Standard & Poor's Ratings Services cut its rating Friday on $39.8 million in bonds issued by the Colorado Springs Airport to one notch above non-investment grade, becoming the second major rating agency to downgrade the debt after Frontier Airlines ended service to the city in April.
The downgrade to BBB+ from A-, was due to a downward trend in passenger traffic, worsened by Frontier's departure, as well as the airport's weakening competitive position with Denver International Airport and less available income to make annual debt payments totaling $5.2 million, Standard & Poor's said. The company affirmed its previous rating in July 2012, just two months after Frontier had expanded its service in Colorado Springs with nonstop flights to four cities in a short-lived bid to make the Springs a "focus city" for the Denver-based carrier.
Frontier's departure has triggered a 17 percent drop in passengers during the first seven months of the year, compared with a year earlier, and is forecast to reduce traffic numbers for the year to the lowest level in 22 years. That forecast doesn't include a daily flight to Seattle that Alaska Airlines is scheduled to begin in November.
Moody's Investor Service downgraded its rating on the airport's bonds in March to Baa1 from A3, just days after Frontier confirmed plans to end service to the Springs, citing the "continued erosion" of the airport's competitive position with DIA, declining "financial metrics" and a stagnating local economy that is vulnerable to cuts in military spending. Fitch Ratings downgraded its ratings in April 2012 to BBB+ from A-, also citing declining traffic and concerns that fewer passengers could potentially reduce the airport's "future operating and financial flexibility." Fitch affirmed that rating in June.
The latest downgrade comes as airport officials are trying to refinance the bonds in a bid to avoid a big jump in airline fees in the wake of Frontier's exit. The airport had planned to use reserves to pay for a series of taxiway projects; instead airport officials plan to use a low-interest loan of up to $10 million from the state to finance the work. A $3 per passenger fee that every airport charges would be used to pay off the loan, which carries a 2.5 percent annual interest rate. Then, the reserves that were to be used for the taxiway projects will instead go to pay off $10 million in airport bonds.
The airport also wants to refinance another $20 million in bonds at a lower interest rate. The loan and bond refinancing could cut the airport's annual debt payments by up to one fourth and make up for much of the loss in income from Frontier, avoiding a potential 50-percent increase in airline fees.
Dan Gallagher, the airport's interim director, said Monday that the downgrade won't derail or delay the refinancing plan, but he called the agency's action "disappointing, since overall they said they agreed with our strategy and believe we are on the right path, but they have grouped us with smaller airports and they are all hurting."
Standard & Poor's found strengths in a stable local economy anchored by multiple military installations and the airport's strong cash position - the airport has enough reserves for 28 months of operating expenses, based on its current spending. While airport officials noted that traffic has stabilized with the airport's four remaining airlines attracting some former Frontier passengers to their flights and is expected to increase somewhat when Alaska Airlines arrives, Standard & Poor's said it is "unlikely traffic will return to" 2012 levels in the medium term.
Airport officials also noted in a news release issued Monday that they "continue to have positive discussions with existing carriers" about resuming flights to destinations Frontier served. Gallagher declined to identify with which carriers the airport was in discussions.
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