Air Freight News

Fitch Affirms Minneapolis-St. Paul Airport’s Sr Revs ‘AA-’; Sub Revs ‘A+’; Outlook Stable

Sep 07, 2017
Fitch Ratings has affirmed the 'AA-' rating on Minneapolis-St. Paul Metropolitan Airport Commission's (MAC) approximately $723 million senior revenue bonds and the 'A+' rating on MAC's approximately $735 million subordinated revenue bonds. The Rating Outlook on all bonds is Stable. KEY RATING DRIVERS Summary: The ratings reflect Minneapolis St.-Paul International Airport's (MSP) strong air trade service area, comprising a large metropolitan area of the Midwest, which provides for a stable and increasing enplanement base driven by Origination and Destination (O&D) traffic, accounting for 58% of enplanements. The ratings further reflect some carrier concentration risk, with Delta maintaining a dominant enplanement market share (70%), offset by Delta's heavy investment in MSP (second largest hub behind Atlanta), a hubbing covenant, and a hybrid use and lease agreement through 2020. The one notch distinction between liens represents the senior lien's higher priority to revenues and its resultant stronger coverage and lower leverage metrics. With sustained positive operational and financial performance, the airport is forecast to maintain total leverage within the 4x to 5x range and Fitch-calculated total coverage levels of no less than 1.37x through 2022. Strong O&D Base, Dependence on Dominant Carrier (Revenue Risk: Volume - Midrange): The Minneapolis-St. Paul metropolitan statistical area (MSA) is a well-established commercial center for the upper Midwest with no competing airport facility in the vicinity. Considerable demand for air service generated an O&D base of 10.5 million enplaned passengers out of 18.2 million total enplanements in 2016. However, there is customer concentration with Delta accounting for 70% of enplanements. Also, connecting traffic represents 42% of total traffic, leaving MSP susceptible to realignment of hubbing service. Total enplanements have grown steadily since 2009 and surpassed the pre-recession high of approximately 18 million enplanements. Hybrid Use and Lease Agreement; Competitive CPE (Revenue Risk: Price - Stronger): Carriers operate under a hybrid operating agreement with a compensatory methodology for Terminal 1 Lindbergh terminal costs and residual for the airfield. Airline charges for Terminal 2 (Humphrey Terminal) are set under an ordinance. The airport has 28 airline agreements, most of which expire in 2018 with the remaining, including Delta, expiring in 2020. MSP expects the agreements expiring in 2018 will be extended to 2020. CPE remained competitive at $6.32 in 2016, below Fitch's prior base case projection of $6.35, and is expected to remain below $8 should enplanement trends continue. This range is competitive relative to MSP's ratings and peers. Modest Capital Needs; Future Borrowing Expected (Infrastructure Development & Renewal - Stronger): The airport's $727 million capital plan from 2018-2022 primarily focuses on the expansion and rehabilitation of Terminal 1 Lindbergh. Various improvement and rehabilitation projects, including police and fire, reliever airports, and airfield and runway projects are also included in the plan. The capital program will be funded from a combination of PFCs, proceeds from new bond issuances, grants, and available cash. Approximately 40% of the capital plan from 2018-2022 will be funded with new bond issuances over the next five years. Conservative Debt Structure (Debt Structure: Senior - Stronger; Subordinate - Midrange): All of the existing senior and subordinated long-term airport debt is fixed-rate and fully amortizing, minimizing the risk for fluctuations in debt interest costs. Approximately $365 million of future debt issuances through 2021 are expected to remain in similar form, with a 57% issued on the senior lien. Financial Metrics: MSP has maintained strong and stable financial performance as traffic has recovered from the economic downturn. The airport maintains a diverse revenue stream with aeronautical revenues only accounting for 32% of total revenues and additional revenues consisting of parking (26%), concession, PFC, CFC and other non-airline revenues. MSP's financial metrics including net debt/CFADS of 4.34 times (x), debt per O&D enplanement of $139, and days cash on hand (DCOH) of 919 days using unrestricted cash and investments and the operating expenses reserve, reflect MSP's healthy balance sheet. Total debt outstanding peaks in 2021 after future debt issuances but senior and total coverage metrics remain favourable with sustained traffic and financial performance. PEER GROUP MSP's peers include Atlanta (rated AA-/A+/Outlook Stable) and Detroit (rated A-/A-/Outlook Positive) airports given that they are hub airports for Delta. Delta accounts for more than 70% of enplanements at MSP and Detroit, and more than 80% of enplanements at Atlanta. MSP and Atlanta's financial metrics are superior than Detroit, accounting for their stronger ratings. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
  • Additional new borrowings for non-revenue generating projects that result in total leverage above 6x on a sustained basis.
  • Reduction in the Delta hub resulting in 50% or greater loss of connecting traffic.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
