Fitch Ratings has affirmed the rating on the Port Authority of New York and New Jersey JFK International Air Terminal's (IAT or Terminal 4) approximately $1.3 billion outstanding parity special project bonds series 6 and series 8 at 'BBB+'. The Rating Outlook is Stable.
KEY RATING DRIVERS
The rating also reflects IAT's strategic significance to foreign-flag carriers and to Delta as the hub for its operations in the New York area. IAT's long-term airline agreement with Delta is contracted through the rated debt's maturity and provides IAT with adequate cost and debt service recovery terms. Despite the significant investment Delta has made into the terminal, the single asset nature of IAT, on-going competition from other terminals and airports in the region, and its heavy reliance on one dominant carrier present material credit risks that keep the credit in the 'BBB' category.
Strong Market Despite Competition - Revenue Risk (Volume): Midrange
The NYC region remains one of the most affluent and historically, culturally and economically important regions in the U.S. and, as such, the terminal benefits from an exceptionally strong catchment area, for both international and domestic services. Nevertheless, IAT faces a high degree of competition, not only from other independently operated JFK international terminals, but also from Newark Liberty International Airport (EWR) and LaGuardia Airport (LGA). The effect of competition is partly mitigated by limited capacity in the market, particularly during peak travel periods. The terminal experienced continued passenger growth in 2017, up 3% from 2016, following completion of the Phase II expansion project, as Delta shifted its domestic service to Terminal 4.
Reasonable Pricing Power - Revenue Risk (Price): Midrange
IAT has complete flexibility to enter into agreements with airlines and set rates as it sees fit. IAT's agreement with Delta essentially functions as a blend of cost recovery methodology and a traditional lease, and agreements with contract carriers reflect negotiated pricing based on market conditions. IAT's pricing power benefits from Terminal 4 being the only facility at JFK with a 24 hour federal inspection service (FIS) facility making it desirable for international traffic. Average airline CPE is comparatively high, and has remained in the $36-$42 range since 2013; however, this should be viewed in the context of high ticket prices for international travel and limited cheaper options for airlines wishing to serve a very competitive region.
Limited Future Capital Needs - Infrastructure Development & Renewal: Stronger
The Phase II expansion project was completed in the first quarter of 2015. Following completion of the Phase II expansion project, terminal facilities have been modernized and improved and are not expected to require major renewal in the foreseeable future. Uncertainty remains surrounding the possibility of the Phase III expansion project which will add capacity for growing Delta operations, but also could add additional leverage to the current debt profile.
Well-Structured Debt Protects Noteholders - Debt Structure: Stronger
All of IAT's debt is fixed rate and fully amortizing, maturing prior to the expiration of the Port Authority of New York and New Jersey's (PANYNJ) lease with the City of New York, and Delta's tenant agreement with the terminal. Debt covenants remain standard, with reserves cash funded at their required amounts.
Financial Profile
The 2010 issuance of series 8 to fund its Phase I expansion project doubled IAT's outstanding senior debt quantum, and the increased leverage amplified the effect of possible construction risks on IAT's credit profile. Following the completion of Phase II, leverage declined to a Fitch calculated approximately 4.2x in 2016 down from 4.8x in 2015, and has continued to decline to 3.7x in 2017. The Fitch rating case expects IAT to be able to maintain a debt service coverage profile above 2.1x while maintaining a competitive CPE around current levels from 2018-2022.
PEER GROUP
The most similar peers to IAT are Terminal One Group Association (TOGA; A-/Stable) and LaGuardia Gateway Partners (LGP; BBB/Stable), which operate under a similar, relatively unique business model as IAT and compete for New York air travel with other terminals at JFK, LGA, and EWR airports. While IAT and TOGA are operating terminals, LGP is under construction and as such, is subject to completion risk and more leveraged than its peers. IAT and LGP share similar, large-scale operations, which are double those of TOGA. TOGA's higher rating reflects a contractually-sound payment obligation from four major carriers on a joint-and-several basis.
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action:
- A sharp decline in enplanements driven either by a reduction in services offered by airlines other than Delta or a failure by Delta to fully utilize the terminal resulting in a material change in financial metrics.
- Any further significant construction works at the terminal, requiring additional borrowing by IAT and thereby materially increasing its leverage profile.
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action:
- Due to the risks associated with the single asset nature of the terminal and the strong exposure to one airline, positive rating action is unlikely.
