L
everaging passenger facility charges (PFCs) has
proven to be an effective tool as airports look
to maximize their debt-issuing capacity or limit the
effect of capital improvements on the airline-sup-
ported rate base. With proper structuring and
strong credit fundamentals, stand-alone PFCs or
revenue bonds where the only security is the pledge
of PFCs can receive solid investment-grade ratings.
The PFC program is now an established and critical
source of capital funding at U.S. airports. Stand-
alone PFC bonds have some fundamental differ-
ences compared with general airport revenue bonds.
These include:
■The vulnerability of a fixed-rate revenue stream
and debt service coverage to declines in enplaned
passengers attributable to a variety of reasons,
including economic downturns, rising air fares,
aviation fuel price increases, or natural disasters;
■Other events that could interrupt pledged revenue
flow, such as an air carrier bankruptcy; and
■The ability of the Secretary of the U.S.
Department of Transportation to terminate the
airport’s power to levy the PFC.
Airport management can reduce these risks
through compliance with the FAA’s record of deci-
sion and its “informal resolution process,” proper
oversight, strong management of PFC programs,
and structural enhancements to the debt transaction
that provide ample coverage of debt service from
pledged PFC revenues. Additionally, upon request,
the FAA includes language in their record of deci-
sion for PFC stand-alone transactions, which indi-
cates the FAA’s intent, in the case of a violation, to
provide a five-year cure period prior to termination.
Most important is compliance with current and
future provisions of the Aviation Safety and
Capacity Expansion Act of 1990 and all imple-
menting federal regulations pertaining to PFCs.
These provisions include those governing use and
administration of PFC revenues, as well as assur-
ances required to prevent termination by the
Department of Transportation.
Standard & Poor’s Ratings Services also
requires management to agree to provide notifica-
tion if revenues from collections decline or are dis-
rupted, or if it is notified by the FAA of a
potential violation of federal regulations. Withcertain other legal assurances, the issuer can keep
the lien open and use PFC revenues on a pay-as-
you-go basis.
With the stand-alone PFC pledge, Standard &
Poor’s analysis will focus on the traditional credit
factors that support the airport’s general airport
revenue bond rating with a special emphasis on
passenger demand, debt service coverage, airport
management, the airport’s PFC program, legal and
structural provisions, and federal agreements—all
of which are important in addressing the inherent
risks of the PFC program.Traffic Analysis
Standard & Poor’s examines the economic under-
pinnings of the airport’s service area. In most cases,
a distinction is made between the added vulnerabili-
ty for connecting versus origin and destination
(O&D) airports, with higher coverage requirements
for airports without a strong and diversified O&D
base. Careful consideration is given to traffic per-
formance through national and local economic
cycles, as well as susceptibility to fluctuations
caused by factors affecting the airline industry.
Traffic variations will be reviewed in the context of
these circumstances, as well as changes attributable
to airline service decisions and growth in the num-
ber of O&D passengers.
Federal regulations allow connecting hubs to col-
lect a disproportionate share of the PFC revenues.
However, if connecting traffic declines, connecting
hub airports stand to lose a greater amount of PFC
revenue than if a similar level of traffic declined at
an airport with a greater proportion of O&D pas-
sengers. Most of this concern is reflected in the gen-
eral airport revenue bond rating, which considers
the concentration of connecting passengers and air-
line market share.
Other important traffic fundamentals are diversi-
ty in airlines and potential competition from other
facilities. Low operating costs and favorable airline
relations are credit strengths.
Because pledged revenues are a direct function of
traffic levels and cannot be adjusted to meet debt
service obligations, passenger forecasts take on a
new significance with PFC-backed bonds. While the
airport already must have traffic levels that gener-
ate revenues in excess of future PFC debt needs,TransportationStand-Alone Passenger Facility Charge Debt ....................................................................
136 Standard & Poor’s Public Finance Criteria 2007