SAN FRANCISCO - (Business Wire) Fitch Ratings assigns a long-term underlying rating of 'A' to bank bonds corresponding to variable rate demand obligations (VRDOs) issued by the Airport Commission, City and County of San Francisco, CA, San Francisco International Airport (SFO or the airport), second series variable rate revenue refunding bonds issue 37A & B. Fitch also affirms its underlying 'A' rating on the airport's $3.9 billion in outstanding debt. The Rating Outlook is Positive.
Although approximately 20% of the airport's $3.9 billion outstanding debt consists of VRDOs, and about $3 million is currently held as bank bonds, the airport's interest rate and term-out risk is relatively low given the airport's sufficient available resources to accommodate any increased principal and interest requirements in the near term. The cure period for all reimbursement agreements is 180 days. Bank rates are capped for the first 90 days at the base rate, defined as the higher of the prime rate plus two percent per annum and the Fed funds rate plus one percent per annum. Between the 91st day and 180th day the bank rates are capped at base rate plus three percent. After 180 days the term loan rate begins, which is set at the prime rate plus five percent per annum. In addition principal amortization begins. The airport is currently considering its refinancing options for these series and expects to execute this plan within the next 180 days.
Passenger data shows continued growth, with enplanements increasing by 8.4% for fiscal 2008 over the same time period in fiscal 2007. Relative to other airports across the nation, SFO has experienced growth and is expected to remain relatively stable to slightly positive through the 3rd and 4th quarter airline capacity reductions. The Positive Outlook reflects the overall improved financial picture over the last five-year period and the addition of new service. Management continues to improve airport profitability and reduce the airport's cost per enplanement, which is budgeted at $13.60 in fiscal 2008, down from a high of $19.62 in fiscal 2003. The Outlook also incorporates the potential for the addition of approximately $648 million in new debt, which should not substantially change the financial metrics at SFO. Between fiscals 2003 and 2007 international air service grew at a robust average annual rate of 7%, reflecting additional flights to Asia, South Asia, and throughout the Pacific. Over that same period, domestic service grew at a 3% average annual rate, reflecting some new low-cost carrier entrants that included JetBlue Airways (JetBlue Airways Corp.; long-term Issuer Default Rating [IDR] 'B'; Outlook Stable, by Fitch), Southwest Airlines (Southwest Airlines Co.; long-term IDR 'A-'; Negative Outlook), and Virgin America. Continued management of the airport's CPE, maintained liquidity levels, a well managed capital program, and an overall healthy airport and airline industry would trigger an upgrade.
The 'A' rating captures SFO's importance as a regional transportation provider for long-range domestic and international air service, as well as the San Francisco Bay Area's significant population base (in excess of 7 million), high wealth levels and diverse economy, which support the strong passenger demand for service. Additional strengths include the airport's stable and strong balance sheet and healthy financial operating ratios (43%, fiscal 2007). Offsetting credit factors include the airport's high cost structure and to some extent, air service market share concentration (48%) in United Airlines (UAL Corp; long-term IDR 'B-'; Positive Outlook). This concentration is partially mitigated by the high level of origination & destination (O&D) enplanements, which represents 73% of total volume. Airport revenues derived from United Airlines represented only 26% of SFO's total operating revenues.
Moderate competition does exist between the Norman Y. Mineta San Jose International Airport (SJC) and Oakland International Airport (OAK) and SFO, which provide short to medium-haul low-cost air service alternatives in the south and east bay. Fitch does not expect immediate changes in the airport's total passenger enplanements related to the Frontier bankruptcy, representing 1.6% of SFO's total enplanements, and the recently announced merger between Delta (Delta Air Lines; Long-term IDR 'B'; Negative Outlook) and Northwest Airlines, representing a combined 9% of SFO's total enplanements. For a more detailed report, please refer to the full rating report issue dated Jan. 24, 2008 found at www.fitchratings.com.
The airport's $919 million capital plan includes the potential for additional debt of approximately $648 million and the use of $166 million in grants, $70 million in PFC funds, $16 million in construction fund cash, $15 million in operating funds, and $4 million in excess reserve fund cash. While the addition of new debt could place upward pressure on the airport's cost structure, management intends to take a phased-in demand driven approach, which should moderate and prevent any rapid cost escalation.
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.
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