Fitch Rates Pensacola, FL's Airport Rev Bonds 'BBB+'; Outlook Stable
2008-07-24 22:45:07 -
- Fitch Ratings assigns a 'BBB+' rating to the City of Pensacola's series 2008 (AMT) general airport revenue bonds (GARBs) and affirms the 'BBB+' rating on approximately $30.3 million of City of Pensacola, FL (the city) airport revenue bonds. Bonds are expected to sell via negotiation on or about August 11, 2008. Net revenues generated from operations at Pensacola Regional Airport (the airport) secure the bonds. Proceeds will be used to fund portions of the airport's capital plan. The Rating Outlook is Stable.
The 'BBB+' rating reflects the airport's role as the principal provider of air travel for the region, the stable nature of the regional economy and the presence of low-fare provider AirTran Airways (AirTran), which initiated service in 2001 and subsequently stimulated considerable air traffic growth, the modest capital needs at the airport, and low liquidity. Credit concerns center on the increasing reliance of the airport on AirTran to generate travel demand, the airport's small base of travel which leaves the airport vulnerable to reductions in air service, and the high elasticity in passenger demand to changes in ticket prices.
The rating also incorporates the airport's ability to capture additional market share from the surrounding airports over the last five fiscal years. Of the five commercial service airports in northwestern Florida and Southern Alabama, the airport accounted for 39% of total enplaned passengers in 2007. While the airport's small enplanement base makes it especially susceptible to volatility stemming from the addition or loss of a single flight, Fitch acknowledges that the airport's nearly 100% O&D market is supported over the long term by the economic stability of the service area rather than by the scheduling decisions of a single carrier. In addition, the service area is home to four major military installations and due to recent Base Realignment and Closure (BRAC) renegotiations, there is a potential for increased economic activity and employment growth.
Enplanements steadily increased at an average annual growth (AAGR) of 8% from 2002 through 2008, with a high initial rate of growth that has slowed in recent years. In 2007 enplanements grew by 3% from the previous year and current available data for the first six months of 2008 shows steady traffic trends, with enplanements up 2.4% over the same corresponding time frame in 2007. However, the airport is expecting an 11% reduction in capacity in the beginning of fiscal 2009 (FYE Sept. 30) which could result in less growth. In addition, the next fiscal year could be challenging for the airport as the reduction in capacity might result in less non-airline revenues. The airport has seen previous declines between 1997 and 2000, when enplanements declined by a 1% average annual rate, to 530,517, as nearby airports in Mobile, AL and Okaloosa, FL (each about a one-hour drive from the city) offered more competitive airfares due to the presence of low-fare airlines. Through a highly targeted incentive program which ended in 2005, the city successfully attracted AirTran away from neighboring Okaloosa Airport. The carrier currently serves 18% of overall passengers and is credited with lowering the overall average fare at the airport and with stimulating additional travel demand. While the benefit from AirTran on airport operations has been extremely positive, it is Fitch's opinion that such 'low-fare effects' are temporary and that growth will approach more normal levels after several years following the initiation of 'low-fare' service. Of note, AirTran continues to operate as a non-signatory air carrier at the airport; thus, the airline has the ability to reduce or completely stop service at the airport if the cost of operating becomes prohibitive. Given the airport's enplanement volatility in the absence of low-cost service and the recent announcement of the loss of seven flights, Fitch expects future travel demand to be highly dependent on the availability of competitive airfares and reliable service schedules.
The hybrid nature of the airport's airline operating agreement provides the basis for consistent financial operations. Net airport operating revenues for fiscal 2007 provided 2.16 times (x) debt service coverage. Going forward, the airport forecasts debt service coverage to range from 2.2x to 2.4x, using Passenger Facility Charges (PFCs) to offset a portion of the debt service. The high rates of passenger growth following the initiation of AirTran's service have moderated the airline's cost per enplaned passenger (CPE), which equaled $5.70 in fiscal 2007 and is significantly down from $8.00 in fiscal 2000. The airport expects its CPE to be $5.32 in 2008 and reach a high of $6.75 in 2011. The airport's lease and revenue sharing provisions allow management to apply surplus revenues toward the reduction of airline landing fees and terminal rental rates in successive years.
The airport's capital improvement plan (CIP) totals approximately $45 million and focuses on expanding and modernizing the terminal area and related facilities. Major components of the program include airline ticketing and office expansion, terminal facility modifications and expansion to accommodate explosives detection systems, aircraft apron expansion, and additional surface parking lot expansion. The authority expects to fund approximately 50% of the CIP with the current bond proceeds, 21% from federal grants, and 17% from a TSA grant. In addition, the airport issued approximately $19 million in series 2006 subordinate bonds (not rated by Fitch) in January 2007 to fund aspects of the capital program. The airport also took on a $21 million CFC-secured loan in the first quarter of 2008 to fund a rental car facility. Going forward, Fitch expects minimal future borrowing needs.
The airport is located three miles from Pensacola, FL and primarily serves the western Florida panhandle counties of Escambia and Santa Rosa. Per capita income levels are low, at 84% of the state and 80% of the national averages for 2007, but the unemployment rate (3.1% for 2006) has been historically low and better than both the state and the nation. Long know as the 'Cradle of Naval Aviation', the economy has long benefited from the historical presence of U.S. Naval bases, which were estimated to have an annual economic impact of approximately $5 billion in 2008.
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.
Fitch Ratings
Vanessa E. Roy, +1-212-908-0508 (New York)
Michael McDermott, +1-212-908-0605 (New York)
Peter Stettler, +1-312-368-3176 (Chicago)
Sandro Scenga, +1-212-908-0278
(Media Relations, New York)
