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Fitch Upgrades John Wayne Airport (California) to 'AA-'; Outlook Stable

Posted on: Monday, 10 April 2006, 18:00 CDT

Fitch Ratings upgrades Orange County, California's (John Wayne Airport) $118 million outstanding general airport revenue bonds to 'AA-' from 'A+'. The bonds are secured by net revenues of JWA. The Rating Outlook is Stable, reflecting the strong demand for air service and the growing regional economy and wealthy population of Orange County.

The 'AA-' rating upgrade reflects the strength of John Wayne Airport's (JWA) compensatory lease structure and strong budgeting practices that consistently produce solid operating margins and healthy cash balances, allowing the airport to internally finance a good portion of its capital needs. Since 2003 when Fitch had a Positive Rating Outlook on JWA, the airport's operating margin has strengthened to 46% from 44% while cash balances increased by 64% to $97 million, up from $59 million in 2003. As a consequence, days cash on hand improved to 685 days in 2005, from 461 days in 2003. Historically, between 2000 and 2005, JWA's operating revenues and operating expenses increased on a compounded average annual basis of 6.2% and 9.3% respectively. The growth in operating expenses is attributable to the higher costs that immediately followed the events of Sept. 11 and the higher costs associated with operating JWA's in-line baggage screening system. Fitch believes that JWA's strong operating fundamentals and good management practices support the rating upgrade at this time.

Airport management's ability to effectively and creatively manage the airport's capital needs provides existing and future bondholders exceptional security. JWA has a low debt burden and a very strong debt service coverage ratio of 2.57 times (x) in 2005. The current debt service payments are structured to remain level at approximately $18.4 million through 2012, before dropping significantly to $4.6 million through the life of the debt in 2018. JWA has limited and known debt financing needs going forward. The current $512 million Capital Improvement Plan (CIP) is expected to be supported from a variety of sources that could potentially include a combined use of any or all of the following: a Federal Aviation Administration (FAA) Airport Improvement Program (AIP) Grant, Passenger Facility Charge (PFC) revenue, Customer Facility Charge (CFC) revenue, General Airport Revenue Bonds (GARBs), Letter of Credit (LOC) and its own internal equity. Fitch will continue to monitor the airport's capital improvement financing plans as they evolve.

JWA's service region consists of 34 incorporated cities in Orange County as well as portions of the Los Angeles, Riverside, and San Bernardino counties. As one of the few airports located in Southern California, the demand for air service is strong and forecasted to increase as population increases. The healthy and diverse economy's employment base is largely employed in professional services, followed by wholesale and retail trade and manufacturing. Median household effective buying income for Orange County is $50,755, 13% above the state of California and 330% above the United States.

The 1985 Settlement Agreement negotiated between various groups within Orange County and the airport has constrained JWA passenger enplanements. The Settlement Agreement limits the number of average daily departures and caps the maximum annual passengers served at the airport. According to a 2003 amendment to the Settlement Agreement, the airport's cap on passengers served at the airport was adjusted to 10.8 million annual passengers, (approximately 5.4 million enplanements), up from the previously negotiated 8.4 million annual passengers (approximately 4.2 million enplanements). Despite the contractual ceiling, enplanements grew at an average annual rate of 4.5% from 2000-2005 and are projected to grow at an average annual rate of 1.4% from 2006-2015. JWA is served by 14 airline carriers, a mix of low cost carriers and mainline legacy carriers, with Southwest Airlines having the largest market share at 23.3% in 2005, followed by American Airlines with 14.1% and United Airlines with 12.8%.

Offsetting the strength of the 'AA-' rating is the moderate airport competition, the contractual ceiling placed on enplanements, and the higher than average cost per enplanement (CPE) for an airport of this size and structure. JWA encounters moderate competition from Los Angeles International Airport, Ontario International Airport, Long Beach Municipal Airport, and Bob Hope (Burbank-Glendale-Pasadena) Airport all of which are located within 50 miles. However, the strong and wealthy service area and the ease and convenience of using this facility, mitigate the travel time to competing facilities. In the long term, the contractual ceiling on enplanements that caps passenger growth at 10.8 million annual passengers, or roughly 5.4 million enplanements, might facilitate growth at an existing competitor airport or the need to develop and construct an entirely new airport to serve future demand. JWA's higher than average CPE was $7.99 in 2005, up from $7.27 in 2000, and is a result of the airport's compensatory lease structure and its practice of cash funding its capital needs. Mitigating any concern of the higher than average CPE, is the airline's ability to receive higher yields at JWA.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.

Source: Business Wire

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