Fitch Ratings has affirmed the 'A-' rating on approximately
$98.4 million outstanding airport revenue bonds issued on behalf of
the Richmond International Airport (RIC).
The Rating Outlook is Stable.
RATING RATIONALE
The rating reflects the airport's small, predominantly
origination/destination (O&D) market within a growing
metropolitan capital area. The enplanement base, which has shown
some recent growth, is still susceptible to some volatility, while
financial operations are significantly supported by non-aviation
revenue. Moderate debt levels and a sound liquidity position
provide ample cushion to sustain some weakness in operational
performance. Additionally, the airport's low cost per enplanement
(CPE) under the current hybrid airline use and lease agreement
(AUL) also serves as an underlying strength.
KEY RATING DRIVERS
Revenue Risk - Volume: Midrange
Essential Service Area, Small Enplanement Base: RIC serves a
relatively small, but primarily O&D, traffic base of
approximately 1.7 million enplanements. After experiencing some
erosion that began in 2009, enplanements have since recovered to
fiscal 2010 levels. Richmond, Virginia (general obligation debt
rated 'AA+'; Stable Outlook by Fitch) has a strong underlying
economic base and serves as a regional center for employment and
cultural amenities. The airport's traffic is favorably balanced
with business passengers and a diverse carrier mix. Two airports in
the Washington D.C. region are within 90 miles of RIC but the
competition risk appears limited.
Revenue Risk - Price: Midrange
Airline Agreement Provides Stability: RIC operates with a
competitive and generally stable cost structure under its current
hybrid rate-setting AUL which is currently operating under annual
renewals. With strong non-airline revenue generation (at
approximately 67% of pledged revenue), airline costs are very
stable in the upper $5 CPE range. Still, the high degree of
non-airline revenue could expose the airport's revenue generation
to some risk from enplanement volatility or economic
cyclicality.
Infrastructure Development and Renewal: Stronger
Manageable Capital Plan: The capital improvement plan is robust
at $163 million through 2019; however, management does not expect
to issue additional parity debt in the near term. The terminal was
expanded in 2007 and a major taxiway reconstruction is set to
commence in March. Remaining airside projects will be predominantly
grant-funded.
Debt Structure: Stronger
Conservative Debt Structure: The airport's debt is entirely
fixed rate with a flat-to-declining amortization profile. Bond
reserves are cash funded.
Financial Metrics:
Stable Coverage, Moderate Leverage: Debt service coverage
improved to 2x in fiscal 2014, furthering a positive trend after
dropping to a low of 1.6x in fiscal 2010. Leverage is manageable at
3.7x net debt-to-cash flow available for debt service (CFADS) while
the airport's 335 days cash on hand (DCOH) provides additional
financial cushion.
Peers: RIC's peer group consists of similarly sized enplanement
base airports such as Albany, NY ('A-'; Stable Outlook), Reno, NV
('A', Stable Outlook), and Tucson, AZ ('A'; Stable Outlook). RIC
benefits from better diversification of carriers than these peers
as well as lower CPE levels. However, RIC's leverage and liquidity
levels are more comparable to Albany.
RATING SENSITIVITIES
Negative - Traffic Performance: Heightened traffic or economic
volatility leading to lower than forecast non-aviation revenue or
debt service coverage could lead to negative rating action;
Negative - Service Changes: Material service changes that
diminish aviation revenue or severely impact enplanement levels
could lead to negative rating action;
Positive - Financial Metrics: If the airport's current
enplanement levels maintain their stability while leverage evolves
below 3x, positive rating action may be considered.
CREDIT UPDATE
While overall traffic growth has been tepid over the past five
years, the airport has gained positive momentum during the past 18
months. Possibly reversing a six-year downtrend, enplanements
increased 2.9% to approximately 1.7 million in fiscal 2014 while
fiscal year-to-date (YTD) traffic levels have further increased
approximately 6% through January 2015. Since peak traffic levels
occur during summer months, Fitch expects this momentum to continue
through fiscal 2015. Furthermore, the economy, which has
traditionally been dominated by the government sector, has gained
additional strength from education and health services, anchored by
Virginia Commonwealth University and eight other higher education
institutions, as well as consistent employment growth supported by
a well-educated labor force.
Destination and frequency changes continually impact RIC, e.g.
with flights to Cleveland being eliminated, while Boston-Logan
remains a growing market. In February 2015, Allegiant Airlines
added service to Tampa Bay, and RIC expects Interjet to provide
seasonal service to Cancun beginning in April. Other airlines, such
as American and Southwest, reduced frequency but up-gauged to
larger-capacity equipment.
The airport's AUL employs a rate-setting approach that is
compensatory for the terminal cost center and residual on the
airfield. The airport commission recently approved a four-month
extension to the airline operating agreement in order to transition
to a new five-year AUL that will likely commence on July 1 of this
year. Under the current agreement, management has maintained a
stable and competitive cost structure by proactively managing
operating expenses and diversifying its revenue stream. As a
result, CPE has maintained its $5 level over the last eight
years.
Total operating revenue increased 2.9% to $40.5 million in
fiscal 2014, driven by increases in parking and concession revenue.
The airport is exposed to discretionary spending risk with parking
and concession revenues contributing 45% and 20% of pledged
operating revenue, respectively. The airport's operating costs
remain stable, increasing 0.5% in fiscal 2014. Expenses were driven
by an increase in professional services, but offset by decreases in
parking and maintenance costs.
Management does not expect to issue additional parity debt in
the near term as the capital improvement plan will be funded from a
combination of state and federal grants, passenger facility charges
and local funds. The airport recently finished an apron expansion
on Concourse B, allowing for the addition of new gates, and plans
to begin reconstruction on Taxiway M in March 2015. Additionally,
the airport is considering a standalone customer facility
charge-backed bond issue later this year to finance a
quick-turnaround car rental facility.
In Fitch's five-year base case forecast, Fitch assumes 1.1%
compound annual enplanement growth through fiscal 2019 and moderate
airline revenue and cost growth. In this scenario, debt service
coverage per the bond resolution hovers around 2.2x while CPE
remains under $6. Accounting for the resolution-required fund
deposits, coverage averages 1.5x. In Fitch's five-year rating case
in which Fitch assumes an enplanement stress of 5% with moderate
recovery thereafter, and further cost escalation, debt service
coverage is in the 2x range, and just above 1.3x with the required
deposits, while CPE levels are a touch above $6. In both cases,
leverage migrates down to the 2x range within five years. These
financial metrics are approximately in line with Fitch's previous
expectations.
SECURITY
The bonds are secured by the net revenue of RIC's operations and
certain funds per the bond resolution.
Additional information is available on www.fitchratings.com.
Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance' (July
11, 2012)
--'Rating Criteria for Airports' (Dec. 13, 2013)
Applicable Criteria and Related Research:
Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=980725
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Fitch RatingsPrimary AnalystCasey CathcartAssociate Director+1
312-368-3214Fitch Ratings, Inc.70 West Madison StreetChicago, IL
60602orSecondary AnalystDaniel AdelmanAssociate Director+1
312-368-2080orCommittee ChairpersonSeth LehmanSenior Director+1
212-908-1755orMedia RelationsElizabeth Fogerty, +1
212-908-0526elizabeth.fogerty@fitchratings.com