December 3, 2011 · 0 Comments
Fitch Ratings-New York-02 December 2011(www.hospitalitybusinessnews.com) AMR Corp.’s (AMR) filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code poses only minor immediate risks to most general airport revenue bonds, according to Fitch Ratings.
AMR is the parent corporation for American Airlines, Inc. (American).
However, credit concerns do exist for individual airports, particularly facilities where American operates major connecting hubs.
These include: Dallas Fort-Worth International Airport, Miami International Airport, and Chicago O’Hare International Airport. Credit concerns may increase during the course of American’s bankruptcy proceedings should the reorganization process lead to operating decisions that reduce or reallocate the carrier’s schedule.
Consequently, Fitch affirms the ratings and revises the Rating Outlook to Negative from Stable on the following bonds:
—Dallas- Fort Worth International Airport (DFW), TX’s approximately $4 billion joint revenue improvement bonds (rated ‘A+’ by Fitch);
—Miami Dade-County, FL’s approximately $6 billion aviation revenue bonds (rated ‘A’ by Fitch), issued on behalf of Miami International Airport (MIA);
–City of Chicago, IL’s approximately $6.5 billion airport revenue bonds (rated ‘AA+’ first lien, ‘AA’ second lien, and ‘A-’ third lien by Fitch), issued on behalf of Chicago O’Hare International Airport (O’Hare).
In addition, Fitch has affirmed the City of Chicago, IL’s approximately $812.7 million passenger facility charge (PFC) bonds at ‘A’ with a Stable Rating Outlook.
As is common in the early stages of the bankruptcy process, American is expected to operate its full schedule and will need to fulfill obligations of its use and lease agreements at the various airports where it operates, though there may be some small amounts of pre-petition rents owed. This would expose airports with inadequate liquid reserves. As bankruptcy courts generally allow an airline to continue making payments to the airports it serves, Fitch expects airports will continue to receive payments from American on a timely basis for the near term. However, an airline bankruptcy filing may allow for rejection of use and lease agreements at individual airports or result in changes through negotiations.
The risks to individual airport finances may increase over the course of the bankruptcy process as American undertakes a reorganization that may result in considerable operational changes. Particularly vulnerable are American’s hub airports that rely on the scheduling decisions of American to generate significant levels of transfer traffic to complement local origin and destination (O&D) traffic. Fitch notes that there are very few airports outside of those hub airports where American has a dominant market share position. One small Fitch-rated airport, Northwest Arkansas Regional Airport (rated ‘BBB’), has a 40% enplanement concentration by American. Most of the other O&D airports rated by Fitch have exposures to American of less than 30%.
At somewhat less risk are airports served by American that rely on local demand for air travel to drive their operations. In many such smaller markets, however, American extensively utilizes commuter and regional jets, where excess capacity can be a concern. Should the carrier decide to rationalize or pare down this fleet while in bankruptcy, some smaller cities could lose service. The O&D nature of traffic in many of these markets does, however, increase the probability that another carrier or carriers may enter the market and provide service previously offered by American. Fitch will issue credit updates on airports that may be exposed.
DFW – American and its regional affiliate, American Eagle, collectively accounted for approximately 85% of DFW’s 28 million total enplanements in fiscal 2011 (ended Sept. 30). Transfer traffic also represents a relatively high 57% of the airport’s total traffic, the majority of which is generated by American. DFW currently serves an important role in the national aviation system and has a favorable geographic location to support its standing as a Midwestern transportation hub and its use and lease agreement has a 10-year term, expiring Sept. 30, 2020. As part of the agreement, the airlines serving DFW have approved the $2.1 billion capital program. As a result, gate use will be preferential, and if American’s passenger traffic declines 10% from fiscal 2010 levels by the time design is complete for Terminals B and C, the projects may be deferred. The airport’s debt per enplanement is expected to approach $200 by fiscal 2015 when all of the debt to finance the terminal renewal and improvement program has been issued.
As part of its credit evaluation, Fitch conducted stress case scenarios that incorporated a complete dehubbing and passenger reductions down to nearly 11 million. Under such circumstances, taking into account substantial operational cost reductions, airline cost per enplanement (CPE) would rise to $14, nearly double current rates. Just as important, Fitch will consider how management intends to execute its ongoing $2.1 billion terminal redevelopment plan, much of which is expected to be debt financed over the next several years. A rising debt burden in the face of lower traffic and operations may weaken the financial metrics and result in rating pressure. In addition, Fitch would consider the rejection by American of the airport’s use and lease agreement or a significant scale-back in its operations at the airport as material negative events. While airline carriers provide for about 35% of total airport revenues, the airport maintains solid liquidity in reserves totaling $765 million.
Miami – American and its regional affiliate, American Eagle, collectively accounted for 68% of MIA’s 18.7 million total enplanements in fiscal 2011 (ended Sept. 30). Transfer traffic represents about 45% of the airport’s total traffic, the majority of which is generated by American. Miami currently serves as a strategic hub for American in terms of its Latin American operations and nearly half of the total traffic serves international passengers. Still, the airport recently completed a major terminal-focused capital program that cost in excess of $5 billion. The airport’s annual debt service costs have risen by approximately 30% during the most recent two- to three-year period while airline CPE is projected to rise to more than $25 by 2014 from the current $18 level.
Fitch believes that in the event the American bankruptcy results in material reductions in passenger traffic, this scenario would exacerbate the cost risk in terms of CPE. As part of its credit evaluation, Fitch conducted stress case scenarios that incorporated a 50% reduction in connecting passenger traffic down to around 13.3 million enplanements. Under such circumstances, taking into account substantial operational cost reductions, airline CPE would rise to more than $32. The airport operates under a residual use and lease agreement through 2017 so all costs would be recoverable regardless of traffic performance. Terminal building agreements are cancellable by either party with 30 days notice. While airline carriers provide for almost 50% of total airport revenues, the airport maintains solid liquidity in reserves totaling $352 million including cash balances in the debt service reserve accounts.
Chicago O’Hare – American and its regional affiliate, American Eagle, collectively accounted for 36% of O’Hare’s 32.3 million total enplanements in 2010. Approximately 50% of the airport’s total traffic i
s connecting; however, the connecting operations are primarily shared by American (15% of total enplanements) and UnitedContinental (35%), which partially mitigates the risk of a loss of American’s service. Still, the airport is working through a major airfield-focused capital program (O’Hare Modernization Plan) that will potentially cost in excess of $3 billion. The scope and timing of the capital plan has previously led to litigation against the airport that was later settled. The airport’s annual debt service costs are expected to rise by more than 50% in the next five years with CPE projected to rise to more than $20 from $15.
Fitch believes that in the event the American bankruptcy results in material reductions in passenger traffic, this scenario would exacerbate the cost risk in terms of CPE. As part of its credit evaluation, Fitch conducted stress case scenarios that incorporated a 25% reduction in connecting passenger traffic down to around 28 million enplanements. Under such circumstances, airline CPE would rise to nearly $25. The airport operates under a residual use and lease agreement through 2018 so all costs would be recoverable regardless of traffic performance. While airline carriers provide for more than 60% of total airport revenues, the airport maintains solid liquidity in reserves totaling $767 million including cash balances in the debt service reserve accounts. With regards to the airport’s PFC credit, Fitch views the high existing coverage levels against existing debt to provide adequate mitigation in a scenario of service loss from American. Therefore, Fitch has affirmed the PFC rating at ‘A’ with a Stable Outlook.