SPY415.95-0.13 -0.03%
DIA340.31-0.99 -0.29%
IXIC13,979.70+29.49 0.21%

Fitch Affirms Dayton (OH) Airport Revs (DAY) at 'BBB'; Outlook Negative

· 03/17/2021 15:40
Fitch Affirms Dayton (OH) Airport Revs (DAY) at 'BBB'; Outlook Negative

(The following statement was released by the rating agency)

Fitch Ratings-New York-17 March 2021:

Fitch Ratings has affirmed the 'BBB' rating on Dayton's (OH) outstanding $66.4 million in Airport Revenue Bonds issued on behalf of the James M. Cox Dayton International Airport.

The bonds have been removed from Rating Watch Negative (RWN). The Rating Outlook is Negative.


RATING RATIONALE

The RWN has been removed based on reduced near term pressures to DAY's cash flow and liquidity profiles evidenced by receipt of federal aid as well as management actions to manage costs. A recent restructuring of the airport's cost profile resulted in significant savings over the next couple of years, resulting in a more stabilized cash flow profile in conjunction with the federal aid received. Fitch expects cash reserves to be maintained in the near-term even if traffic volumes have limited recoveries in the coming months.

The rating reflects the airport's elevated traffic volatility, its vulnerability to economic factors in the air service area and, to a moderate extent, competition from larger airports in the state. The airport's historical leverage, cost per enplanement (CPE) levels, and coverage ratios have been largely stable even in a period of deteriorating traffic; however, the declining use of airline subsidies are likely to weaken airport metrics. Softening financial metrics are partially mitigated by the airport's residual-style airline agreement and adequate liquidity. The airport has also recently undertaken a large cost restructuring effort, which is expected to stabilize cash flows going forward despite the severe enplanement declines.

The Negative Rating Outlook reflects the substantial adverse impact on operating and financial performance due to the coronavirus and related containment measures, along with uncertainty around the timing and magnitude of recovery. Fitch remains uncertain as to the long-term economics for airlines serving the region if net charges continue to rise, especially during periods of traffic decline. While the airport's enplanement recovery to date has remained in line with the national average, uncertainty continues with respect to the timing of a sustained path towards recovery.


KEY RATING DRIVERS

Weaker Service Area; Moderate Competition - Revenue Risk (Volume): Weaker

The airport serves a mostly origination and destination (O&D) market consisting of approximately 892 enplanements prior to the coronavirus pandemic. As a result of the coronavirus pandemic, enplanements fell by over 62% in 2020. The airport holds some carrier concentration risk due to its largest carrier, American Airlines (B-/Negative), which holds approximately 53% market share, and competition exists with both Columbus and Cincinnati/Northern Kentucky airports located less than 80 miles from Dayton.

Full Cost Recovery - Revenue Risk (Price): Midrange

Carriers operate under an annual operating permit with a residual rate-setting methodology. Airline charges have remained relatively low in recent years compared to other small hub airports, due to an airport rate subsidy to airlines. However, CPE is expected to average $10 over the next five years because of the airport's subsidy phase out caused by low enplanement levels due to the coronavirus pandemic.

Manageable Capital Program - Infrastructure Development & Renewal: Midrange

The airport's current CIP through fiscal 2024 totals $63.7 million and is funded via proceeds from airport improvement entitlements, airport improvement discretionary funds, state grants, airport cash, customer facility charges and passenger facility charges (PFCs). The CIP projects will primarily address the snow removal equipment building conversion, taxiway rehabilitation and roofing projects. The capital plan remains flexible, and Dayton has deferred some projects in light of the coronavirus pandemic.

Standard Debt Structure - Debt Structure: Stronger

All outstanding debt is fixed-rate and fully amortizing with revenue bond debt service payments of nearly $6.0 million per year. The debt has a final maturity of 2041 with standard structural features tied to producing at least 1.25x coverage of maximum annual debt service. Reserves are currently cash-funded at their required amounts.

Financial Profile

The airport's leverage remained steady at approximately 4.4x in 2020, and is projected to remain in the 3x range through 2025. Revenue bond debt service coverage of 1.6x in 2020 is in line with the previous year, and management projects an increase in coverage in fiscal 2021 as a result of additional cash flow provided through the federal funding and the airport's cost savings measures. Coverage thereafter is expected to average 1.5x in Fitch's conservative Rating Case. The airport's CPE spiked to over $20 as a result of the decrease in enplanements, though is expected to decline to the $10 range as enplanements normalize. The airport maintains solid liquidity with $20.7 million of unrestricted cash, equivalent to 264 days cash on hand.


PEER GROUP

Airports that provide secondary service or experience competition from larger nearby airports, such as Fresno (BBB+/Negative) and Rhode Island Airports Corporation (RIAC) (BBB+/Negative) serve as comparable peers to Dayton. Dayton's leverage is higher than Fresno's, though comparable to RIAC. CPE levels are comparable to RIAC, however CPE is expected to rise as a result of the coronavirus pandemic. Dayton's rating case coverage is below both peers. Dayton serves a smaller service area than both RIAC (2.0 million enplanements in FY2019) and Fresno (930 thousand). Further, Dayton has experienced greater traffic volatility in recent history compared to each of its peers.


RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

--A positive rating action is not expected in the near future. However, a return to a Stable Outlook could be possible, and the ratings affirmed, if Fitch sees sustained recovery in traffic while maintaining a low sustained leverage profile.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

--A continued period of material traffic declines that presents further challenges to stabilize the airport's finances;

--Further credit erosion of the major air carriers or payment delinquencies to the airports;

--Sustained deterioration in airport liquidity levels leading to sustained leverage of over 5x.


