The affirmation reflects the airport's stabilizing origin and destination (O&D) traffic profile amidst continued connecting traffic declines resulting from Delta's ongoing dehubbing. CVG maintains extremely low leverage and high liquidity, and is able to generate stable debt service coverage ratios (DSCR) at the required 1.25x pursuant to the residual airline use and lease agreement (AUL). These features serve to offset operating risk related to competition from neighboring airports for its O&D travel base and the significant carrier concentration that still exists on Delta Air Lines (Delta, rated 'BB-'/Positive Outlook by Fitch). Fiscal year (FY) 2013 traffic beat Fitch's previous base case assumption, despite connecting traffic falling below expectations, as a result of O&D traffic outperforming projections by 3%.
KEY RATING DRIVERS
-- Volume Risk: Weaker
O&D enplanements have remained relatively steady between 2.1 and 2.3 million over the last five years, despite competition from several other airports in the region. Nevertheless, significant carrier concentration exists on Delta, which still accounts for 66% of O&D enplanements despite its significant dehubbing activity at the airport.
The airport operates under a strong, fully residual AUL. Currently, high fares at the airport provide flexibility to limit airline subsidies. However, CVG has used fund balances in past years to maintain a more competitive cost structure so this flexibility may not be sustained. With only passenger facility charge (PFC)-backed debt remaining after 2014, no debt service costs are planned to be passed onto the air carriers, only the operating expenses which are not covered by non-airline revenue sources. Annual PFC collections are estimated to be nearly
The capital program running through 2014 has been managed without the use of additional debt and has been funded from a mix of PFCs, AIP grants, and other airport funds. The airport now has a modern terminal that houses all passenger carrier operations with ample capacity for expansion in the long term. Through 2018, Fitch has been advised that any debt-funded capital investment will be demand-driven and mainly focused on the expansion of the airport's parking facilities.
-- Debt Structure: Stronger
Outstanding debt fully amortizes at a fixed rate of interest. A large portion of the airport's debt has been retired, substantially reducing the airport's annual debt obligations to
-- Financial Metrics:
The airport has achieved DSCR of 1.25x through the residual agreement and maintains very low leverage, reflecting its significant operating reserves. Fitch-calculated net debt-to-cash flow available for debt service (CFADS) for FY2013 - before the significant debt paydown - equaled 0.27x, and days' cash-on-hand amounted to 292.
Negative - Volatility in O&D Demand: A substantial reduction in the airport's O&D traffic base below 2 million enplaned passengers.
Negative - Poor Cost Management/Stagnant Non-airline Revenues: A deterioration in the airport's cost structure or sluggish non-airline revenue growth could push the airport's CPE upwards, making it a less attractive base for airlines and leading to a fall in traffic.
Negative - Additional Debt Absent Organic Traffic Growth: Issuance of new debt without a corresponding increase in O&D traffic, leaving the airport higher leveraged.
Positive - A sustained trend of positive enplanements supported by carrier diversification.
Despite Delta's substantial capacity reductions at CVG since 2008, the airline still accounted for 74% of 2013 traffic, meaning the airport remains exposed to significant carrier concentration. Airport management projects enplanements to decrease in 2014 by another 9.6% due to an additional 41.4% cut to Delta's connecting services. Nevertheless,
Positive developments for the airport include
Despite Delta's reductions in connecting traffic over the last eight years, DSCR has remained stable in the 1.25x range pursuant to the CVG's fully residual AUL. The airport has also managed to maintain CPE between
The only bond series that remains outstanding is the 2003B series, payable from PFC collections, which airport management estimates should allow for coverage of nearly 2.0x above annual debt service going forward without charging any remaining debt costs to carriers. Fitch also notes that CVG raised the PFC rate to
The bonds are secured by a pledge of all funds derived from direct or indirect use of the airport, including all rentals, landing fees, minimum airport use charges, AUL income, concession revenues, motor vehicle parking fees and charges and interest earnings on funds available for operations and on sinking fund and bond reserve funds. The Board may also use PFC monies up to the amount of debt service on the 2003B bonds.
Additional information is available at 'www.fitchratings.com'.
--'Rating Criteria for Infrastructure and Project Finance' (
--'Rating Criteria for Airports' (
Rating Criteria for Infrastructure and Project Finance
Rating Criteria for Airports
Source: Fitch Ratings
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