CREDIT UPDATE
JFK IAT, through its sole member, is a partly-owned subsidiary of Schiphol USA Inc., an indirect U.S. subsidiary of Schiphol Group, and was created as a special purpose vehicle to operate Terminal 4. IAT leases Terminal 4 under a long-term leasehold agreement with the PANYNJ expiring in 2043. Terminal 4 is home to over 30 international and domestic carriers, including Delta Airlines, who operates at the terminal under an anchor tenant agreement also expiring in 2043. Delta and its affiliates now account for over 60% of traffic within the terminal following the Delta-funded Phase II expansion project.
Performance Update
Traffic at Terminal 4 continues to increase following the completion of Phase II expansion project, with enplanements up 3% in 2017 to 10.6 million, following a significant 6% growth in 2016. Delta and its affiliates continue to increase their presence at Terminal 4, accounting for approximately 65% of traffic in 2017. Aside from Delta, IAT maintains a diverse mix of carriers, with no one airline accounting for more than 5% of enplanements in the current year. While several carriers left the terminal following Delta's initial expansion, other airlines, such as WestJet, Thomas Cook Airlines, and Volaris have backfilled lost service. Additionally, Hainan Airlines and Xiamen Airlines joined the terminal in 2017 and are expected to increase their traffic as the market for international travel to and from China continues to grow. Fitch views near-term traffic increases as reasonable driven by increased operations from airlines and general economic growth in a very strong service area.
Increases in passenger traffic continue to improve financial performance with total revenue increasing 9.4% to $436 million in 2017. Total revenue growth was driven by an increase in passenger terminal charges and other airline revenue. Delta's Terminal 4 payments grew by approximately 1.8% in 2017, while non-Delta passenger terminal charges grew 16%. As such, blended CPE levels fell to a Fitch calculated approximately $40 in 2017, up from around $36 in 2016. CPE levels remain elevated when compared to peers, however, the economic value to airlines serving the region is not in question and Fitch believes demand for slots at JFK remains strong. Further, when CPE is viewed in the context of higher airfares for international flights it is more reasonable.
Total O&M expenses increased coinciding with the completion of the terminal expansion project. In 2017, expenses increased 10.2% to approximately $110.5 million due to increased expenses on labour, repairs, and maintenance. An increase in minimum wage is the primary driver of the increase in labour costs. New York State's minimum wage will be increasing by $2 annually before arriving at $15 at the end of 2019. In addition to O&M, IAT pays a ground rental fee for its lease of space at JFK with PANYNJ, which totalled approximately $24 million in 2017, and is expected to increase at an annual rate of no less than 4%. Costs are recovered in the terminal through Delta's airline payments and terminal charges from contract carriers, and Fitch expects expenses to moderate in the near term as the terminal reached a new base level of costs following Delta's increased operations.
The growth in total revenue has enabled IAT to maintain solid coverage levels, at 2.6x in 2017 and expected to remain at least above 2.0x even under a period of economic decline. The project's overall leverage decreased faster than initially anticipated as a result of the relocation of domestic flights to the terminal. Fitch calculated leverage totalled approximately 3.7x in 2017, and is expected to continue to decline below 3.0x by 2022. Although a future Phase III expansion project remains uncertain, given the current involvement of Delta in the expansion of LGA, IAT management does not foresee additional leverage in the near term.
Fitch Cases
Under Fitch's five-year base case forecast, which assumes marginal Delta and contract carrier annual enplanement growth and escalating O&M costs of approximately 5% annually, coverage averages 2.4x through the forecast period. Following the high non-aviation revenue growth in 2017, CPE levels are expected to remain generally in line with historical levels, remaining in the $43-$44 range through 2022.
Fitch's rating case contemplates debt service coverage under a stressed condition aimed to capture a decrease in near-term traffic with moderate recovery thereafter. Debt service coverage remains at or above 2.1x through 2022. The profile remains resilient to traffic losses with leverage remaining under 4x in the forecast period. Total blended CPE increases, but remains under $45. IAT's financial profile in a rating case scenario remains strong due to the increase in Delta's domestic airline activity resulting from the Phase II expansion, and is aligned with Fitch criteria and peers at 'BBB+'.
SECURITY
The bonds are secured by a facility rental payment made to PANYNJ, by IAT, in an amount sufficient to cover the required debt service obligations annually through to maturity, and by a leasehold mortgage pledged to the trustee in the leased premises.
