven by demand from Quebec, Canada due to significantly cheaper fares to U.S. destinations. Enplanements were slightly over 617,000 in fiscal year (FY, ended 6/30) 2014, reflecting a decline of 17% from a peak of 743,000 in FY 2009.

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 $6.05 for FY 2014 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 five-year capital improvement plan (CIP) is modest at $56.3 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 7.14x, which is elevated for an airport of its size. In FY 2014, BTV's senior lien DSCR per resolution increased to 1.61x from 1.54x in FY 2013 and on a cashflow basis increase to 1.52x from 1.43x. Liquidity levels remain low but continue to improve with 140 DCOH at the end of FY 2014.

Peer Group: Similar airports with a 'BBB-' rating include Pensacola, FL and Augusta, GA. All three 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: Execution of an airline rate agreement with strong cost recovery mechanisms leading to further improved airport liquidity and financial ratios could lead to positive rating action.

CREDIT UPDATE

BTV has maintained a small but reasonably diverse carrier base consisting of US Airways, United Airlines, JetBlue, Porter, and Delta with no single airline representing more than 32% of market share. BTV had 617 thousand enplanements during FY 2014, a 2.1% increase over the previous year. Through the first 11 months of FY 2015, enplanements have declined 2.4%. Stabilization along with some potential growth is projected for FY 2016 due to Delta upgrading their Atlanta route to mainline service, doubling the amount of seats per flight, American beginning daily service to Charlotte in August, and United up-gauging aircraft on their Chicago route to a Boeing 737 in August.

The main source of revenue for BTV is parking operations, which accounts for 36% of total operating revenue. BTV expanded parking capacity on two occasions in the past to accommodate robust demand. Airline revenues make up only 23% of total revenues, but the airport has negotiated a 10% increase in rates for FY 2015 and is expecting a 6% increase in FY 2016 to alleviate some of its reliance on non-airline revenues.

Operating revenues have grown at a 5.2% five-year compounded annual growth rate (CAGR), while operating costs have increased at a CAGR of 4.5% over the same period. FY 2014 operating revenue grew 3.1% from the prior year to $16.4 million, driven by improvements in CFC revenues and car rental concessions. FY 2014 operating costs increased 6.6% to $12.5 million due to elevated costs relating to the harsh winter. BTV has taken steps in recent years to grow non-airline revenues; notably, it added new restaurants, retail concessions and amenities.

Under Fitch's five-year base case forecast, which assumes relatively flat annual enplanement growth and annual cost escalation of 4%, coverage on a cash flow basis averages around 1.4x. Fitch expects CPE levels to increase to high $7 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 4.5% 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 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 140 days cash on hand in FY 2014.