Fitch Ratings affirms the City of Houston, TX's $323.5 million airport system special facilities revenue bonds (Continental Airlines Inc. Terminal E Project) series 2001 at 'B-'. The series 2001 bonds are fixed-rate revenue bonds with a final maturity in 2029. The Rating Outlook on the special facilities bonds has been revised to Positive from Stable.
The rating reflects the combined carrier's, United Continental Holdings, Inc. (UAL, or United Continental) which currently has a Fitch Issuer Default Rating (IDR) of 'B-' and a Positive Outlook (see related analysis on United Airlines and Continental Airlines, dated Oct. 1, 2010, following the merger), improved underlying financial strength and liquidity, the essential nature of the Terminal E as it handles the majority of the carrier's international operations at Houston Airport System (HAS) and the re-letting provisions allowing the airport to retake the facility in the event of an early lease termination.
The Outlook revision reflects the current outlook of the terminal project's primary obligor, United Continental, as well as continued strong utilization of the facility by the combined carrier following the merger.
The Continental Terminal E Project bonds financed the construction and development of Terminal E at George Bush Intercontinental Airport (Intercontinental), which United Continental uses as an international connection hub and Latin American gateway. Special facilities rent paid by United Continental secures the Continental Terminal E Project bonds and bondholders have no access to liquidity or structural enhancements to avoid default if the carrier fails to provide timely debt service payments. Terminal E was built in two phases and fully opened in January 2005.
Intercontinental serves as the primary commercial airport for the metropolitan area and it is the only Houston-area airport providing international service. United Continental has continued to operate its major system hub at the airport since the merger in October of 2010, without any major scheduling changes and hubbing decision; no significant changes in traffic profile are expected as a result of the merger. United Continental accounted for approximately 86% of Intercontinental's passengers and 80% of total international traffic in 2010. Terminal E is a 600,000 square-foot facility with 23 gates that can handle both domestic and international passenger traffic. The terminal is an essential facility for the airport itself as well as for United Continental's international operations. Terminal E handles about 32% of total Intercontinental traffic while the terminal's international traffic of 5.3 million passengers in 2010 represented 13% of all the airport's passengers and 62% of all international traffic. Intercontinental's traffic has held up relatively well through the recent downturn, with modest declines in enplanements at a compound annual growth rate (CAGR) of 1.3% between 2006 and 2010. After year-over-year enplanement declines of 3.1% and 4.1% in 2008 and 2009, respectively, 2010 demonstrated a positive increase of 1% in total airport traffic, indicating signs a recovery is underway. In 2010, international traffic has increased at a faster rate than domestic, rising by 8.9% compared to 0.7% decline in domestic traffic.
In September 2010, Fitch upgraded United Airlines' (United) IDR to 'B-' and maintained its Positive Rating Outlook; the upgrade followed steady strengthening in United's stand-alone credit profile during 2010 and clear progress toward the resolution of merger-related issues. Additionally, in September 2010, Fitch affirmed its IDR on Continental Airlines (CAL) at 'B-' and revised the Outlook to Positive from Stable in anticipation of the closing of the merger. The Outlook revision reflected a steady strengthening of CAL's stand-alone credit profile during 2010 and clear progress toward the resolution of merger-related issues. Fitch affirmed the individual debt ratings for both carriers and maintained the Positive Outlook following the merger on Oct. 1, 2010. IDR for UAL reflects the combined carrier's expected continued improvement in margins and free cash flow (FCF) generation relative to other airlines and the anticipated establishment of a more disciplined approach toward capacity management in a cyclical industry that remains uniquely vulnerable to external demand and fuel price shocks. Fitch expects the combined carrier to generate positive FCF in excess of $1.5 billion in 2011, providing room to push pro forma lease-adjusted leverage down, while maintaining unrestricted cash balances above $7 billion. Fitch cited that an upgrade of United Continental post-merger IDR to 'B' is possible in 2011 if a continuation of positive yield and RASM comparisons, coupled with a generally favorable fuel price scenario (average jet fuel prices below $2.50 per gallon) drive strongly positive FCF and allow the post-merger airline to fund 2011 maturities largely out of internally generated cash flow and excess cash on the balance sheet.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 16, 2010;
--'Rating Criteria for Airports' dated Nov. 29, 2010.
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745
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