Fitch Downgrades Corpus Christi International Airport, TX, to 'BBB'

Business Wire, Nov 9, 2004

NEW YORK -- Fitch Ratings downgrades the rating for $22 million in outstanding Corpus Christi, TX general airport revenue bonds to 'BBB' from 'BBB '. The bonds are secured by net revenues and other pledged funds generated from operations at Corpus Christi International Airport. The Rating Outlook is Stable.

The rating downgrade reflects the historical decline in both passenger traffic and in the number of average daily flights, stemming from strong competition with other regional airports, which combined have weakened the airport's financial margins. Fitch placed the airport's bond rating on Rating Outlook Negative on April 22, 2004. Enplaned passenger levels at the airport in fiscal 2004 were 11% below those forecasted by the airport's consultant in 2000. Additionally, the number of average daily non-stop flights was reduced to 24 in 2003 from 30 in 2000. The Stable Rating Outlook is based on a recent recovery in passenger traffic during fiscal 2004, which marked the first year of traffic growth at the airport since 1994, and suggests the stabilization in local demand for air service.

The airport enplaned 395,750 passengers in fiscal 2004, reflecting a 9% increase in traffic from the prior year. This marked the reversal of a deteriorating trend through the 1990's, during which passenger levels declined to 426,147 in 2001 from 516,975 in 1995. This gradual decline occurred despite the national economic expansion of the 1990's, during which many similarly sized airports experienced record growth levels. Enplanements declined an additional 14% in 2002 (compared to 11.2% nationally) due to the effects of the national recession and the events of Sept. 11, 2001, and a further 2% in 2003. In addition to national economic events, local conditions contributed to the traffic loss, including the changing transportation preferences of tourists visiting the region and the competition from larger regional airports. Management conservatively expects enplanements to grow at 2% per year from 2004 to 2006. While this growth is sustainable, especially given the 9% growth seen in the last 12 months, it remains dependent on the airport maintaining or increasing the number of daily flights or destinations.

While Corpus Christi remains a popular tourist destination, studies show that many tourists are driving and not flying into the area. Occupancy rates at major area hotels equaled 60%-62% in 2002, up from the 42%-60% range in 2001, but traffic at the airport still fell during this period. Furthermore, the airport faces stiff competition for passengers from San Antonio International airport, located two and a half hours driving from Corpus Christi. San Antonio offers non-stop service to 24 destinations, relative to three non-stop destinations from Corpus Christi. A sampling of ticket prices from both San Antonio and Corpus Christi to major destinations (i.e. Chicago, New York, Las Vegas and Orlando) show discount of $15-$50 from San Antonio, a margin which has narrowed from past years when some flights were up to $100 cheaper at San Antonio.

Service at Corpus Christi International Airport has traditionally consisted of flights of major airlines to their connecting hubs at Houston, Dallas, and Atlanta, with airline market share remaining relatively unchanged for the past 10 years. The top three airlines and their regional partners (Southwest Airlines, 37% of enplaned passengers; Continental Airlines, 31%; and American Airlines, 20%) account for 88% of the total enplanements. The airport's fourth largest carrier, Delta Air Lines, recently announced plans to eliminate three daily flights in connection with the closing of its Dallas hub. While Delta currently holds a small share, the loss of these three flights would represent an approximately 42,000 annual enplaned passengers, or 11% of the airport's demand. Delta will add a third flight to Atlanta during this period, somewhat mitigating the loss of the airport's three Dallas flights. The prospect exists that another carrier, such as American, may add some capacity to Dallas, but such an outcome may not be realized for another six to nine months, placing further strain on the airport's fiscal 2005 outlook.

The airport's credit strengths include the stability of the Corpus Christi area economy, as well as the airport's modest debt burden and low cost of operations. The economy of the Corpus Christi MSA (GO bonds rated 'AA-' by Fitch) is stable, with a 2003 population base of 287,290, up 12% from the 1990 census. The city's unemployment rate (6.6% in 2003) was comparable to that of the state (6.8%) but higher than the nation (6%). The Port of Corpus Christi is also a major component of the local economy, ranking as the seventh largest in the nation, based on tonnage.

Airport operating revenues increased 9% for fiscal 2004, after increasing 19% in fiscal 2003, as the airport began collecting revenue from sales of oil on airport property. Oil royalties contributed $1.2 million for fiscal 2004, or approximately 16% of the airport's total operating revenues. The royalty lease, which runs through 2024, was executed as recent increases in the price of crude oil made extraction on airport property profitable. Airport management plans to budget for approximately $1 million per year in revenue, though future amounts could be significantly above or below this level depending on the market price of oil and on the quantity extracted. Airport operating expenses increased 9%, to $5.9 million, in fiscal 2004 due to the opening of the airport's rebuilt terminal. Management has budgeted approximately $7.5 million in operating expenses and approximately $6.5 million in operating expenses for 2005.