JMAA’s airport revenue bonds downgraded due to loss of Southwest

Opening Day for New Terminal at Dallas Love FieldJACKSON — Fitch Ratings has downgraded the Jackson Municipal Airport Authority’s airport revenue bonds of approximately $39.4 million to “BBB+” from “A-.”

The rating outlook remains “stable. “

The downgrade reflects concerns related to the pending loss of the airport’s second largest carrier, Southwest Airlines Co. (Southwest, Fitch rated IDR “BBB” with a stable outlook), and its serviced destinations at an already destination-limited airport. In December 2013, Southwest Airlines announced it was discontinuing all service to and from the Jackson-Evers International Airport (airport) by June 7, 2014. The service cut will likely lead to measurable and potentially permanent declines in the airport’s small enplanement base. While the airport historically maintained strong financial metrics, Fitch believes that Southwest’s actions, absent a backfill of service, will translate to a higher airline and passenger cost profile in order to maintain stable debt service coverage performance. Fitch also views the monthly use and lease agreement as additional exposure to airline revenue generation. Fitch will continue to monitor cost containment actions, successes to replace lost service and revenue elasticity in light of increasing costs.

The stable outlook reflects the importance of the airport’s origination/destination (O&D) market to the Jackson area as well as its relatively low leverage similar to peers.

 

KEY RATING DRIVERS

SMALL ENPLANEMENT BASE LOSING KEY CARRIER: The airport is the primary service provider for the Mississippi state capital region, serving mostly business-oriented travelers. While airport management has indicated that enplanements are forecasted to drop 10% in fiscal year (FY) 2014, Fitch expects the predominantly O&D nature of traffic and service levels as well as limited competition from neighboring airports, as mitigating factors. Revenue Risk – Volume: Weaker

MONTHLY USE AND LEASE AGREEMENT: The airport operates under a short-term hybrid use and lease agreement, giving either party the ability to cancel the agreement with 30-days written notice. Much of the airport revenues are derived by non-airline sources such as parking and rental car activities, which are driven by passenger volumes. Forecasted cost per enplanement is higher than average among airports similar to its size and is expected to increase 11% in Fitch’s Base Case. The airport increased landing fees 18% and parking fees 8% at the beginning of FY2014 and is now implementing an additional 15% landing fee increase effective May 2014 to offset future declines in revenue due to Southwest’s departure. Revenue Risk – Price: Weaker

ADDITIONAL DEBT TO FUND CAPITAL PROJECTS: The airport’s $88 million five-year capital improvement plan (CIP) includes terminal concourse and security checkpoint upgrades and the design and construction of a new quick-turnaround (QTA) 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. The debt is expected late FY2015 but is ultimately deferrable. Infrastructure Development and Renewal: Midrange

CONSERVATIVE DEBT STRUCTURE: The airport’s debt is entirely fixed rate. The flat debt service profile includes annual payments of $3.3 million through FY2027 before decreasing to $1.9 million through final maturity in FY2036. Debt Structure: Stronger

STRONG FINANCIAL PROFILE: The airport’s leverage was low at 3.2 times (x) net debt to FY2013 cash flow available for debt service (CFADS) and it had $11.7 million of unrestricted cash, equivalent to 409 days cash on hand. The airport’s FY2013 debt service coverage was high at 2.65x, inclusive of airline revenue transfers.

RATING SENSITIVITIES

–Slower than expected rebound by remaining or new carriers to cover the loss of Southwest;

–Additional debt for capital projects leading to either higher leverage metrics or dilution of debt service coverage below the historical two-times level; and

–Rising costs to airlines which could impact the ability to maintain existing service level.

CREDIT UPDATE

In December 2013, Southwest Airlines Co. announced it was discontinuing all service to and from the Jackson-Evers International Airport by June 7, 2014. With the loss of Southwest (representing 27% of available seats), the airport will now lose direct service to Houston Hobby, Orlando and Chicago Midway airports in addition to the loss of Baltimore/Washington in August 2013.

Enplanements were down 1.3% in FY2013, to 605 thousand, and are a continuation of a slow downward trend in traffic since peak levels in 2006. Seats are currently down 10% from October 2013 to February 2014 versus the same period last year while enplanements are down an additional 7.6%. Current forecasts demonstrate a net reduction of 15% scheduled monthly seats post-departure due to already announced United increasing frequency to Chicago and Houston, as well as Delta upgrading from regional jets to 717s on all flights.

Nearly two-thirds of the authority’s operating revenues of $17.6 million are derived from non-airline sources. Parking revenues alone count for approximately $6.1 million. Revenues increased 3.3% in FY2013 due to the addition of a non-aviation tenant occupying previously vacant space. Operating expenses decreased 0.8% in FY2013. However, the FY2014 pro forma forecasts a 7.9% increase in operating expenses. This increase is due to a one-time building maintenance project ($0.6 million of $1 million opex increase) and increases in employee benefit costs. Management’s FY2015 budget goal is to reduce expenses by at least 5%-6%.

Debt coverage levels exceeded 2.3x in each of the past three years, with some of the cushion provided by airline revenue transfers ($1.65 million in fiscal 2013). Leverage at the airport remains low at under 3.2x and should remain so even with the proposed capital plan.

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