Fitch Affirms JFK IAT (NY) Project Bonds at 'BBB'; Outlook Revised to Positive
The Positive Outlook reflects continued strong performance of the terminal post-completion of its headhouse and gate expansion projects. Debt service coverage ratios (DSCR) averaged 2.36x from 2010-2014 and are expected to remain above 2x in the near term in Fitch's base case. Net debt to cash flow available for debt service (CFADS) has declined faster than originally anticipated, while cost per enplanement (CPE) levels remain comparable to other international terminals.
The rating reflects IAT's strategic significance to foreign-flag carriers and to Delta Airlines (rated 'BB+'/Positive Outlook) as the hub for its international operations in the New York area. Despite the significant investment Delta has made into the terminal, the single asset nature of IAT as well as its heavy reliance on one dominant carrier present material credit risks that keep the credit in the 'BBB' category. IAT also faces on-going competition for international traffic from other terminals at JFK and Newark airport.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Strong Market despite Competition: The NYC region remains one of the most affluent and historically, culturally and economically important regions in the U.S. and, as such, the terminal benefits from an exceptionally strong catchment area, both for its international and domestic services. Nevertheless, IAT faces a high degree of competition, not only from other independently operated JFK International Terminals, but also from Newark Liberty International Airport (EWR) and LaGuardia Airport (LGA). The effect of competition is partly mitigated by limited capacity in the market, particularly during peak travel periods. The terminal experienced significant passenger growth in 2014 and continuing into 2015, following completion of the Phase II expansion project.
Revenue Risk - Price: Midrange
Reasonable Pricing Power: IAT has complete flexibility to enter into agreements with airlines and set rates as it sees fit. IAT's agreement with Delta essentially functions as a blend of cost recovery methodology and a traditional lease, and agreements with contract carriers reflect negotiated pricing based on market conditions. IAT's pricing power benefits from Terminal 4 being the only facility at JFK with a 24 hour federal inspection service (FIS) facility making it desirable for international traffic. Average airline CPE is comparatively high, and has remained in the \\$35-\\$45 range over the past few years; however, this should be viewed in the context of high ticket prices for international travel and limited cheaper options for airlines wishing to serve the region.
Debt Structure: Stronger
Well-Structured Debt Protects Noteholders: All IAT debt is fixed rate maturing prior to the expiration of the Port Authority of New York and New Jersey's (PANYNJ) lease with the City of New York. All reserves are cash funded at their required amounts.
Infrastructure Development & Renewal - Stronger
Limited Future Capital Needs: The Phase II expansion, which was completely Delta funded and included 11 regional jet gates, was completed in the first quarter of 2015. Following completion of the Phase II expansion project, terminal facilities are in a good condition and are not expected to require major renewal in the foreseeable future.
Improving Financial Profile following Project Completion: The 2010 issuance of series 8 to fund its Phase I expansion project doubled IAT's outstanding senior debt quantum, and the increased leverage amplified the effect of construction risks on IAT's credit profile. With construction now complete, leverage is expected to decline to near 5x in 2015, continuing to decrease thereafter. IAT is also expected to be able to maintain a debt service coverage profile above the 1.5x range, whilst returning a cut to CPE to airlines over the period 2015-2020.
Peer Group: The most similar peer to IAT is Terminal One Group Association (TOGA) which operates under a similar relatively unique business model as IAT and competes for New York international travel with other terminals at JFK and Newark Airport. IAT is more highly leveraged and more dependent on one dominant carrier relative to TOGA. However, IAT has a much larger operating scale with a 2014 enplanement base that is more than double TOGA.
RATING SENSITIVITIES
Positive: Delta's continued growth at Terminal 4 along with other airline commitments to the terminal and coverage levels remain in excess of 2x.
Negative: A sharp decline in enplanements driven either by a reduction in services offered by airlines other than Delta or a failure by Delta to fully utilize the terminal resulting in a material change in financial metrics.
Negative: Any further significant construction works at the terminal, either formally planned or funded by IAT in the near term, increasing its leverage profile.
CREDIT UPDATE
Traffic at Terminal 4 has increased substantially following the completion of Phase I & II expansion projects, with enplanements up 21% in 2014 to 7.9 million, and expected to reach 9.7 million this year. Delta and its affiliates continue to increase their presence in Terminal 4, accounting for approximately 59% of traffic in 2014. While several carriers left the terminal following Delta's initial expansion, other airlines, such as WestJet, Thomas Cook Airlines, and Volaris have begun service in 2015. IAT maintains a diverse mix of carriers, with no one airline other than Delta accounting for more than 7% of enplanements in the current year.
The significant increase in passenger traffic has improved financial performance with total revenue increasing nearly 17% to \\$356 million in 2014. Total revenue growth was driven by a 48% increase in Delta payments made to the terminal, up to \\$141 million. As Delta ramped up activity at Terminal 4, payments are estimated to increase, by 4% in 2015, with total revenue growth of approximately 3%. Non-aviation revenue also contributed to total revenue growth at Terminal 4, up 30% in 2014, and estimated to increase an additional 16% in 2015.
Total operation & maintenance (O&M) expenses increased coinciding with the completion of the terminal expansion projects. In 2014, expenses increased 34% to approximately \\$89 million, and are estimated to increase an additional 12.4% in 2015. However, costs are recovered in the terminal through Delta's payments and other terminal charges. Operating costs are expected to stabilize in the near term as the expanded terminal reaches a new base level of expenditures. In addition to O&M, IAT pays a ground rental fee for its lease of space at JFK with PANYNJ. In 2014, ground rental fees were approximately \\$21 million, which included 15 months of fees retroactively related to an additional 2.41 acres of leased space for the Phase II expansion. As 2015 will only include 12 months of fees related to this space, the total year-over-year increase is expected to be 3.6% in 2015. However, per the lease agreement with PANYNJ, ground rentals increase at an annual rate no less than 4% and are expected to do so going forward.
The growth in total revenue has enabled IAT to maintain solid coverage levels, at 2.07x in 2014, with the project's overall leverage decreasing faster than initially anticipated. Leverage was approximately 5x in 2014, down from roughly 6x in 2013. On the surface, the project's CPE seems high at approximately \\$30 for Delta and \\$50 for non-Delta carriers. However, when viewed in the context of higher airfares for international flights and limited options it is more reasonable.
Under Fitch's five-year base case forecast, which assumes marginal Delta and contract carrier annual enplanement growth and escalating costs of approximately 5% annually, coverage averages in the low 2x to high 1x range. Following non-aviation revenue growth in 2015, CPE levels are expected to decrease, with slight growth thereafter, averaging approximately \\$37 through 2020. Fitch's rating case contemplates debt service coverage under a stressed condition aimed to capture a decrease in near-term traffic with moderate recovery thereafter. Debt service coverage remains above 2x through 2016 in Fitch's rating case. From 2016-2020, rating case DSCRs average 1.70x, with a minimum of 1.52x (2020). The profile is further strengthened through the five-year period with leverage remaining below 5x, and while total blended CPE increases, it remains below \\$38.
SECURITY
The bonds are secured by a facility rental payment made to PANYNJ, by IAT, in an amount sufficient to cover the required debt service obligations annually through to maturity, and by a leasehold mortgage pledged to the trustee in the leased premises.
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