Fitch Ratings said it has downgraded Cleveland, Ohio's approximately $786.9 million of outstanding airport system revenue bonds to BBB-plus from A-minus.
The rating outlook remains negative. Cleveland also has $58.0 million in Series 2013A bonds purchased by U.S. Bank National Association that are not Fitch rated.
The downgrade reflects elevated concerns over the airport's long term financial flexibility and cost competitiveness in light of the recent announcement by its leading carrier, United Continental Holdings (UAL, Fitch rated IDR B with a positive outlook), to significantly reduce its flight operations over the coming months at Cleveland-Hopkins International Airport.
United plans to cut back daily departures by 64% from 200 to 72 as well as reduce 66% of non-stop markets served from 59 to 20. The effects of these actions will lead to a near elimination of its connecting service and reductions of 11% to its O&D service at the airport. The cuts in flights and markets will be fully phased in by June 2014 and will likely lead to measurable and potentially permanent declines in the airport's current 4.5 million enplanement base.
Fitch believes the United's actions will soon translate to a higher airline cost profile and pressure financial flexibility. Given the elevated debt burden, with scheduled debt service requirements at over $73 million annually for the next nine years, the airport's cost per enplanement (CPE) will likely rise well above its current level of $16 in order to maintain stable debt service coverage performance.
Non-airline operating revenues are vulnerable to passenger losses as well as passenger facility charge receipts which together contain the cost burden to the airlines. Airline revenues are less at risk with UAL expecting to support its existing special facility leases at Concourse C and D, through 2019 and 2027 respectively.
The negative outlook reflects uncertainties to the steps that will be taken by management to preserve financial and cost flexibility as the airport transitions more closely to its origination/destination (O&D) base. Fitch will monitor cost containment actions, intentions to utilize its strong cash reserves, successes to replace lost services, and negotiations on a new use and lease agreement with sound cost recovery terms following the expiration of the current residual-based agreement at the end of 2015.
