KEY RATING DRIVERS
The Negative Outlook reflects the continued enplanement declines and their impact on non-airline revenues, leading to debt service coverage ratios (DSCRs) weakening towards the airport's policy of 1.50x. Although airport management has shown its willingness to raise airline rates to adhere to their policy, an increasing cost per enplanement metric will lead to a less profitable market for carriers to operate in, impacting future service decisions. Without a reversal in traffic trends, the rating will migrate into the 'BBB' category.
The rating reflects a relatively small airport facility serving Long Beach and the surrounding area as well as a secondary airport for the greater Los Angeles air service area. LGB is acutely susceptible to JetBlue Airways Corp.'s (rated 'B+' with a Stable Outlook by Fitch) service decisions as they compose 80% of the market. City restrictions exist on the number of flights at the airport resulting in a limited number of air carrier slots.
Revenue Risk - Volume: Weaker
Small Hub with a Concentrated Traffic Base: The airport operated with 1.43 million enplanements in fiscal year (FY) 2014 (ending Sept. 30), of which 95% was origination & destination (O&D) traffic. This represents a 4.3% year-over-year decline compared to FY 2013. Through the first eight months of FY 2015, enplanements have continued to deteriorate by a further 8.9% and the airport expects traffic to reach a base of 1.28 million before stabilizing.
Small Hub with a Concentrated Traffic Base: The airport operated with 1.43 million enplanements in fiscal year (FY) 2014 (ending Sept. 30), of which 95% was origination & destination (O&D) traffic. This represents a 4.3% year-over-year decline compared to FY 2013. Through the first eight months of FY 2015, enplanements have continued to deteriorate by a further 8.9% and the airport expects traffic to reach a base of 1.28 million before stabilizing.
Revenue Risk - Price: Midrange
Moderate Historical Cost Profile: The airport's cost per enplaned passenger (CPE) was low relative to peers at $8.53 for FY 2014. The airport forecasts FY 2015 CPE to be higher at $8.91 and reach the $10 range in FY 2016 as rates increase to offset further enplanement declines. The airport utilizes an ordinance like approach for rate setting, which nets some non-airline revenues against annual debt service obligations. To the extent traffic levels were to face adverse developments, the economic capacity to raise airline rates could be limited.
Infrastructure & Renewal Risk: Midrange
Limited Near-Term Infrastructure Needs: The current capital improvement plan (CIP) totals $102.4 million through FY 2019, consisting primarily of runway and taxiway rehabilitation. The airport has completed a number of major capital projects in recent years and there are currently no anticipated future borrowings expected.
Debt Structure: Stronger
Conservative Debt Structure: All existing long-term debt has a fixed rate, flat debt service profile and benefits from a cash funded debt service reserve.
Stable Financial Profile: The airport maintains adequate financial flexibility, with 387 days cash on hand. The airport has an internal policy to maintain coverage at 1.5x and liquidity of 365 days cash on hand (DCOH). FY 2014 coverage, without the benefit of transfers, was 1.78x but is expected to drop to near 1.5x in FY 2015. Debt per enplanement is at $80 and leverage is comparable to peers at 5.5x net debt-to-cash flow available for debt service (CFADS).
Peer Group: Similar airports with an 'A-' rating include Ontario, CA and Albany, NY. All three exhibit a weaker volume score but LGB is leveraged higher than the others with a comparable CPE to Albany and a higher debt service coverage ratio.
RATING SENSITIVITIES
Negative: A continued downward trend in airport traffic may pressure financial metrics resulting in a downgrade.
Negative: Increases in airline costs above current forecasts to maintain adequate coverage metrics would lead to negative rating action.
Negative: Should JetBlue exit or substantially retrench its presence at LGB, it is uncertain how the airport's enplanement base would recover, given that new and/or incumbent carriers could fill slots with smaller gauge aircraft.
Positive: A return to growth and traffic levels moving towards the historical level of over 1.4 million would return the Outlook to Stable.
SUMMARY OF CREDIT
CREDIT UPDATE
Noise ordinances currently restrict activity at LGB to 41 commercial air carrier slots but competition for the slots remains high. When airlines relinquished slots in the past (Horizon in 2009, Frontier in April 2011, and Allegiant in September 2011), the airport received significantly more applications for slots than were available.
As JetBlue continues to reposition capacity to its growing Caribbean/Latin American service and recently acquired slots at Reagan National Airport, enplanements at LGB have continued to decline. At the request of JetBlue, the Long Beach City Council recently approved a feasibility study to review the possible development of a U.S. customs facility at LGB to allow for international flight operations.
Despite heavy volatility in enplanements, cashflows have been relatively stable due to the airport prudently managing expenses and raising airline rates. FY 2014 debt service coverage ratio (DSCR) without transfers increased to 1.78x from 1.65x in FY 2013 due to a 9% increase in airline revenues.
DSCR is expected to decline to 1.48x in FY 2015 as continued enplanement declines impact non-airline revenues. Airport management intends to maintain their policy of 1.5x DSCR on a cashflow basis by increasing airline fees to offset other revenue losses. CPE is expected to increase to the $10 range in FY 2016.
The sponsor's forecast of enplanements stabilizing at 1.28 million requires CPE to reach the $11 range in FY 2019 to maintain management's policy of 1.5x DSCR. Fitch's rating case assumes traffic continues to decline to 1.19 million before plateauing, requiring CPE to reach the mid-$12 range in FY 2019 to maintain the coverage policy.
The airport is located between major business and tourist destinations between Los Angeles and Orange Counties, with convenient access to the major freeway links in Southern California.
Long Beach Airport is owned by the City of Long Beach. The mayor and the city council of Long Beach serve as the board of directors and set policies for the airport. The airport director and airport staff oversee day-to-day operations.
(Business Wire / Yahoo Financial News)
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