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Fitch Affirms Corpus Christi, TX Airport Revs 'BBB'; Outlook Stable

Posted on: Thursday, 4 May 2006, 18:04 CDT

Fitch Ratings affirms the 'BBB' rating on approximately $21 million outstanding City of Corpus Christi, Texas (the city) airport revenue bonds. The Rating Outlook is Stable. The bonds are payable from net revenues generated by the operations of Corpus Christi International Airport (Corpus Christi, or the airport).

The 'BBB' rating reflects the airport's stable financial operations, its economically sound air service area, and recent positive enplanement trends. Credit concerns include significant competition from larger regional airports, vulnerability to changes in the air service market, and limited financial flexibility.

Fiscal 2005 marked the second consecutive year of growth in the airport's enplaned passenger base since fiscal 1994, with enplanements increasing 7% in fiscal 2005 (ended July 31) and 4% in fiscal 2004 to reach 428,443. These two years mark the reversal of a deteriorating trend through the 1990s, during which passenger levels declined to 452,719 in fiscal 2001 from 516,975 in fiscal 1995. This gradual decline occurred despite the national economic expansion of the 1990s, during which many similarly sized airports experienced record growth. In addition to national economic events, local conditions contributed to the traffic loss, including the changing transportation preferences of tourists visiting the region and competition from larger regional airports. While the city remains a popular tourist destination, some studies have shown that many tourists are driving instead of flying into the area.

Additionally, the airport has faced stiff competition for passengers from San Antonio International Airport, located 2.5 hours from the city by car. San Antonio currently offers nonstop service to 30 destinations, compared with four nonstop destinations from the airport. A sample of ticket prices from both airports to major destinations (such as Chicago, New York, Las Vegas, and Orlando) shows a discount of $15-$50 from San Antonio, a margin that has narrowed from prior-year levels when some flights were up to $100 cheaper at San Antonio.

Given the recent growth in passenger demand over the past two years, management conservatively expects enplanements to grow an average annual 2% in the near term. Fitch believes that this growth is sustainable given that load factors at the airport have increased to above-average levels as airlines have reduced their gauge of aircraft. High load factors increase airline yields per flight and should encourage carriers to maintain or increase the current level of service.

Air service at the airport, which consists of flights of major airlines to their connecting hubs at Houston, Dallas, and Atlanta, has been relatively unchanged for the past 10 years. The top three airlines and their regional partners (Southwest Airlines, 37% of enplaned passengers; Continental Airlines, 31%; and American Airlines, 20%) account for 88% of the total enplanements. The airport's fourth carrier, Delta Air Lines, held a 12% share for fiscal 2005 and offers two daily flights to Atlanta, down from three the prior year.

Net operating revenues of $1.6 million in fiscal 2005 were sufficient to produce a 20% operating margin, equivalent to the airport's average margin since fiscal 1998. Net revenues, in combination with passenger facility charge revenues, were sufficient to provide 1.80 times (x) coverage of senior lien revenue bond debt service, and 1.24x coverage including debt service on the city's outstanding general obligation (GO) bonds issued for airport projects. Debt service on the GO bonds is secured by the general credit of the city, but has historically been paid from net revenues of the airport.

Fitch expects the airport to maintain its relatively low cost base in the near term, as no significant capital construction is expected in the next five years. Corpus Christi had a moderate cost per enplaned passenger of $6.04 in fiscal 2005. Near-term projects focus on routine maintenance and upgrades and call for $43 million in spending, with federal grants funding the majority of project costs. Management forecasts little to no impact in the airline rate base stemming from these projects. Longer-term plans call for an additional $43 million spending, but such projects are expected to be implemented once additional external financing is secured.

The city is the eighth largest in the state, with an estimated 2005 population of 290,000 and a relatively diversified mix of education, health care, military, government, construction, and oil and gas industries. The median income remains below the state and national averages, but has increased in recent years. The area's below-average cost of living mitigates some concerns over lower incomes. With nearly five million visitors to the area in 2000, Corpus Christi is second only to San Antonio as the most visited vacation destination in Texas.

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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