  • Given the airport's projected financial profile, together with the Delta concentration, no upward rating action is envisioned at this time.
CREDIT UPDATE Performance Update Enplanements in 2016 were up 2.4%, reaching 18.2 million. Year to date through May 2017, enplanements were 7.3 million, 1.4% growth over the same period last year. In 2016, Origination and Destination (O&D) traffic grew by 7.2% and Connecting traffic decreased by 3.5%. Accelerating growth in O&D traffic has increased its percentage of enplanements from under 50% in 2005 to 58% in 2016. Connecting traffic accounts for the remaining 42%. Operating revenues increased 10.2% in FY2016, largely due to increases in parking revenues, ground transportation, and higher terminal building rental rates. Parking revenues (6.5% five-year CAGR) continue to drive growth as a result of higher volume, longer lengths of stay, and the effect of higher parking rates implemented in January 2015. An increase of approximately $2 million in Ground Transportation revenue was primarily due to the addition of fees related to Transportation Network Companies (TNC) activity (e.g. Uber and Lyft), which started in 2016. TNC activity is expected to drive growth in Ground Transportation through 2017. Ground Transportation is already up 38.4% y-o-y through May 2017. Rental fees increased by 34.3% in 2016, primarily due to higher auto rental customer facility charge (CFC) revenue, due to an increase in the CFC rate in 2016 and higher ground rental rates for non-airline revenues. Operating expenses increased by 6.8% in 2016. The largest component of operating expenses, personnel, increased by 8.3%. The increase is due to annual wage adjustments, new employees, and additional medical claims, partially offset by a decrease in post-retirement medical benefit. Delta continues to maintain its strong position at MSP, accounting for 70% of enplanements in FY2016. The second and third largest carriers, Sun Country and American, together account for 12% of enplanements. The airport currently has 28 airline lease agreements with 22 expiring in 2018 and six, including Delta, expiring in 2020. The commission expects all agreements expiring in 2018 will be extended to 2020. Fitch Cases Fitch's base case scenario is derived from management's estimates for 2017, budget for 2018, and the consultant's forecast from 2019 to 2022. Under this scenario, enplanements increase at a conservative 1.4% CAGR over the forecast period. In line with modest enplanements growth, total revenues and operating expenses grow at a 3.0% and 3.9% CAGR, respectively. This is reasonable given that revenues and expenses have historically grown in tandem. Including $366 million of new debt to be issued through 2021, MSP continues to demonstrate competitive total coverage and leverage metrics when compared with Fitch's 'A+' rated airports. Fitch-calculated average senior and total DSCR (with transfers and PFCs treated as revenues) is 3.55x and 1.78x, respectively. Total leverage ranges from 3.35x to 4.12x over the forecast period, while CPE is projected to remain below $7.00. The airport's financial metrics are resilient under Fitch's rating case scenario, which assumes a hypothetical 7% enplanement loss in 2018 due to an economic shock, with enplanements recovering over the following five years. Some expense cost savings are incorporated in the year of enplanement loss, followed by slightly higher operating expenses than in the base case, resulting in a 4.5% CAGR of operating expenses from 2016 to 2022. Revenue losses from fewer enplanements results in a 2.1% CAGR for total revenues. Fitch-calculated average senior and total DSCRs of 3.30x and 1.67x, respectively. Total leverage still remains competitive within a 3.90x to 4.43x range, while CPE increases gradually to $7.51. Under this scenario, the airport still demonstrates financial resilience at both lien levels despite its increasing debt service profile combined with moderate levels of traffic volatility, commensurate with the 'AA-' rating on the senior debt and 'A+' rating on the subordinate bonds.

Similar Stories

Wizz Air sees peak Pratt engine groundings in six to 12 months

Wizz Air Holdings Plc’s top executive expects the number of aircraft grounded due to flaws with Pratt & Whitney’s geared turbofan engines will take another six to 12 months to…

View Article
https://www.ajot.com/images/uploads/article/Port_of_Huntsville_airportjpg.jpg
The Port of Huntsville marks another year of growth in intermodal transportation
View Article
https://www.ajot.com/images/uploads/article/DHL_Aviation_WFS_in_France.jpg
DHL Aviation renews warehouse handling contract with WFS in France
View Article
Lufthansa, German union agree on ground crew wage deal: dpa-AFX

Deutsche Lufthansa AG and German labor union Verdi agreed on the main features of a wage deal for ground staff, ending a series of strikes that disrupted travel in recent…

View Article
China’s biggest airlines post loss on slow international return

China’s three biggest airline companies reported annual losses for 2023 as international traffic remained well below pre-pandemic levels.

View Article
https://www.ajot.com/images/uploads/article/Changi_Airport_Group.jpg
Extreme weather testing demonstrates value of Aurrigo’s unique approach to autonomous ground handling
View Article