Fitch Ratings said settlement agreement involving Ontario Airport raises credit questions.

—LOS ANGELES  Los Angeles and Ontario's settlement agreement involving Ontario International Airport is likely to provide for a more politically acceptable and stable ownership, though credit issues linger, according to a Fitch Ratings report.

Los Angeles has agreed to return control of LA/Ontario International Airport to an Ontario, Calif.-based local authority.

Los Angeles Mayor Eric Garcetti and Ontario Mayor pro Tem Alan Wapner announced the deal during an Aug. 6 press conference in Ontario.

While the agreement should resolve a longstanding dispute and ongoing litigation over ONT's governance and operations, the operational and financial benefits of the settlement over the long term remains to be seen, Fitch analysts said in an Aug. 11 report.

Los Angeles has owned and operated the Ontario airport for the past 30 years through Los Angeles World Airports. LAWA also controls the Los Angeles International Airport and Van Nuys Airport.

Each airport effectively acts as an independent enterprise with separate bonding programs and financial reporting. This historical arrangement between the two cities, as public parties, is atypical in the U.S. commercial airport space, Fitch said.

Given the complexity involved with airport ownership transfers, Fitch said, uncertainties remain over the ultimate timing of the transfer, since approval from the Federal Aviation Administration and other units of local governments will be needed.

The financial implications remain unclear as the settlement agreement calls for compensation payments to Los Angeles totaling $190 million in a stair-step process, Fitch said. Some of the payments are tied to Ontario airport's performance-based schedules, which creates an element of uncertainty around the timing of the payments, Fitch said.

The source of the payments also has not been determined, and making the payments from ONT's funds and reserves, could damage ONT's currently very strong liquidity position, analysts said.

"ONT's debt will also need to be addressed by the ownership transfer, and to the extent replacement debt is effectuated, Fitch will need to review the security features and covenants," Fitch analysts wrote in the report. "Similarly, the airport operates under a residual airline agreement and whether this form of rate setting remains in place following the ownership transfer will be an important area of review."

Fitch also raised concerns about the mechanics of transferring ownership, management, and operations, since there are not many examples in recent years where an airport has changed ownership from one public entity to another.

Fitch rates LAX's senior and subordinate debt AA/AA-minus with a stable outlook. Enplanement trends for the region's dominant airport have trended in a positive direction since the 2008 economic crash. In contrast, ONT is rated A-minus with a negative outlook. The Inland Empire airport has seen measurable traffic declines in most years since 2007 as carriers pulled back services.

In Fitch's view, the change in ownership is not likely to create in itself any significant shifts in the traffic profile of ONT, a secondary airport for the Los Angeles region, primarily serving San Bernardino and Riverside counties.

Given its location, the degree of regional competition, and the underlying economy of its air trade service area, bringing in more airline services will be an ongoing challenge.

Over a decade ago, the airport benefitted from a strong influx of low cost carrier services, such as Southwest and JetBlue, as an alternative to serving at LAX.

Over the more recent five- to 10-year period, Fitch said, the low cost carriers subsequently adjusted their routes to include more costly airports such as LAX at the expense of secondary airports.

The major network carriers have also implemented route shifts to the detriment of smaller airports, and reversing these trends may take time, Fitch analysts said.

Improvements in the general fundamentals of the regional economy may bode well for airports like ONT where capacity at other airports is more limited or much more expensive, analysts added.

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