Best/Worst Case Rating Scenario

International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [https://www.fitchratings.com/site/re/10111579].


CREDIT UPDATE

Traffic growth prospects continue to face challenges given the coronavirus pandemic, rising costs to airlines and competition from other airports in the region. In 2020, enplanements declined 62.2% as a result of the coronavirus pandemic. However, enplanements at Dayton are currently comparable to the national recovery, which management has attributed to the strong performance of Allegiant Airlines throughout the pandemic, with Allegiant's yoy 2020 enplanements down only 1.9% over the prior year. Enplanements through January 2021 have stabilized at approximately 30%-35% of pre-coronavirus levels month over month since August 2020.

The airport has suffered significant traffic volatility in the past, and Fitch remains uncertain as to what level of traffic growth the airport can achieve given the coronavirus pandemic, rising costs to airlines, competition from other airports in the region and the lack of economic strength within Dayton's immediate service area. However, due to the airport's cost restructuring efforts and additional funds provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act, financial metrics are expected to stabilize despite the ongoing traffic volatility.

Total revenues decreased 35% in fiscal 2020, with airline revenues declining by approximately 13.5% and non-airline revenues declining by nearly 45% over 2019. Due to approximately $7.4 million in CARES Act Funds and cost savings measures enacted, net revenues only declined by approximately 6.2% over the prior year.

Operating and maintenance expenses decreased approximately 17% to $21.2 million. The Airport had started a broad look at a cost restructuring well before the pandemic, and implemented Phase 1 of the restructuring when the coronavirus outbreak started. Phase 2 of the restructuring occurred in the late fall, and included additional personnel reductions and cost saving measures, reducing expenses approximately by an additional $2 million over the $4 million saved in implementing Phase 1. Overall, the changes made as a result of the restructuring has resulted in a 21% decline in fiscal 2021 budgeted expectations compared to expenses prior to the restructuring. The airport's ability to manage costs remains important, as any material expense growth will exacerbate increasing airline costs and pressure coverage levels.

Due to the cost restructuring and the additional support provided by the CARES Act, the airport's financials are expected to stabilize despite continued enplanement stresses. 2020 Fitch calculated revenue bond coverage came in at 1.6x, and coverage is expected to spike to 2.1x in fiscal 2021 due to significant cost reductions and CARES funding in conjunction with enplanement recovery. Fitch calculated CPE spiked in 2020 as a result of the coronavirus pandemic, though it is expected to return to the $10 range once enplanements recover. Despite the volatility in enplanements, CPE is expected to remain largely in line with Fitch's pre-coronavirus expectations due to the CARES Act funding and the airport's recent cost restructuring efforts.


FINANCIAL ANALYSIS

Fitch modeled two coronavirus downside cases to reflect deep traffic declines as well as prolonged recovery back to pre-coronavirus levels. The Fitch Coronavirus Rating Case which also operates as the Base Case reflects enplanement recovery of 63% in 2021 before ramping up to recovery levels of approximately 95% of 2019 levels by fiscal 2025. Airline revenues are calculated to achieve 1.5x debt service coverage, while non-airline revenues move broadly in relation to passenger traffic trends. Operating expenses are cut in 2021 due to the restructuring, before growing at 5% thereafter. The result is the coronavirus rating case coverages that average 1.5x (including CARES Act funds), and airport system CPE averages $10. Leverage remains stable throughout the pandemic, and declines to 3.0x by fiscal 2025.

Fitch's Coronavirus Downside case reflects more severe enplanement declines and a limited recovery, with enplanements at 40% in 2021 and only recovering to approximately 88% of pre-coronavirus traffic levels. Airline revenues are calculated to achieve 1.3x debt service coverage, while non-airline revenues move broadly in relation to passenger traffic trends. Operating expenses are cut in 2021 due to the restructuring, before growing at 5% thereafter. Under this case, coverages average 1.3x (including CARES Act Funds), though CPE is more elevated, at an average of approximately $15. Leverage remains stable throughout the pandemic, and declines to 3.5x by fiscal 2025.

Due to the cost restructuring efforts and federal funding received from the CARES Act, airport cash flows are expected to remain relatively stable despite severe enplanement stresses over the near term, supporting a removal of the Negative Rating Watch. However, a continuation of low activity levels into 2021 without further adjustments to maintain strong credit metrics would likely result in a rating downgrade.


SECURITY

The bonds are secured by net revenues of the airport and any special funds, including but not limited to: bond funds, bond reserve funds, PFC revenue funds, debt service funds, other improvement funds and airport reserve funds.


REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg



Dayton (OH) [Airport]
----Dayton (OH) /Airport Revenues - Dayton International Airport/1 LT; Long Term Rating; Affirmed; BBB; Rating Outlook Negative

Contacts:
Primary Rating Analyst
Victoria Babcock,
Senior Analyst
+1 646 582 4608
Fitch Ratings, Inc.
Hearst Tower 300 W. 57th Street
New York, NY 10019

Secondary Rating Analyst
Jeffrey Lack,
Director
+1 312 368 3171

Committee Chairperson
Seth Lehman,
Senior Director
+1 212 908 0755

Media Relations: Sandro Scenga, New York, Tel: +1 212 908 0278, Email: sandro.scenga@thefitchgroup.com

Additional information is available on www.fitchratings.com
Applicable Model
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
GIG AST Model, v1.2.0 (1)

Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
Solicitation Status
Additional Disclosures For Unsolicited Credit Ratings
Endorsement Status
Endorsement Policy

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR WHICH THE LEAD ANALYST IS BASED IN AN ESMA- OR FCA-REGISTERED FITCH RATINGS COMPANY (OR BRANCH OF SUCH A COMPANY) CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE.

Copyright © 2021 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.