2008-05-22 01:03:41 -
- Fitch Ratings assigns an underlying 'A' rating to the following two series of Rhode Island Economic Development Corporation's (EDC) airport revenue bonds:
--Approximately $23 million series 2008 A (AMT);
--$9 million series 2008 B (Non-AMT).
The bonds are special obligations of the Rhode Island Airports Corporation (RIAC) payable principally from net revenues and pledged funds generated
principally from T.F. Green airport (T.F. Green, or the airport). Bond proceeds will be used to fund components of the authority's capital improvement plan (CIP). In addition, Fitch affirms the 'A' rating on the authority's approximately $252 million in outstanding airport revenue bonds. The Rating Outlook for all of the corporation's debt is revised to Negative from Stable.
The revision of the Rating Outlook to Negative is based on the airport recording two consecutive years of enplanement declines, its rising CPE (cost per enplaned passenger) and leverage position, with long-term debt per passenger well above the Fitch median at $96 in 2006, and its growing reliance on Southwest Airlines, which has seen its market share increase to 53% market share in fiscal 2008 from 46% in 2007, and the related exposure to this one carrier's scheduling decisions. The Negative Outlook also reflects the increasing financial pressures facing the domestic airline industry due to the rising price of oil, and the likelihood of systemwide service reductions to counteract this additional cost. A downgrade of the airport's rating may occur should there be additional service reductions and increased pressure on its financial margins over time. Should the airport successfully implement planned cost reduction efforts and moderate or reduce its CPE, generate non-airline revenues above the minimum annual guarantee it will receive from its new concession program, and/or maintain or increase passenger throughput over the next few years, the Outlook may be returned to Stable.
The 'A' rating reflects the core base of passenger demand at T.F. Green, and the airport's adequate operating margins and debt service coverage. In addition the rating reflects the airport's strong liquidity position and modest CIP plan. The rating also incorporates strong airport competition within the New England area which limits expansion of service, and the airport's higher than average cost structure with a CPE that is above the average for Fitch-rated medium hub 'A' category airports.
The airport recorded strong average annual enplaned passenger growth rates throughout the late 1990s, but passenger demand has dropped in the last three years due to the weakening national and regional economy, changes in the airline marketplace at T.F. Green, and increased competition from Boston Logan. Enplanements in fiscal 2007 (June 30 fiscal year end) fell 9% from fiscal 2006 to 2.5 million, and show continued declines of approximately 1% through the first three quarters of fiscal 2008. Traffic declines in fiscal 2008 capture substantial capacity cuts by Northwest Airlines and United Airlines (including their regional affiliates) which have reduced service by approximately 10% and 16%, respectively. However, these reductions were largely mitigated by Southwest Airlines maintaining a consistent level of service and thereby absorbing additional passenger activity at the airport.
The overall decline in passenger volume has been attributed to several factors, including the continued reduction of mainline service at the airport by traditional network carriers, as well as the expansion of service by low-fare carriers at Logan, most notably jetBlue Airways. The number of passengers enplaned at Logan on jetBlue increased 70% between fiscal 2005 and fiscal 2006, to reach 1.3 million. Prior to the commencement of service by jetBlue, Logan lacked significant low-fare leisure service, with T.F. Green serving as a low-fare alternative for many Boston-area passengers. With the completion of the Big Dig project, which facilitates easier access to Logan, and continued low-cost carrier expansion at that airport, Fitch views the growth of Logan as a rationalization of geographic and cost preferences. As a result, Fitch views future growth at T.F. Green as becoming influenced more by the strength of the underlying economy, the scheduling decisions of Southwest, and to a lesser extent, the scheduling decisions of other incumbent airlines.
RIAC has maintained adequate financial margins despite declining enplanements in the last three fiscal years. During fiscal 2007, the airport's operating revenues remained flat at $49 million while operating expenses grew 7%, to $31.5 million. Operating expense growth has stabilized in recent years from double-digit growth seen between 1999 and 2004 as management initiated operations in its new terminal and increased its security staff. Going forward the airport expects operating expenses to increase by 7% average annually capturing the effect of new terminal and security improvements being incorporated into the airport's rate base. Coverage of long-term debt was 1.72 times (x) in fiscal 2007, and the airport reported a 7.69 CPE, which has substantially increased from $6.28 in fiscal 2006. Going forward, the airport expects to maintain coverage near or above 1.7x times and a CPE ranging from a low of $8.91 to a high of $9.65 through fiscal 2016. Fitch will continue to monitor the airport's finances and cost-structure to ensure the airport's financial profile remains in-line with its current rating.
RIAC's capital plan calls for $72 million in project costs and elements of the plan will only be implemented once funding sources and demand targets have been realized. The airport anticipates most of the program will be funded through grants or internal funds. The airport's current infrastructure is modern and well equipped to handle increased passenger volumes. The airport's terminal underwent expansion in 2005 and a new concession program will commence in 2008 that will provided increased revenue under revised minimum annual guarantees in the respective leases. Other elements of the CIP include improvements at three of the five general aviation airports, including a new terminal facility at Block Island and construction of a new hangar at Quonset. The airport is currently undergoing an Environmental Impact Statement (EIS) to further determine project costs within its CIP.
RIAC was created in 1992 by the RI EDC to operate T.F. Green as well as five smaller airports throughout the state. T.F. Green is located close to several airports that provide competing or more expansive service. The airport is 55 miles from Logan International Airport in Boston, MA, and 71 miles from Bradley International Airport in Hartford, CT. Given that Logan is New England's principal airport for long-haul domestic and for international service and the competitive New England airport environment in which the airport operates, Fitch views it is unlikely that T.F. Green will attract similar service in the near term.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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