Fitch Ratings assigns an underlying 'A+' rating to approximately $85 million City and County of Denver, Colorado, (the city), series 2008B airport system revenue bonds for the Denver International Airport (the airport). The series 2008B (AMT) bonds will current refund and defease series 2005C1-C2. Fitch also affirms the underlying 'A+' rating on the city's approximately $4.2 billion in outstanding airport system revenue bonds. All airport system revenue bonds are payable from the net revenues of the airport system. The Rating Outlook on all bonds is Stable.
The 'A+' rating reflects the large and diverse economy of the Denver Metropolitan Area, continued growth in origination and destination (O&D) and connecting passenger traffic, the airport's favorable geographic location, growing presence of low-cost carriers, and favorable airport economic structure that consistently produces sound financial performance. Credit concerns include the airport's increasing debt levels and cost structure, construction risk associated with the implementation of a large capital program, and the deteriorating financial condition of the domestic airlines.
The airport serves not only as the primary commercial airport for the Denver Metropolitan Area, but for the entire eastern Rocky Mountain area in general, providing natural regional connecting traffic to complement the national hubbing operation of United. The airport served a record 25 million enplaned passengers in 2007 with March 2008 year-to-date results up 5.1% over that same period prior year. Originating passengers accounted for approximately 57% of total enplanements, representing an adequate local component of overall traffic for a major connecting hub facility.
Fitch expects airline service and market share to adjust over the next 1-3 years at the airport as United implements a system-wide reorganization of its network, including the elimination of its low fare Ted service, and as Frontier operates in bankruptcy. Serving as a partial mitigant to the uncertainty in the airline industry is the airport's importance as a regional connecting hub, strong O&D passenger base, and management's past experience operating through airline bankruptcies. United remains the airport's largest carrier, although its share of enplaned passengers (including United, Ted, and United Express) declined to approximately 50.4% according to year-to-date results through March 2008 down from 53% in 2007. While United's share continues to diminish, it still represents the majority of airline revenue, thus its scheduling decisions could significantly influence the overall financial operations of the airport.
Denver-based Frontier increased its share of passengers to approximately 25.6% according to year-to-date results through March 2008, up from 22.7% in 2007. Currently, Frontier operates in bankruptcy and faces strong competition with Southwest Airlines at the airport. Southwest, which entered the market in January 2006, has quickly captured approximately 6.6% of total enplanements according to year-to-date results through March 2008, a figure likely to expand given its planned increase to 70 daily departures, up from its current 54 daily departures, by the end of 2008.
According to 2007 results, operating revenues and operating expenses are up 4% and 11%, respectively. Record passenger growth in 2007 bolstered non-airline revenues while increased costs were largely associated with snow removal, overtime pay, guard services, janitorial services and repair and maintenance costs. Management has historically worked to manage its finances and control costs, as reflected by a 1.8% average annual growth rate in operating and maintenances (O&M) expenses between fiscal 2002 and 2006. The airport's favorable economic model drove operating revenues to grow at a 3.1% average annual growth rate, over that same period, producing a strong operating ratio of 49% in fiscal 2006. The airport has consistently produced a strong liquidity position holding an average of 415 days cash on hand, between 2002 and 2006, providing enough financial flexibility to cash fund projects.
The airport's sizeable capital program includes $987 million in projects through 2013. The largest portion of the program includes terminal and concourse improvements at $465 million and airfield improvements at $177 million. The airport plans to finance the program through a variety of sources including federal grants, passenger facility charge receipts, and through future bond issuance that will fund an estimated $722 million in projects. This sizable capital program results in the airport's cost per enplaned (CPE) passenger increasing to an estimated $15.01 in 2013, from $11.09 in 2007. While the airport's CPE remains above the industry average level, the difference will become more comparable as other airports continue to undertake major capital initiatives to address their respective capacity needs.
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