Fitch Affirms Memphis Airport Bonds; Outlook Revised to Negative
NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the 'A' rating on Memphis-Shelby County Airport Authority, Tennessee's (the authority) outstanding $394.8 million bonds secured by the net revenues generated from the operation of Memphis International Airport (MSCAA, or the airport). The change in Outlook reflects heightened risk and uncertainty following Delta's recent announcement to end all remaining connecting activity at the airport after Labor Day 2013, which is a much faster and more severe service reduction than previously forecast. Annual enplanements may fall to below 1.8 million, leaving the airport more reliant on non-airline and cargo revenue sources, both of which are subject to greater volatility. The Outlook revision indicates that the rating will likely be downgraded unless Memphis can maintain healthy debt service coverage through a combination of O&D enplanement growth, increases in airline rates and charges and expense reductions. Significant Service Reductions: MSCAA has experienced significant enplanement declines in the past two years as result of Delta's (rated 'B+' with a Stable Outlook by Fitch) decision to reduce connective service at the airport. Fiscal 2012 enplanements were down 18% to 3.9 million. Year-to-date fiscal 2013 enplanements are down another 29% from fiscal 2012 and full year fiscal 2013 enplanements are projected to finish at 2.8 million. Based on Delta's June 4, 2013 announcement of further service cuts, including the elimination of all connecting service, daily flights by Delta will pare down from 92 to 64. Despite these developments, Delta is likely to continue to dominate its market share of overall enplanements. Partially mitigating MSCAA's loss of enplanements is the airport's favorable position as one the world's busiest cargo airports. Federal Express Corporation's (FedEx) maintains its Worldhub operations and has ongoing major capital investments on airport property. FedEx represents over 80% of the airport's total landed weight. Residual Agreement with growing CPE: The airport's airline use agreement uses a residual methodology which enables it to pass along all net remaining costs to the air carriers. Reductions in enplanements have resulted in the airport's CPE increasing from $7.69 in fiscal 2012 to a projected $11.74 in fiscal 2013 and over $12 in fiscal 2014, which could impact the airport's competitiveness to attract new air services as Delta downsizes. The airport remains one of the few Fitch-rated airports that does not currently levy a passenger facility charge (PFC) and an imposition of a PFC is not anticipated. Conservative Debt Structure: The airport's debt is fixed rate with a steadily declining amortization profile. Debt service drops by 24% to $37.2 million in 2017 and then to less then to $7 million in 2026. Moderate Debt with Stable Financial Matrix: The airport has a moderate debt load with debt/enplanement of $141 and net debt to cash flow available for debt service (CFADS) of 5.28x. Cash reserves are relatively modest with approximately 181 days cash on hand. Coverage is slightly above the covenant requirement at 1.34x in fiscal 2012 which is consistent with a residual nature agreement. Minimal Capital Needs: The airport's CIP is mostly focused on the airfield and apron and is largely scalable depending upon future demand. The majority of the funding for the CIP is derived from federal and state grants with a small portion paid through borrowing either through an existing line of credit or bonds. Additional borrowings while in the environment of a sharply reduced scale of operations could exacerbate credit pressures. The authority's bonds are secured by net revenues of the airport. Fiscal 2012 enplanements were down 18% to 3.9 million and the losses continue with year-to-date fiscal 2013 enplanements falling an additional 29% from the previous year. The Authority had projected enplanements of 2.2 million in fiscal 2013 prior to Delta's June 4, 2013 announcement that it will completely de-hub Memphis after Labor Day. According to the authority after Labor Day Delta will operation 64 flights per day from Memphis down from the 92 daily flights it currently operates. Delta has been scaling back operations at the Airport since March 2011 when it reduced service from 204 daily flights to 178.
While enplanements are down dramatically, the presence of FedEx balances the airfield operations of the airport and provides some cushion which makes the airport unique from other airports that have been de-hubbed. With the FedEx operations, the Airport has been the world-wide leader for cargo, based on landed weight, for nineteen of the past twenty years. Cargo handled in fiscal 2013 is projected to be up 1.5% from fiscal 2012. Total cargo landed weight for fiscal 2013 is projected to increase 2.2% from fiscal 2012; however, overall landed weight is down 3.5% due to the drop in enplanements. The lease agreement with FedEx runs for 30-years with two 10-year options. FedEx accounted for 99% of total cargo volume at the airport in fiscal 2012, and has represented at least 92% of such activity since fiscal 1992.
The Airport's airline agreement employs a cost center residual rate-setting methodology. While the agreement expires in June 2017, provisions included in the agreement allow Delta to annually reset their space and gate requirements which could affect Delta's share of costs. Delta gave up 30,000 square feet in 2014 prior to its announcement to end connecting activity; however, the bulk of the impact in space adjustment will be felt in fiscal 2015. Fiscal 2012 CPE (including Supplemental Rent and FIS Fees) was $7.69 and is projected to increase to $11.74 in fiscal 2013 due to Delta reductions in activity. CPE is likely to go to over $14 in the near-term as result of Delta's plans to de-hub the Airport. All of the Airport's major passenger carriers are signatories to the agreement, along with FedEx and UPS.
The airport's net revenues, including the coverage carryforward account, have historically provided sufficient debt service coverage ratios, ranging from 1.25x to 1.44x since fiscal 2001. Without including the 25% annual debt service coverage account as well as transfers of prior year surplus payments, coverage ratios have been much narrower at 1.0x to 1.1x range. The airport projects debt service coverage to remain at or above the rate covenant of 1.25x even in a de-hubbing scenario. Fiscal 2013 coverage is expected to be 1.30x. The residual nature of the current airline agreement enables the airport to continue to meet its coverage requirements. Continued implementation of this rate making approach, even at a much higher CPE base, is critical to rating preservation.
Fitch RatingsPrimary AnalystScott Zuchorski, +1-212-908-0659DirectorFitch Ratings, Inc.33 Whitehall StreetNew York, NY 10004orSecondary AnalystReed Singer, +1-312-368-3120DirectororCommittee ChairpersonSeth Lehman, +1-212-908-0755Senior DirectororMedia Relations, New YorkElizabeth Fogerty, +email@example.com