Fitch Rating Service’s downgrading of $39.4 million of Jackson Municipal Airport Authority revenue bonds will force a year-long delay of security checkpoint upgrades and improvements to the terminal building of Jackson-Medgar Wiley Evers International Airport.
The drop to BBB+ from A- came largely from Southwest Airlines’ decision to stop nearly two decades of service on June 7. Fitch says the loss of the airport’s second-largest carrier will likely lead to “measurable and potentially permanent declines in the airport’s small enplanement base.”
The result, Fitch says, could be higher fees to airlines and higher costs to passengers. This is already occurring, Fitch said, citing the airport’s increase of landing fees by 18 percent and parking fees 8 percent at the beginning of FY2014 and its implementing of an additional 15 percent landing fee increase effective in May to offset future declines in revenue caused by Southwest’s departure.
Passenger declines can severely damage airport revenues by causing the loss of dollars from non-airline sources such as parking and rental car activities — both of which account for much of the airport’s revenues.
Nearly two-thirds of the Authority’s operating revenues of $17.6 million come from non-airline sources. Parking revenues alone count for approximately $6.1 million, Fitch said.
Dirk Vanderleest, Airport Authority executive director, said Fitch’s designation of a “stable” credit outlook for the Authority assures borrowing costs won’t go up on the $39.4 million bond issue “at this time.”
“We’re still investment grade,” Vanderleest said. “We have the capacity for timely payments.”
Fitch said as much in its reporting on the downgrade, noting the airport “historically maintains strong financial metrics.”
The security and terminal improvements would require issuing more debt. The projects are part of the airport’s $88 million five-year capital improvement plan. In addition to terminal concourse and security checkpoint upgrades, the capital plan includes design and construction of a new quick-turnaround car rental facility.
The airport expects to issue $20 million in bonds and a $3 million-$5 million subordinate loan to finance a portion of these projects, Fitch said.
The debt had been expected to be issued in late fiscal 2015, but delaying the projects by up to 12 months keeps the debt off the books as Fitch Ratings makes further evaluations of the Municipal Airport Authority’s credit worthiness, Vanderleest said.
Debt is among a host of factors bond raters weigh in making or changing a credit rating, according to Airports Council International North America. Other factors can include overall finances, use and lease agreements with airlines, market share of airlines serving an airport, capital improvement projects, passenger counts and competition.
Vanderleest said to adjust to the departure of Southwest – which represents 27 percent of available seats and a loss of direct service to Houston Hobby, Orlando and Chicago Midway airports – airport officials are looking at the “whole budget itself” and are trying to get other carriers at Jackson-Evers to increase service levels.
A determination will have to be made on what the Southwest loss translates to in terms of “the overall cost per passenger” after June 7, Vanderleest said.
It will take at least six months of enplanement totals to gain a fix on the financial consequences of the loss of Southwest, he said.
Meanwhile, the Airport Authority has made strides in getting other airlines to increase their services to Medgar Wiley Evers International, according to the airport chief.
He said Delta Airlines has agreed to increase its seat offerings by at least 10 percent in July when it replaces its regional jets at Jackson-Evers with 7/17 aircraft.
United will bump up total seat availability by 35 percent by adding a daily direct flight to Chicago O’Hare and 1.5 flights a day to Houston’s George H. Bush International.
The loss of Southwest leaves the airport without a direct flight to Orlando, a popular vacation destination for Central Mississippians. “We are talking to some other carriers about that direct service,” Vanderleest said.
Even with the increased service of Delta and United, forecasts are for a net reduction of 15 percent of scheduled monthly seats after Southwest leaves, according to Fitch.
That drop would come on top of a 1.3 percent decline in seats in fiscal 2013. Seats are down 10 percent from October 2013 to February compared to the same period last year, while enplanements are down an additional 7.6 percent, Fitch said.
The Airport Authority selected Fitch over other ratings services to assess the revenue bonds. Fitch typically requires an airport to have annual enplanements of one million before it agrees to do a revenue bond rating. “We are basically at 600,000 enplanements,” Vanderleest said. “That tells me had good credit quality and low risk.”
For its part, Fitch said it will continue to monitor the Airport Authority’s “cost containment actions, successes to replace lost service and revenue elasticity in light of increasing costs.”
In explaining Southwest’s departure, airline industry professionals say Jackson became ill-suited from a cost standpoint to be part of the Dallas-based carrier’s future after the acquisition of Atlanta’s AirTran.
As Southwest began merging the operations, it moved away from life as a discount carrier serving a handful of large cities and a roster full of mid-cities. Now its ambition is to be a national carrier concentrating on the largest markets, industry observers say.