Fitch Rates Charlotte North Carolina Airport Revs 'A+'; Outlook Stable

The Rating Outlook is Stable.

The series 2010 A and B bonds are expected to price on or around Feb. 13, 2009. The series 2010A bonds will be used to complete airfield improvements at the airport, and the series 2010B bonds will be used to refund all of the Charlotte/Douglas International Airport's (the airport) series 1999B airport revenue bonds. The city subsequently expects to issue approximately $31 million in series 2010C bonds to bridge finance federal grants in the near term. The bonds are secured by a pledge of airport net revenues.

The 'A+' rating reflects the airports outstanding financial performance across all major categories including: historical and projected debt service coverage ratios (DSCRs) above 3.0 times (x); very low leverage resulting in debt per enplaned passenger of $28 with minimal future debt expected; one of the lowest cost per enplaned passenger (CPE) levels in the industry at less than $1.00; and strong liquidity with unrestricted cash to debt of nearly 1.0x. In addition, the airport has the flexibility to raise its passenger facilities charge (PFC) from $3.00 to the $4:50 cap, where most of its peers airports currently are. The airport also benefits from a solid air trade service area with a population of over 2.38 million that is expected to continue to growing.

The rating also reflects several key risks, the combination of which do not exist at most U.S. airports, including: significant carrier concentration, with US Airways comprising approximately 88% of total enplanements - the highest of any airport rated by Fitch; an origination and destination (O&D) base of only 29%, which is one of the lowest among airports rated by Fitch and leaves the airport exposed to significant downside risk if it were to be de-hubbed; and, exposure to one of the weakest legacy carriers (US Airways currently rated 'CCC' by Fitch) in a business environment where industry consolidation and/or lower overall level of capacity is likely.

The combination of outstanding financial metrics and conservative management offset the significant risks associated with a weak counterparty, low O&D base and significant carrier concentration and have allowed the airport to achieve a high credit rating of 'A+' that unlike other airports is not likely to face significant downward pressure should US Airways pull back significantly. If US Airways were to restructure its route network and de-emphasize the airport as a connecting hub, it would have an immediate effect on the airport, with some recovery expected in the medium term. However, the airport's strong internal liquidity, modest capital demands, flexibility to increase PFC charges, and low cost structure place the airport well to deal with such a challenge. Despite the airport's extremely healthy cash balances and tremendous financial flexibility, upward rating movement is unlikely unless there is significant change with respect to carrier concentration and dependence upon connecting traffic.

Passenger traffic growth at the airport has been strong in recent years, with the airport achieving over a record 17 million enplaned passengers in fiscal 2009, a slight increase over fiscal 2008. Total enplanements from 2005 through 2009 grew by 6.3% average annually while total seats offered at the airport grew from FY 2005 through FY 2009 2.1% on average annually, indicating healthy load factors at the airport. The number of O&D passengers reached 5.2 million in fiscal 2008, an 8% increase over the 2007 level. However, as a result of the current recession O&D traffic retrenched by 8.7% in 2009 and is expected to drop an additional 2% in FY 2010. Connecting passengers, which make up the largest component of the airport's volume increased by 5.8% in FY 2009 and are expected to decrease by 2% in 2010.

Under a stress case scenario reviewed by Fitch that assumes a 100% reduction in US Airways' connecting activity, airline costs would be significantly higher, near the $4.00-$5.00 per passenger range when PFCs are used to reduce debt service. The stress scenario also indicates that coverage would fall to near the low 2.0x range, as management would increase its PFC collection to $4.50 and apply unspent PFC balances to reduce debt service to continue to maintain a low airline cost base.

In this scenario, the airport would rely heavily on PFC collections to maintain a low cost structure, and long-term traffic depressions could substantially affect the airport's ability to continue offsetting debt service as well as negatively affect revenue sharing agreements with the signatory airlines. Despite the increase in CPE, drop in coverage and heavier reliance on PFC revenue, the resulting financial metrics would still be consistent with an 'A' category rating.

(c) Centre for Asia Pacific Aviation. Date posted: 22-Dec-09