Deal in Focus

Southwest’s Love Field Enlargement

DALLAS — Southwest Airlines, which after its launch in 1971 built its entire business plan around Love Field, will issue $310 million of revenue bonds to expand operations at the historic Dallas airport.

The tax-exempt bonds, issued by the conduit Love Field Modernization Corp., will go toward a complete redevelopment of the airport’s main terminal and concourse that is already underway. Completion is expected in four years, and the project is estimated to cost $500 million.

Southwest, which will manage construction, has entered into a special facilities agreement with the city of Dallas and the issuer.

Southwest is responsible for repaying the debt from its revenues, so the bonds carry the airline’s rating of BBB from Standard & Poor’s with a negative outlook and Baa3 from Moody’s Investors Service with a stable outlook.

“Since there is no lien on the lease or facilities, we view this as the equivalent to senior unsecured debt,” said Standard & Poor’s analyst Betsy Snyder. “We placed the rating on CreditWatch with negative implications, reflecting the CreditWatch status of Southwest’s ratings.”

This week’s deal is led by book-runner Goldman, Sachs & Co. Bank of America Merrill Lynch, Citi, Comerica Securities Inc., Ramirez & Co., and Wells Fargo Securities are co-managers.

First Southwest Co. and Estrada Hinojosa & Co. are financial advisers. McCall, Parkhurst & Horton and Escamilla, Poneck & Cruz are bond counsel. Mahomes Bolden & Warren is underwriters counsel.

The deal comes amid sweeping changes in the airline industry after a decade of economic turmoil.

Southwest, which is headquartered at Love Field, recently announced record third-quarter profits amid plans to acquire AirTran Airways and operations at its Atlanta hub for $1.4 billion. In addition to opening new markets in the U.S., the merger gives Southwest its first international flights to Mexico and the Caribbean.

At the same time, Southwest is preparing for unrestricted flights from Love Field beginning in 2014. That is the year when remaining route restrictions under the so-called Wright Amendment will be lifted and Southwest will be allowed to fly nonstop to long-haul destinations such as New York and Los Angeles.

Currently, Southwest’s Boeing 737s can fly passengers under one ticket from Love Field to any of its destinations, as long as the passengers change planes in another airport in Texas or nearby states.

Aircraft with 56 or fewer seats can fly anywhere in the United States from Love Field, but there are few commercial flights by the smaller regional jets.

The Wright Amendment, named for former U.S. Rep. Jim Wright, D-Fort Worth, was passed by Congress in 1979 to protect the newly opened Dallas-Fort Worth International Airport from competition from Love Field.

DFW opened in 1974, fulfilling a federal court order that the cities of Dallas and Fort Worth jointly build a new airport serving the two cities.

Meanwhile, another court order had allowed Southwest to continue flying from Love Field to cities in Texas. Southwest, which initially flew from Dallas to Houston and San Antonio, built its business model around ease of access.

Because of its distance from Dallas and Fort Worth, DFW International was considered impractical for Southwest, which was offering an alternative to driving between the three cities. Just six miles north of downtown Dallas, Love Field served a heavily populated area of the city and its suburbs.

As Southwest grew nationally, becoming the nation’s most profitable airline and now one of its largest, the limitations on its home airport began to bind.

After an intense lobbying and public relations campaign, Southwest and its DFW rival American Airlines announced in 2006 a plan to gradually lift the Wright Amendment in agreement with Dallas and Fort Worth.

Under the agreement, Love Field’s maximum gate capacity would be lowered to 20 gates from 32, and only domestic, nonstop flights would be allowed. Southwest was allowed to operate from 16 gates, American two gates, and Continental Airlines two gates.

AirTran’s operations at DFW will end when it becomes part of Southwest.

Since the 2006 agreement, Continental has merged with United Airlines. However, United has announced plans to use its gates at Love Field for commuter flights to Denver International Airport. As of Oct. 16, 2014, United will be able to use the gates for any of its jets.

Ironically, United agreed to help build DIA only with the provision that Denver’s Stapleton Airport would be demolished. United feared a scenario like American’s DFW hub experienced with Love Field, where a low-cost competitor was operating from a smaller airport in its own backyard.

In a special comment last month after the Southwest-AirTran merger announcement, Moody’s analyst Kurt Krummenacker said the deal could put pressure on airports in the event of scheduling shifts.

Love Field and Chicago’s Midway Airport, two of Southwest’s major operations, drew special attention.

The merger could affect airline service, which provides various fees, such as passenger facility charges, a major revenue source for airport debt service, Moody’s said.

“Unlike other mergers, this merger doesn’t necessarily present a credit concern for any particular airport,” Krummenacker said. “We don’t expect that there is a material credit impact at any single airport, but we’ll continue to monitor” their credit profiles.

As Southwest prepares Love Field for 2014, DFW is remodeling its four original terminals under a $2 billion project that includes a new operating agreement with American. DFW last week issued the first $301 million of revenue bonds for the project.

In advance of the issue, Fitch Ratings downgraded DFW to A-plus from AA-minus, citing the airport’s increasing debt load, now at $3.5 billion, and the threat of competition from Love Field.

“After the planned borrowing, DFW will have one of the highest debt burdens among peer airports, creating materially higher fixed costs for its operating budget,” said Fitch analyst Emari Wydick.



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