Fitch: Issues Remain for Ontario Airport After Dispute Resolved

NEW YORK--(BUSINESS WIRE)-- The recent settlement between the Cities of Los Angeles and Ontario over Ontario International Airport (ONT) is likely to provide for a more politically acceptable and stable ownership framework for ONT, according to Fitch Ratings. That said, there remain lingering credit issues.

The recently announced settlement agreement letter of intent between the Cities of Los Angeles and Ontario, which is intended to transfer the ownership and control of the Ontario International Airport from Los Angeles back to the City of Ontario, through the Ontario International Airport Authority (OIAA), should resolve a longstanding dispute and ongoing litigation over ONT's governance and operations. However, the true merits of this settlement will only be evident in the medium and long term.

A number of issues remain from a credit perspective over the longer term as to the operational and financial benefits of the transaction. Similar to Los Angeles International (LAX), ONT is currently owned and operated by the City of Los Angeles, and has been for the past 30 years. However, each airport effectively acts as an independent enterprise, with separate bonding programs and financial reporting. This historical arrangement between the two cities, as public parties, is atypical in the U.S. commercial airport space.

Given the complexity involved with airport ownership transfers, uncertainties remain over the ultimate timing of the transfer, since approval from the Federal Aviation Administration and other units of local governments will be needed. Financial implications remain unclear at this time as the settlement agreement calls for several steps of compensation payments to be made to Los Angeles. The total payments come to $190 million although some of the payments are tied to ONT performance-based schedules, thus an element of uncertainty as to timing of receipt. The source for these payments, however, will be decided at a later time and making such payments from ONT's funds and reserves could impact ONT's currently very strong liquidity position.

ONT's debt will also need to be addressed by the ownership transfer, and to the extent replacement debt is effectuated, Fitch will need to review the security features and covenants. Similarly, the airport operates under a residual airline agreement and whether this form of rate setting remains in place following the ownership transfer will be an important area of review.

Lastly, questions remain on the ability to carry through with a successful transition of ownership, management, and operations. ONT is expected to be handed to the Ontario International Airport Authority, an authority formed under a joint powers agreement between Ontario and San Bernandino County. There are not many examples to point to in recent years where an airport changed ownership control from one public entity to another.

Fitch rates LAX's senior and subordinate debt 'AA/AA-' with a Stable Rating Outlook. It is the dominant airport for the LA market with a strong and broadening mix of domestic and international markets served. Further, enplanement trends have been notably positive during the recovery years following the 2007-2009 recession. In contrast, ONT is rated 'A-' with a Negative Rating Outlook as the airport has seen measurable traffic declines in most years since 2007 as carriers pulled back services.

In Fitch's view, the change in ownership is not likely to create in itself any significant shifts in ONT's traffic profile. Given its location, the degree of regional competition, and the underlying economy of its air trade service area, bringing in more airline services will be an ongoing challenge. ONT is a reliever airport for the Los Angeles metropolitan region, serving a traffic base primarily in the Inland Empire region. Over a decade ago, the airport benefitted from a strong influx of low cost carrier services, such as Southwest and JetBlue, as an alternative to serving at LAX.

Over the more recent five- to ten-year period, the low cost carriers subsequently adjusted their routes to include more costly airports such as LAX at the expense of secondary airports. The major network carriers have also implemented route shifts to the detriment of smaller airports and reversing these trends may take time. Still, improvements in the general fundamentals of the regional economy may bode well for airports like ONT where capacity at other airports is more limited or much more expensive.

Additional information is available at 'www.fitchratings.com'.

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Fitch Ratings
Seth Lehman
Senior Director
+1-212-908-0755
Fitch Ratings, Inc., 33 Whitehall Street, New York, NY 10004
or
Jeffrey Lack
Director
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Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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