Regional News

Delta's Memphis Cuts May Be the New Normal

BRADENTON, Fla. — Delta Air Lines Inc.’s 25% service reduction at Memphis International Airport could be a harbinger of future cutbacks at the Tennessee hub and other airports as carriers respond to sharply increasing fuel prices, according to rating agency analysts.

The legacy carrier is facing a 35% increase in fuel prices this year that could translate into a price tag $3 billion higher than last year, Delta president Edward Bastian announced Tuesday. The airline said it will increase fares and make capacity cutbacks overseas.

The only reduction in U.S. service will be in Memphis, where the airport is serviced by older, costly regional aircraft that will be retired. The airport is operated by the Memphis-Shelby County Airport Authority. Service reductions will be implemented over 12 to 18 months and the authority will adjust its business plan accordingly, said Scott Brockman, executive vice president and chief operating officer for the MSCAA.

Debt service will continue to be paid in a timely fashion, he said, adding that the authority believes Memphis will remain a viable hub for Delta.

The airline and its affiliates constitute  87% of all enplaned passengers at the airport.

The MSCAA had $479 million of outstanding revenue bonds at the end of fiscal 2010. The bonds are rated A-plus by Fitch Ratings, A2 by Moody’s Investors Service, and A-minus by Standard & Poor’s.

Analysts covering the Memphis airport said they are reviewing potential consequences of the 25% cutback in service.

“At this point we don’t have enough information to say what the impact will be on financial performance but a reduction of that size, if service is not replaced by another carrier, will impact revenues,” said Seth Lehman, head of the U.S. airport sector for Fitch.

Memphis does not currently assess passenger facility charges, but that could be an option to give the airport flexibility going forward, he said.

Brockman said PFCs are a viable funding tool for the future, though the authority has no current plans to levy them.

Moody’s rating incorporated the “strong possibility” that service at Memphis might be reduced, according to analyst Kurt Krummenacker.

“It’s our view that Memphis is always at risk, out of all of Delta’s hubs, for reduction in service just based on its size and location,” he said, pointing to the airport’s close proximity to Atlanta where Delta is headquartered.

The fact that FedEx Corp. is based in Memphis provides a stabilizing force, Krummenacker added.

Memphis International Airport is ranked first worldwide in handling of cargo tonnage, according to the Airports Council International.

In an effort to stabilize airport rates and smooth debt-service costs, Memphis sold $90 million of refunding bonds earlier this year, which was half what had been planned due to market conditions.

The bonds sold in two series on Feb. 11. The $57.8 Series A-1 bonds priced to yield 2.3% in 2012, 4.24% in 2017 and 5.5% in 2022. The $32 million Series A-2 bonds priced to yield 2.3% in 2013, 3.5% in 2015 and 4.57% in 2018.

Brockman said the present-value savings ranged from 5.72% to 13.38%, adding that the airport is monitoring the market for opportunities to refund the remaining bonds.

Last week, Fitch warned that the rise in oil prices would impact U.S. airports, and could slow economic recovery in the sector.

“While there have been widely held expectations for improving economic conditions and accelerated growth in air travel for 2011, elevated fuel prices can dampen such prospects,” Fitch said. “What has been observed so far is passenger traffic has grown quite robustly in recent months. However, the rise in jet fuel costs has subsequently resulted in responses from several of the leading U.S. network carriers to cut back planned growth in flights and seating capacity scheduled for later in 2011.”

In addition to service cutbacks and reduced landing fees, higher fuel costs can be expected to pressure airport budgets related to utility costs, which can run between 10% and 15% of operating expenses, Fitch said.



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