S&P - Public Finance Criteria (2007). - The Global Clearinghouse

TransportationGiven the declining number of viable carriers andthe proliferation of hubs, it is unlikely in othercases that a departing hub carrier would bereplaced so easily. In general, Standard & Poor’shas viewed the debt of most transfer airports slightlybelow similarly secured debt of an O&D facility.However, hubs that have demonstrated sufficientstrength in the aforementioned conditions, havereceived ratings comparable to an O&D facility.Competitive facilities within or near a servicearea are a concern, especially if they offer betterservice. Passengers are often quite willing to travelfurther on the ground for less expensive fares, morefrequent air service, or larger aircraft. Increasingly,however, due to the increasing need for facilitiesand the slow pace that new or improved facilitiesare provided to meet demand, even those airportsin close proximity with one another can serve separateand distinct segments of the market.The carrier mix becomes increasingly importantas any single airline’s share grows. At an O&D facility,dependence on one or two carriers creates shorttermvulnerability, as a strike can cripple an airporttemporarily and have a significant impact on financialoperations. This problem can be partially mitigatedby legal provisions that provide ample reservefunds and coverage levels, midyear flexibility toraise rates, and the ability to recover deficienciesoccurring in the prior year. While one or two dominantcarriers may expose the airport to temporaryproblems, Standard & Poor’s believes that the criticalrating factor is still air traffic demand.If demand exists and the routes prove relativelyprofitable, other carriers have historically filled thevoid over time to replace an airline that hasreduced or cease operating out of an airport,diminishing the likelihood of prolonged loss of airportactivity. However, in certain economic climatesthat affect the airline industry as whole, theability of other carriers to take all or even a largeportion of a failed carrier’s traffic may be significantlylimited—especially if much of the activityrelated to connecting passengers or serviced routesconsidered marginally profitable by the remainingor new airlines.Use And Lease AgreementsThe intent of use agreements between an airportand its carriers is twofold:■ To ensure a revenue stream providing for operatingcosts and debt service payments; and■ To establish certain procedures for rate settingand revenue collections.Historically, long-term agreements also have indicatedan air carrier’s commitment to a particularmarket. There are two general categories, residualand compensatory, which differ primarily in termsof which party bears financial responsibility for revenueshortfalls, and, conversely, who benefits fromany surplus. Standard & Poor’s does not explicitlyfavor one methodology over another, but evaluateswhether the specific agreement terms are appropriatefor an airport’s operating conditions.Attitudes toward lease agreements havechanged considerably since deregulation. Threetrends are clear:■ For both carrier and airport, the desire to committo long-term agreements has decreased;■ The traditional distinction between residual andcompensatory rate-setting methodologies nolonger exists; and■ A desire by airport operators to have more controlover revenues, particularly nonairline revenues.The greater degree of competition under deregulationand the risk of airline (tenant) bankruptcyare largely responsible for the shorter terms commonin many of today’s use agreements. Air carriersmay not want to maintain service in an area generatingintense interline competition or low yield.Conversely, airport operators want to avoid beingsaddled with unused terminal space resulting fromtenant bankruptcy or routing changes.Many agreements have been structured to combinethe revenue protection offered by a residualapproach with some sharing of excess revenues, asin a compensatory agreement. This latter provisionallows for the build-up of discretionary reserves,which can be used to fund capital projects on apay-as-you-go basis. Airports with agreements thatgenerate annual debt service coverage, as opposedto rolling coverage, can provide more of a cushionabove minimum coverage levels and be viewed as acredit strength. Similarly, the presence of a sophisticatedconcession program that results in significantnonairline revenue supporting capital development—andoffsetting debt needs—will be viewedpositively. Airports with compensatory ratemakingmethodologies are generally demonstrate coveragelevels in excess of typical rate covenant requirementsof 1.25x debt service.However, the presence of one type of rate-settingmethodology does not necessarily result in a ratingdistinction. It is important to note that the presenceof use agreements does not produce any specificlevel of airline usage at an airport. An air carrier’sfinancial obligations under a use agreement are verysmall, compared with potential operating lossesincurred by serving an airport with poor demand.Federal law restricts the application of airport-generatedrevenues for airport purposes generally. Forinstance, airport revenues cannot subsidize otherpublic services unrelated to operating the airport,therefore, in many respects; even compensatory air-132 Standard & Poor’s Public Finance Criteria 2007