Fitch Ratings assigns an 'AA-' rating to the approximately $600 million joint revenue refunding bonds, series 2009A and series 2009B, issued by the cities of Dallas and Fort Worth, Texas for Dallas-Forth Worth International Airport (DFW, or the airport). Fitch also affirms its 'AA-' rating for the airport's $3.59 billion of outstanding joint revenue bonds. The Rating Outlook on all bonds is Stable.
Proceeds from the series 2009A bonds will refund the airport's outstanding series 2004A1-2 and 2006A bonds while the series 2009B bonds will refund the airport's outstanding series 2004B and 2007 bonds, if the current tender offer is successful. The bonds are secured by an irrevocable first lien on gross revenues generated by the operation of DFW, as well as passenger facility charge (PFC) revenues to the extent they are specifically pledged to an individual series of bonds.
The 'AA-' rating reflects the airport's strong primary market area that generates sufficient demand for air service, its favorable central geographic location that provides for a well-balanced traffic profile for both domestic and international passengers, a diverse revenue stream supplemented by natural gas royalties, and a historically sound financial profile demonstrated by the airport's competitive cost structure and conservative debt structure. The rating also reflects the dominance of Fort Worth-based American Airlines (American, Issuer Default Rating of 'CCC' by Fitch) with approximately 86% market share and a high proportion of connecting traffic, the combination of which could expose the airport to financial pressures should American significantly change its operating strategies.
Despite the airport's ability to maintain its existing carrier service and low cost per enplaned passenger (CPE) in the current economic environment, DFW does face some near-term pressures. As a result of litigation concerning the airport's natural gas royalties, there is the potential for a significant decline in non-airline revenues. While 100 gas wells have been drilled and are producing gas for sale, all drilling ceased in May 2009 and the rigs have been moved off airport. The drilling agreement was meant to produce an accretive and steady stream of income to the airport, improve the airport's financial flexibility by allowing for more pay-as-you-go capital, and provide an additional source of liquidity. In addition, should the financial position of American deteriorate further, large capacity reductions cannot be ruled out. Finally, the airport is exploring a large 10-year capital program that is projected to be $2 billion-$3 billion. A material decline in royalty revenues, major capacity changes, or a significant increase in leverage, could negatively pressure the rating.
DFW is one of only four airports averaging more than 800 departures per day and served 29.1 million enplaned passengers in fiscal 2008 (ended September 30), representing a 2.7% decline from fiscal 2007. The traffic declines have continued, as year-to-date fiscal 2009 (through June) enplanements are down 5.1% compared to the same period in fiscal 2008. However, this decline fares well compared to many other large U.S. airports. While American's level of concentration does pose a credit concern, it is Fitch's view that the airport's sizeable local market combined with its favorable geographic location would prompt other carriers to enter the market - albeit over a period of time - should American significantly reduce its operations at DFW.
The airport's use and lease agreement with the airlines expires on Dec. 31, 2009. Management has proposed a nine-month extension of the current fully-residual agreement to Sept. 30, 2010 to coincide with the end of fiscal 2010 and provide time to finalize the capital and financial plan with the airlines. If the parties cannot reach an agreement or do not extend the current agreement, management is prepared to convert to a permit-based model, and would in accordance with the Department of Transportation's policy regarding airport rates and charges, implement them so they generate gross revenues sufficient to pay operating and maintenance expenses and debt service.
The airport has historically produced consistently sound financial operations. In fiscal 2008 the airport had nearly two years of unrestricted cash to pay for operating expenses, 67% of revenues were generated by non-airline sources, and its operating margin was a strong 41%. When non-operating revenues, including PFCs, are included, the excess ratio rose to 55%. In addition, debt levels are moderate, with long-term debt per enplaned passenger at $125 in fiscal 2008, while debt to operating and non-operating income was 8.2 times (x). Both figures are down from their peaks of $138 per enplanement and 16.7x, respectively, in fiscal 2003. DFW's CPE for fiscal 2008 equaled a competitive $6.85, up from $3.97 in fiscal 2004 as debt service related to capital improvements in fiscal years 2005-2006 entered the rate base. Based on the expected decline in enplanements in fiscal 2009, management estimates CPE to increase to $7.37 and is budgeted to decline slightly to $7.29 in fiscal 2010. Debt service coverage equaled 1.25x annually for fiscal years 2002-2008, which is in line with the requirement of the use and lease agreement.
DFW's management team is developing a new 10-year Airport Development Plan (ADP) that will identify and prioritize future capital projects. The airport is currently negotiating elements of the plan with the signatory airlines as part of the new use & lease agreement. Management hopes to define the scope and timing of the terminal projects by January 2010 and expects to reach an agreement on the new ADP with the airlines and obtain Board of Directors' approval of the plan no later than March 2010. The ADP will include a Terminal Redevelopment Plan (TRP). The major focus of this plan will be for the rehabilitation and replacement of aging systems/infrastructure (approximately 60%-70%) rather than for expansion and/or aesthetic purposes. The July 2009 cost estimate for the TRP is between $1.5 billion and $2 billion. The ADP will also include a capital plan for needed renewal and replacement of runways, roads and bridges, utilities, and other non-terminal capital, as well as some expansion projects. The July 2009 cost estimate for this non-terminal capital plan is between $0.5 billion to $0.9 billion, net of expected Federal Aviation Administration funding. The airport expects to fund these programs with capital generated annually from operations and/or non-airline sources, natural gas revenues, future incremental PFC revenues, if enacted into law, the Transportation Security Administration, and ultimately the issuance of new debt.
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