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