Fitch Ratings has affirmed the Long Beach, CA’s approximately $107.6 million of outstanding airport revenue bonds at ‘A-’. The Rating Outlook is revised to Stable from Negative.
The revision to Outlook Stable from Negative reflects expectations of a strong enplanement recovery, tied to additional flight slots and improved utilization for passenger carriers, which should also strengthen Long Beach Airport’s (LGB) coverage, leverage, and airline cost metrics. After several years of underutilized carrier slots resulting in sizable traffic losses since 2012, carrier slots at LGB have recently increased to 50 from 41 in 2016, allowing for more competition of services to support passenger growth. Enplanement activity is already expanding by more than 40% in 2017 and debt service coverage levels may potentially increase to over 2x with the higher traffic base.
The rating reflects the relatively small size of LGB in which total allowable flights and carrier slots are determined by local noise ordinance, limiting traffic activity. The rating further reflects LGB’s exposure to airline concentration attributed to JetBlue Airways Corp. (rated ‘BB-’, Outlook Positive), which comprises over 80% of total enplanements. Despite this, competition among carriers has grown with the entrance of Southwest Airlines Co. (rated ‘BBB+’, Outlook Stable), and the airport’s ordinance-based rate-setting methodology provides some flexibility in cost recovery, partially mitigating any enplanement declines while keeping cost per enplanement (CPE) under $11. Fitch’s rating case metrics show future improvement, with a strong average debt service coverage ratio (DSCR) of 2.4x, and low average leverage of 2.2x.
KEY RATING DRIVERS
Small Hub with Rebounding Traffic (Revenue Risk - Volume: Midrange) (Revised from Weaker)
The airport provides secondary commercial air service for the greater Los Angeles area, with its largely O&D traffic (96%) limited to total carrier slots determined by local noise ordinance. Additionally, a high degree of concentration risk exists with JetBlue Airways Corp. (‘BB-’/Outlook Positive) representing 82% of enplanements. Recent traffic declines caused by JetBlue’s repositioning of capacity have now ended and enplanements are expected to rebound as the entrance of new major carriers and the city’s addition of nine carrier slots in 2016 help mitigate further declines.
Moderate Cost Profile (Revenue Risk - Price: Midrange)
The airport utilizes an ordinance-based rate-setting methodology which provides adequate recovery of debt service and operating expenses from airlines, and produces a stable CPE. LGB has worked to contain costs and maximize non-airline revenue, resulting in a moderate airline cost profile which should keep CPE competitive under $11 going forward.
Limited Near-Term Infrastructure Needs (Infrastructure & Renewal Risk: Stronger)
The current five year capital improvement program (CIP) totals $101.2 million and consists primarily of runway and taxiway reconstruction, and a new baggage screening facility project. The program will be financed by a mix of grants, passenger facility charges (PFCs), customer facility charges (CFCs), and airport cash flow. The airport has completed a number of major capital projects in recent years and has no plans for future borrowings.
Conservative Debt Structure (Debt Structure: Stronger)
All existing long-term debt is senior, fixed-rate, and fully amortizing with a flat debt service profile through maturity. The airport also maintains a 12-month cash-funded debt service reserve fund (DSRF).
Stable Financial Profile: The airport upholds an internal policy to maintain coverage and liquidity of at least 1.50x and 365 days cash on hand (DCOH), respectively. Future metrics are expected to strengthen, with Fitch’s rating case producing robust average coverage of 2.4x (without transfers), and low average leverage of 2.2x. Liquidity remains high, averaging 512 DCOH.
The airport’s peers include Ontario, CA and Albany, NY, both rated ‘A-’/Outlook Stable. Each airport currently exhibits a weaker volume score but LGB has the highest coverage, with comparable CPE and DCOH to Ontario, and similar leverage and traffic levels to Albany.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
Traffic experienced annual declines between 2013 and 2015 of 22% since peak levels due to JetBlue’s repositioning of capacity to its Caribbean and Latin American markets during those years. Enplanements have now begun to stabilize, and the City of Long Beach recently allocated an additional nine carrier slots in 2016 for a total of 50 slots, increasing the maximum allowable number of flights out of the airport. Fiscal 2016 traffic recovered 3.9% to 1.3 million enplanements, and six month year-to-date (YTD) 2017 enplanements are up 44%.
Airline revenues grew 22% in 2016 due to an increase in rates and charges, and as airlines increased services and airport usage. Non-airline revenues (parking and concessions) increased 3.4% due to the growth in passenger traffic. Overall, total operating revenues increased 8.7% in 2016, and six month YTD revenues are up 27%. The airport’s operating expenses grew 3.9% in 2016 due to the recovery in traffic and increased airport activity. Six month YTD expenses are down 1.2%. LGB has managed expense growth well, maintaining low to negative cost growth especially during periods of traffic decline.
Given the increase in traffic and airport activity, Fitch-calculated 2016 DSCR without transfers grew to 1.63x (1.85 with transfers) compared to Fitch-calculated 1.42x (1.64x with transfers) in 2015. Leverage continued to devolve, stepping down to 4.07x compared to 4.53x in 2015. Additionally, the airport maintained adequate financial flexibility, with 521 DCOH. Metrics are expected to strengthen as traffic continues to recover and grow.
LGB’s five year capital program is manageable and totals $101.2 million through 2021. Major projects include runway and taxiway reconstruction, terminal renovations, a new airport support facility, and a new in-line baggage screening facility. The airport has no plans to issue additional debt for its capital program.
Fitch formed its base and rating cases based on the airport’s projections and actual YTD 2017 performance. Fitch’s base case assumed enplanements growing at a five year compound annual growth rate (CAGR) of 6.7%, with expenses increasing at a CAGR of 3.4%. Additionally, a reduction in airline rates and charges is assumed in fiscal 2018. This profile produced an average DSCR of 2.3x (without transfers) with average leverage of 1.8x. CPE is expected to average $9.96 in this scenario, while liquidity is robust, averaging 646 DCOH.
Fitch’s rating case assumed a 15% traffic stress spread between 2018 and 2019, followed by flat growth thereafter. No reduction in rates and charges is assumed, and airline revenues are set to increase with expense growth, while non-airline revenues grow with enplanement trends. Cost growth is assumed to be low in stress years, and overall operating expenses are assumed to grow at 1.5% CAGR. This produced an average DSCR of 2.4x (without transfers) with average leverage of 2.2x. Average CPE is elevated at $13.31 and liquidity falls to 512 DCOH.
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.
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