News Column

Fitch Rates Dallas-Fort Worth Airport Revenue Improvement Bonds Series 2014C 'A'; Outlook Stable

June 9, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A' rating to approximately $118 million joint revenue improvement bonds, series 2014C, issued by the cities of Dallas and Fort Worth, Texas for Dallas - Fort Worth International Airport (DFW). In addition, Fitch has affirmed approximately $6.2 billion in outstanding DFW joint revenue improvement bonds at 'A'. The Rating Outlook is Stable.

RATING RATIONALE

The rating reflects the strong demand for air travel in an expanding market, the strategic location of Dallas-Ft Worth to serve as a hub, stability from the recent American Airlines-US Airways merger, and coverage metrics that remain constant. The high degree of single carrier exposure and the capital program which focuses on terminal redevelopment, leading to a sizable increase in airport borrowings in recent years constrains the rating. Operating characteristics and leverage metrics are comparable to other large-hub 'A' category airports.

KEY RATING DRIVERS

SIZABLE TRAFFIC BASE SUBJECT TO CONCENTRATION AND CONNECTING EXPOSURES: DFW is located in a strong primary market area that generates strong demand for air service. DFW has a base of 30.1 million total enplanements, of which 12.8 million are categorized as origination/destination. Further, DFW's favorable central geographic location provides for a well-balanced traffic profile for both domestic and international passengers. The bankruptcy of DFW's leading carrier, American Airlines, (85% of enplanements) and American's merger with US Airways have not impacted operations at DFW. Fitch will continue to monitor developments of the combined carrier at DFW. Revenue Risk - Volume: Midrange.

STRONG RATE SETTING MECHANISM: The current airline use agreement (which runs through 2020) allows for timely recovery of costs within all airline cost centers. The agreement also provides for adequate cash flow generation to meet all funding requirements under the bond documents as well as funding for renewal and replacement. Airline costs are currently low for a large-hub airport at $7.54. However, they will steadily increase over the next five years as airport capital spending is funded, even under conditions of traffic growth. Revenue Risk - Price: Stronger.

LARGE SCALE CAPITAL PROGRAM WITH RELIANCE ON ADDITIONAL BORROWINGS: Much of the $2 billion terminal renewal and improvement program (TRIP) as well as another $2.2 billion of airport improvements will be funded by up to $2 billion of additional borrowings. While there have been some recent modest upward revisions to the TRIP budget, and potential for over $500 million of additional projects, Fitch currently does not see these developments as a material credit concern; however, prudent management of capital spending and borrowings will be critical to credit maintenance. Infrastructure Development and Renewal: Midrange.

FIXED RATE, LOW COST CAPITAL STRUCTURE: All of DFW's debt is issued in fixed rate mode with generally conservative debt amortization. Aggregate general airport debt is projected to peak at $7.0 billion in 2016 and approximately 30% - 50% of future debt service is expected to be paid from passenger facility charges (PFC). Debt Structure: Stronger.

STABLE BUT MORE LEVERED FINANCIAL POSITION: Debt service coverage and liquidity metrics have been sound. In fiscal 2013 (ended Sept. 30), debt coverage was 1.50 times (x) combined (including the use of rollover coverage funds) with 710 days cash on hand. High leverage remains a concern as debt per enplanement is around $205 in fiscal 2013 and $488 per origination enplanements.

RATING SENSITIVITIES

Enplanement Declines: Losses in total enplanements that signify a change in American's total support at DFW (15%-25% reduction from current levels).

Lack of Adequate Revenue Growth: Flat or declining airline and non-airline revenue for multiple years.

Borrowing Beyond the Current Plan: Significant additional borrowing beyond the airport's current plan.

SECURITY

The bonds are secured by an irrevocable first lien on gross revenues generated by the operations of DFW, as well as PFC revenues to the extent they are specifically pledged to an individual series of bonds.

TRANSACTION SUMMARY

Net proceeds of the series 2014C bonds will be used to fund non-TRIP capital improvements across the airport, with an emphasis on parking garage projects. The 2014C bonds will be fixed rate obligations with final maturity of Nov. 1, 2045.

Fitch views DFW as an airport with an important role in the national aviation system and a favorable geographic location to support its standing as a Midwestern transportation hub. Fiscal 2013 operating data indicates positive trends in enplanements (30.1 million), up 3.3 % over the prior year, with growth in both domestic and international passengers. Connecting passengers remain the dominant component of traffic representing 58% of total passengers.

American Airlines, including American Eagle and its recently merged US Airways, account for an 85% market share of traffic. Even through the recent bankruptcy period followed by the merger with US Airways, American has demonstrated a strong commitment to the Dallas-Ft Worth market and is expected to remain a vital hub for its global network. DFW is the largest hub operation in the combined American - US Airways network, with over 800 daily departures and is supported by a favorable, high average passenger yield. The current rating level assumes the combined carrier will maintain a comparable level of operation at DFW.

The elimination of flight restrictions at nearby City of Dallas' Love Field airport later in 2014 may create more competitive dynamics between the two regional airports, particularly for air services at major domestic markets. Fitch notes that Love Field has physical limitations for growth and would not be introducing international service.

Financial performance under the current airline agreement is healthy evidenced by stable debt service coverage levels and strong reserve balances. The ongoing capital programs, including the $2.2 billion TRIP, have resulted in a much higher leverage position in recent years. Still, the program is expected to enhance non-airline revenues while airline costs should be competitive to many of the hubs operated by other major network carriers.

The multi-year TRIP plan calls for an estimated $2.2 billion of expenditures at four existing terminals built in the 1970s. The TRIP budget has seen some increases over the past year and management is contemplating additional projects in excess of $500 million. The financial plan anticipates much of the funding will come from existing and future borrowings. Additional capital needs separate from TRIP are at a similar spending level although the funding will be more balanced with debt, grants and airport funds. The rising debt levels resulting from borrowings issued mainly in 2013 and 2014 will result in rising cost and leverage metrics. DFW's debt is expected to peak at $7.0 billion by 2016. The cost per enplanement (CPE) is likely to reach the $12-14 range from the $7.54 level in fiscal 2013. Similarly, net debt to cashflow is now very high at 15x and will remain over 10x for the next several years under both the airport's financial plan and Fitch's base case forecast.

Debt service coverage levels are expected to remain stable near 1.5x (including the use of rollover coverage funds) over the five year forecast period. In Fitch's view, the overall financial flexibility including the airline cost and debt service coverage stability will depend on both maintenance of current traffic performance as well as steady and timely growth in airline and non-airline revenues. In particular, revenue growth in terminal concessions and commercial development activities will be instrumental to preserving the airport's financial profile. Fitch recognizes that the TRIP enhancements have the potential to increase concession revenue from new and reconfigured concession spaces, increase parking revenue from expanded and improved parking garages, and reduce operating expense through energy and maintenance cost savings.

Additional information is available at '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=833669

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. 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. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Media Relations

Elizabeth Fogerty, New York, +1-212-908-0526

elizabeth.fogerty@fitchratings.com

or

Primary Analyst

Seth Lehman, +1-212-908-0755

Senior Director

33 Whitehall Street

New York, NY 10041

or

Secondary Analyst

Jeffrey Lack, +1-312-368-3171

Associate Director

or

Committee Chairperson

Scott Zuchorski, +1-212-908-0659

Senior Director

Source: Fitch Ratings


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