DALLAS - As Denver International Airport nears its 20th birthday, the nation's fifth-busiest airport plans to restructure its variable-rate debt to help lower operating costs for its primary hub operator, United Airlines.
In exchange for DIA's cost-reduction efforts, United is extending its lease by 10 years to 2035. That brings relief to airport officials wary of competition from hubs United acquired through its 2010 merger with Continental Airlines, particularly Houston's Bush Intercontinental Airport.
"It was big for us," said Patrick Heck, chief financial officer at DIA. "One reason is that United is our largest carrier here. They were also the first major carrier at Denver International and helped build the airport."
With its largest carrier locked down, the airport approaches its third decade of operations with a sense of stability that contrasts with its rocky launch, which included months of delays, an SEC probe, and the loss of a hub carrier.
It was United's future merger partner and then-rival Continental that turned its back on DIA after agreeing to help finance construction of the airport. Continental, based in Houston and recovering from its second bankruptcy, closed its Denver hub, allowing United to dominate the market when the new airport belatedly opened on Feb. 28, 1995.
"One of our challenges was getting any of the airlines to sign the typical long-term agreements," former Denver Mayor Federico Pena said in a recent phone interview. "We said, this airport is so strong and stable that we were going to sell the bonds without having an airline agreement. And we did. Of course, we had to pay a high interest rate."
After the first bonds were sold, Continental signed a lease for gates on DIA's Concourse A. That prompted United to get on board, agreeing to operate gates at Concourse B. But Continental changed course in November 1994, announced it was closing the Denver hub, once its largest, sharply reducing its flights and leaving dozens of gates to be subleased.
Pena, who later became secretary of energy in President Clinton's cabinet, remembers the negotiations about closing Stapleton International Airport in favor of the more distant and costly DIA as "bare-knuckle."
"Sometimes the airlines believe these facilities are theirs," he said. "But financing also comes from concessions. Financing comes from parking. I wish we had had a much more cooperative relationship from the beginning because we might have sold those bonds at a lower cost."
The major financing came from a $3 billion issue in 1994 that sold in about an hour but led to lawsuits from bondholders over DIA's disclosure of its failed automated baggage system, which kept the airport from opening for months, and a Securities and Exchange Commission investigation of how the underwriters were chosen. In the end, the SEC cleared Denver, and the bondholder lawsuits were settled out of court for $4.5 million.
"It was a pretty wild history," Pena told The Bond Buyer. "There hasn't been a new airport since then."
While the main thoroughfare into the airport is named for Pena, some believe the airport itself should be named for the mayor who invested so much time, effort and political capital on the project.
Pena announced the initial funding for the project in 1989, as the city received the first $60 million of federal grants. By the time it opened, DIA's cost would land at $4.8 billion, more than twice the original estimate.
Two decades after the landmark $3 billion bond issue, DIA still carries $3.72 billion of senior-lien revenue bonds and $719 million of subordinate bonds, according to Moody's Investors Service.
A portion of that - about $275 million of variable-rate debt - will be restructured to lower annual debt service by about $25 million per year through 2025, Heck said.
"It's several series," he said. "We plan to work on that over the next quarter."
Extending the maturities by six years through negotiation should not require new bond issues, Heck said.
Under the extended lease, DIA also agreed to take back 140,000 square feet of leased, but unused, space on United's Concourse B.
The airport also agreed to eliminate its annual connecting-passenger penalty for the airline, which charges United $6 for every connecting passenger below a 6.5 million target. United has failed to reach the threshold by about 1.5 million passengers in recent years, according to Moody's.
Denver officials estimate that dropping the penalty saves United about $9 million a year.
In return, United pledges to keep 9.1% of its total capacity at DIA through 2025.
Moody's Investors Service, which revised its outlook on DIA's A1 rating to stable from negative in June, said the new lease was a positive credit factor, particularly given United's efforts to lower operating costs.
"We feel the positive effects outweigh the negative credit implications of the airport's plan to increase variable-rate exposure and extend debt maturities," wrote Moody's analyst Earl Heffintrayer in a special comment.
"While the restructuring will result in less flexibility in those future years, the moderate effects are outweighed by the relief provided to airlines and addresses the reality that the useful life of the assets extend beyond the maturity of the bonds," he noted.
With the new lease in hand, United continues to evaluate its service levels to match the financial performance of its U.S. competitors, the analyst noted.
"Given the importance of hub airports in the current operating environment, airports such as Denver are subject to a greater degree of risk to major service disruptions in the United system than origination and destination airports," Heffintrayer said.
Passenger growth at the DIA reversed in 2013, dropping 1.2% from the previous year, after posting three consecutive years of record enplanements. At 26.3 million enplanements, the airport is currently the fifth-busiest in the United States.
So far in 2014, enplanements have grown 1.43%.
DIA's connecting traffic declined for the second consecutive year in 2013, though origin and destination enplanements grew 3.9%. Moody's calculates that O&D traffic at the airport has grown at a 3.6% growth rate since 2001, second only to Charlotte, N.C.,'s 3.8% growth.
Southwest Airlines, which started operations at DIA in 2006, and Denver-headquartered Frontier are the second- and third-biggest airlines at DIA. Southwest, Frontier and the airport's other carriers will also benefit from the lower operating costs under the new United lease, officials said.
While Denver was securing the United lease, other hubs appeared to experience elevated levels of anxiety.
Moody's special report on the airport sector Aug. 15 prompted United and Houston officials to issue reassuring statements about the airline's future at Bush Intercontinental , where United is backing bonds for a major rebuild of Terminal B.
"Houston is a vital part of United's network," the airline said in a statement on Aug. 19, the day it announced the DIA lease extension.
"We don't see any signs that there are issues with Bush as a hub for United Airlines," Houston airport officials added.
DIA expects a steep approximately $200 million drop off in debt service costs in 2025 when the original 30-year debt for the airport matures. That level of debt service reduction would reduce airline costs by about $7.60 per enplanement passenger, according to Moody's.
In the meantime, completion nears for a new $736 million South Terminal, which will include a 519-room Westin Hotel and Regional Transportation District commuter rail and bus station. That project is covered by subordinate debt issued last year.
The decision to finance the hotel was one of the factors that originally prompted Moody's to lower the outlook because analysts said it was not a core function of the airport. The mass transit station was also seen as a threat to revenues from parking and rental cars.
Standard & Poor's affirmed its A-plus rating on DIA Aug. 5.
"The stable outlook reflects our anticipation that United will continue to operate a major hub at DIA, that debt service coverage on a cash flow basis will remain good, and that the airport will maintain an adequate liquidity position," said analyst Mary Ellen Wriedt. "Significant additional debt for capital projects that are not passenger demand-based and would weaken financial metrics may result in a rating downgrade."