Credit agency takes dim view of airport controversy.

Standard & Poor's puts airport bond rating under review

The ongoing dispute over the operation of Los Angeles International Airport has reached into the financial arena, with a major credit-rating agency placing the facility's operating department under review.

Standard & Poor's Corp., the New York-based national rating company, said on Sept. 10 it was reviewing its AA-minus rating of bonds issued by the Los Angeles Department of Airports because of the uncertainty of the outcome over the dispute between LAX and major international and domestic airlines (see related story on page 16). The Los Angeles Department of Airports has maintained the AA-minus rating for years, said a S&P spokesman.

The conflict between the airport and the airlines involves new user fees charged to the carriers for landing at LAX.

The AA-minus rating is S&P's highest given to any of the nation's commercial airport operators.

The action, called a "credit watch with negative implications" means the department's current rating is under review and could be downgraded. In some cases, credit watches lead to downgrades, but in other instances, the rating remains unchanged.

A downgrade would hurt the department's ability to borrow money and sell bonds. In addition, such action would cost the department more in interest payments on borrowed funds, and bondholders who cash in their department bonds could get a slightly lower payout.

The other leading credit rater, New York-based Moody's Investors Service, has not taken any action on its Aa rating of the department's bonds but is "following the situation closely," an analyst for Moody's said last week.

In its statement, S&P said the dispute could affect the department's "operational and financial flexibility consistent with its existing AA-minus rating."

The agency also said the dispute, "including disruption in negotiations of new airline agreements, could have credit implications."

In June, S&P lowered from AA to AA-minus the rating of the Port of Long Beach bonds after placing them on a credit watch. The credit watch was issued following passage of a new state regulation that allowed Long Beach city officials to tap some of the port's revenues in tight financial times.

However, the agency did not change the rating of the Port of Los Angeles after the regulation's passage. The Port of L.A. had also been placed on a credit watch a year earlier.

Last week, Department of Airports officials and members of its Board of Commissioners were in Washington, D.C., for an airport operators' meeting. None of them returned phone calls for comment on the S&P action.

The rating agency said the conflict at LAX had both short- and long-term credit implications. In the near term, it noted, the dispute could effect the department's revenue flow, and in the long run, it could alter how the airport assesses airlines' user fees.

About 40 international and domestic, cargo and passenger airlines have sued the Department of Airports over new landing fees that went into effect July 1. The new rates tripled -- from 51 cents per 1,000 pounds of landed aircraft weight to $1.56

The airlines have sued to rescind the change because they claim the department wants to eventually divert the additional revenue from the airport to the city's general fund.

The airlines have said it is illegal for the landing fees to be used for anything other that LAX operations.

Since the suit was filed at the end of July, the airlines have refused to pay the new rates. Instead, they have paid the old rate, and have vowed to keep paying the former rate until the issue is resolved.

As a result, the Department of Airports is losing about $4 million a month in expected revenue from landing fees. For the 12-month period ended June 30, LAX posted total revenues of $228 million, including $93 million from aviation-related activities. The other primary source of revenue is from concession fees paid by operators of terminal business, as well as operators of parking and transportation services.

Los Angeles Mayor Richard Riordan and the airport commissioners, all of whom are appointed by Riordan, have publicly admitted they want to divert funds from the cash-rich airport to the cash-starved city.

The mayor and the board are trying to convince federal officials and members of Congress to change U.S. regulations that mandate commercial airport revenues only be used for its operations and improvements.

In its statement, S&P asserted, if the airlines continue to pay the landing fees at the former, lower rate, the department's ability to cover its debt payments could be in jeopardy. The S&P credit watch is on $317 million of outstanding revenue bonds issued by the department between 1972 and 1987.

"What we are saying here is that there is a potential for a negative impact on the financial operations of the airport," said Peter Bianchini, a director at S&P's San Francisco office.

The airport has traditionally been considered one of the best-run in the nation by the investment community. Moody's Aa rating is also the highest given to any airport department in the country.

David Brodsly, a credit analyst and vice president at Moody's San Francisco office, said, "It's a dynamic situation at LAX right now, and that means we are following what is going on very carefully."

Officials at the department have said that, if the arilines continue to withhold payments at the new rate, it may have to delay the start of planned short-term capital improvements at the airport. However, they added that so far the airlines' action should not affect the department's long-range capital projects.