Muni spotlight: Regional airport authority

Case Study: Spotlight on a Municipal Credit

Issue: Regional Airport Authority Subordinate Airport Revenue Bonds

Project: Terminal Replacement Project

Moody’s/Standard & Poor’s/Fitch Ratings: A2/A/A+

These bonds are secured by the net revenues of a major regional airport authority. The revenues are generated primarily from an international airport in a large US city.

About the airport

The airport is located three miles northwest of the downtown area on 661 acres of land with one 9,401-foot commercial runway, 51 gates in three passenger terminals, and over 585,000 square feet of rentable terminal space. The airport facilities are located on land leased from the city’s Unified Port District.

The airport is the primary air facility in the region, with 11 domestic and five foreign flag air carriers. Non-stop passenger service is provided to 67 domestic cities and 11 international cities. Five all-cargo carriers also serve the airport, which is the 23^rd busiest airport in the United States and the busiest single-runway airport in the nation. Aviation activity peaked in FY 2019 with over 12.4 million passenger enplanements, with an initial impact from the onset of the pandemic being a 25.3% decrease in enplanements for FY 2020 and a further 47.4% decline in FY 2021 to 4.8 million. These enplanements rebounded in FY 2022, more than doubling to roughly 10 million passengers. The rebound is expected to continue in FY 2023, based on a 26% increase during the first three months of the fiscal year.

About the project

The cornerstone for the authority’s master plan for the airport, dubbed the “New T1,” is the replacement of the airport’s Terminal 1. The total cost of the New T1, including the replacement terminal, is approximately $3.5 billion. The authority issued over $1.9 billion of Subordinate Airport Revenue bonds in December 2021 to help finance the New T1 and expects to fund additional project costs from various sources, including the issuance of an additional $2 billion of airport revenue bonds in 2024 and 2025.

The rebound in airport enplanements has helped increase coverage levels and reduce airline cost per enplanement (CPE) following the pandemic-related financial impact in fiscal years 2020 and 2021. As with most US airports, the authority utilized federal COVID aid to maintain debt service coverage above 2.0x in both years. We estimate that debt service coverage would have declined to about 1.85x in FY 2020 and 1.2x in FY 2021, absent the federal assistance. CPE increased moderately to $13.73 in FY 2020 from $10.74 in FY 2019 and jumped to over $26 in FY 2021.

The dramatic increase in airport enplanements in FY 2022 led to a robust increase in operating revenues. We estimate that debt service coverage increased to 2.2x, excluding federal COVID assistance. CPE had been estimated to decrease to $21.51, but with the increase in pledged revenues and availability of remaining federal aid, we expect that FY 2022 CPE fell well below $20.

Why Invesco likes the credit

The airport has a strong service area driven by a stable local economy and tourism demand, as well as a diverse passenger carrier mix that is not dependent on connecting passenger traffic. The airport’s airline agreement provides for protection against increasing costs, including provisions that increase airline rates to maintain stable debt service coverage levels. The cost protections and the term of the agreement through 2029 support the airport’s strong market position.

Although the authority expects to issue more debt to fund its capital program, the debt structure and expectations for continued enplanement growth should mitigate impact on debt service coverage levels and CPE. The authority has maintained high levels of liquidity — over 1,000 days cash on hand — and is expected to maintain levels above its 600-day target.