CHICAGO — Moody’s Investors Service has downgraded to Baa1 from A3 its rating on Cleveland-Hopkins International Airport, warning that the airport faces pressure from declining enplanements and airline revenue.
The downgrade affects $850 million of revenue bonds issued by the city-owned facility. Standard & Poor’s rates the airport A-minus, and Fitch Ratings assigns an A.
Hopkins is the chief commercial airport in northeast Ohio and enjoys a strong base of demand, limited competition and strong liquidity, analysts said. The facility is further strengthened by its strong origination-and-destination traffic, which accounts for about 77% of its total passenger traffic.
But it relies heavily on Continental Airlines for revenue, and the recent merger of Continental and United Airlines could pose risks, Moody’s said. Before the merger, the airport was a Continental hub, where the carrier represented 66% of passengers.
The new airline, United Continental Holdings Inc., will make up 70% of Cleveland International’s enplanements, and if it decides to decrease that number it could pressure the airport, Moody’s said.
The merger could mean a “weakening long-term incentive to remain a hub,” Moody’s analyst Charles Berckmann said in a report on the downgrade.
In the near term, however, the airport’s position is somewhat protected due to a settlement between United, Continental, and the Ohio attorney general that, among other things, requires that the new airline for the first two years maintain an average daily departure rate that equals at least 90% of Continental and United’s average daily departures last year. The agreement’s commitment requirements soften after three years and if the new carrier experiences profitability losses. The airline can pay $20 million to opt out of the agreement.
Cleveland International has struggled with enplanement and airline revenue declines over the two years before the merger, Moody’s said. Officials are having a difficult time drumming up enough non-airline related revenue to offset the declines.
On the plus side, the airport has trimmed an already-lean capital plan that now totals $162 million. The plan is expected to be financed largely with federal grants, existing bond proceeds, and passenger facility charge revenue, with $21 million coming from cash.
“Moody’s believes the airport’s ability to keep expenditures close to this plan will be essential in maintaining its key credit strengths of financial liquidity and low additional debt needs,” Berckmann wrote.
As of Nov. 11, airport debt with a 2027 maturity was yielding 4.194%, according to Thomson Reuters.
