Fitch Ratings has affirmed the following city of Chicago, IL (the city) bonds issued on behalf of Midway International Airport (Midway:
--Approximately $783.2 million outstanding first lien airport revenue bonds at 'A';
--Approximately $685.8 million outstanding second lien airport revenue bonds at 'A-'.
The Rating Outlook is Stable for all bonds.
KEY RATING DRIVERS:
--Midway is an established provider of low-cost, point-to-point domestic service with a favorable mid-continent geographic location in an economically strong local air trade service area. The airport serves 8.7 million enplanements of which 5.5 million are origination and destination (O&D) passengers.
--The airport has demonstrated solid traffic resiliency as noted by its status as one of a few in the nation to experience traffic growth in both 2009 (nearly 3%) and 2010 (3.3%). Fitch notes this growth is primarily attributed to connecting traffic performance due to the significant presence of Southwest/AirTran airlines.
--Midway's residual use and lease agreement has provided for stable financial results in recent years.
--A significantly high market share concentration (91% in 2010) of Southwest/AirTran (Southwest, Fitch Issuer Default Rating 'BBB' with a Stable Outlook) and the airport's expanded connecting traffic profile (38% in 2010).
--Midway has a slightly higher debt burden and cost profile relative to its peers at $167 debt per enplanement or 13.72 net debt/cashflow available for debt service, and a signatory airline cost per enplanement (CPE) of $10.78 in 2010.
--Limited airfield footprint (one square mile) results in significant barriers to future airfield expansion and Midway is located in a somewhat competitive air traffic environment.
WHAT COULD TRIGGER A RATING ACTION:
--Material changes in the traffic profile or financial support from Southwest. Given the concentration risk and dependence on airline revenues for debt repayment, a continuation of strong cost recovery terms from the airline use agreement, which currently expires in December 2012, will be key for rating maintenance.
--Significant increases to Midway's near-term plans for borrowing, a material decline in non-aviation revenues, or a higher than projected rise in operating expenses could pressure the airport's cost profile.
SECURITY:
The first and second lien bonds are secured by a pledge of the net revenues generated at the airport on a senior and subordinate basis, respectively. The series 2010C bonds are secured by airport revenues, but the city plans to pay debt service with consolidated rental car facility charges (CFCs).
CREDIT UPDATE:
Midway's traffic has recovered since the sharp 11.4% traffic decline in enplaned passengers in 2008. Traffic grew nearly 3% in 2009 and an additional 3.3% in 2010 to 8.75 million. For the first seven months of 2011, enplanements are up 6.1%; should the year end at this level, traffic growth will surpass the projections from Fitch's September 2010 review by 3.3% and put the airport back to 2006 traffic figures.
O&D traffic has fallen in each year since 2007 to 5.5 million while connecting traffic increased a high 19.4% in 2009 and another 15.3% in 2010, primarily as a result of Southwest's increased utilization of Midway for network passenger connections as well as the introduction of several new non-stop destinations. Given the expectation of continued high market share by Southwest and a 38% connecting passenger base, Midway's future traffic performance and financial flexibility will be heavily influenced by the future decisions taken by Southwest.
Through 2007, Midway benefited from competitive airline costs at below $5 per enplanement. However, the higher debt service costs assumed in recent years have resulted in cost per enplanement (CPE) levels rising to $9.58 in 2009, almost double the $4.99 rate in 2007. In 2010, CPE did not increase as much as expected in Fitch's September 2010 review ending with $10.78 compared to the projected $11.09. Expectations for 2011 are modest with an anticipated $10.83 CPE. Should the airport issue additional debt and/or non-airline revenues fall short of expectations, Midway's financial profile will likely be pressured with higher CPE levels.
Taking into account the use of cash reserves and certain non-pledged revenue sources, primarily PFCs and federal grants, the airport's coverage levels of total debt service have exceeded 1.40 times (x) from 1999-2006. While total coverage dropped to a low of 1.31x between 2007 and 2009, it nearly rose to its historical level of 1.38x in 2010. Without the inclusion of cash reserves, coverage levels on total debt obligations ranged from 0.92x to 1.16x over the past five years. The city anticipates total coverage to remain above its 1.1x rate covenant through the projection period.
The city's 2011-2017 capital improvement program is currently a manageable $316.1 million. The primary investments are the construction of the consolidated rental car facility, residential sound insulation, and airfield pavement rehabilitation. The airport anticipates future borrowing of approximately $140 million which would increase the airport's debt per enplanement by 10% to $183.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance', dated Aug. 16, 2011;
--'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=648832
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745
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