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Rating Action:

MOODY'S DOWNGRADES DEBT OF N.V. LUCHTHAVEN SCHIPHOL AND SCHIPHOL NEDERLAND B.V. TO Aa3 FROM Aa1; CONCLUDING REVIEW

14 May 2002
MOODY'S DOWNGRADES DEBT OF N.V. LUCHTHAVEN SCHIPHOL AND SCHIPHOL NEDERLAND B.V. TO Aa3 FROM Aa1; CONCLUDING REVIEW Moody's Investors Service has downgraded the long term debt rating of N.V. Luchthaven Schiphol, trading under the name Schiphol Group ("Group"), and Schiphol Nederland B.V. to Aa3 from Aa1. This action concludes the review for possible downgrade that was initiated in October, 2001. The downgrade reflects reevaluaton of the Group's relationship with the government, and a reappraisal of its growth prospects. The rating action also incorporates continued pressure on Group finances and operations post September 11th, as well as Moody's view that the Group's credit should be viewed on its own industry fundamentals absent any implied tangible financial support that may arise purely from government ownership. In addition the rating revision reflects the Group's large debt financed capital program, airline concentration, and dependence on transfer passengers. These concerns are mitigated by the critical role that the Group's main asset, Amsterdam Airport Schiphol, plays in the Dutch economy, modest debt levels, lack of an independent economic regulator, and management's efforts to diversify company revenues. At the Aa3 level the Schiphol Group's ratings reflect those of many larger international gateway airports rated by Moody's. These airports tend to be clustered in the A1 to Aa3 range, reflecting the key underlying fundamentals of large local catchment areas, revenue diversity and satisfactory financial operations and facility control.


The rating outlook of both ratings is stable.


SCHIPHOL GROUP CONTINUES TO BE A COMPANY IN TRANSITION

Moody's has characterized Schiphol Group as an airport company in transition. As with other airport holding companies that had sought to diversify revenues and increase profits through direct investments or long term operating agreements for other airports, Schiphol has been forced to retrench into its core business of operating Amsterdam Airport Schiphol. While the Group has not changed its long term goals of international ownership and management, practical experience in that sector over the long term has proven that it is not as lucrative as originally projected. The Group had hoped to develop this business line to significantly diversify its revenue base from its air services and retail operations at Amsterdam Airport Schiphol. One of its most important investments to date, held by Schiphol USA, is the JFK International Arrivals Terminal project which was particularly hard hit after September 11th, and has an underlying rating of Ba1.


Group is structured as a limited liability company under Dutch private law. It is owned by the Dutch government (75.8%), City of Amsterdam (21.8%), and the City of Rotterdam (2.4%). Last year the company reorganized into two subholding companies for its international and domestic activities, respectively. Schiphol Nederland B.V. is the domestic sub-holding company.


AMSTERDAM AIRPORT SCHIPHOL IS MORE DEPENDENT ON TRANSFER PASSENGERS THAN OTHER EUROPEAN HUBS

Amsterdam Airport Schiphol is the fourth largest airport in Western Europe after London Heathrow, Paris Charles De Gaulle and Frankfurt. As with these other airports the local catchment area and the ability to transfer on to other destinations are important factors contributing to the growth and size of the passenger market. Amsterdam, however, differs from these other hubs in that the size of the local population catchment area is smaller. This is somewhat mitigated however by the superior intermodal connections with the Dutch rail system which considerably increases the catchment area. Transfer passengers represent roughly 41% of total passengers at Amsterdam Airport Schiphol over the past two years compared to roughly 30% at Heathrow and 26% at Aeroporti di Roma.


While Moody's does not expect Amsterdam Airport Schiphol to significantly reduce the number of transfer passengers over the near term, given the dominance of KLM, there is a need for management to balance the overall debt and capital profile of the airport with the local origination and destination market.




KLM DOMINATES THE AIRPORT

KLM dominates the passenger market at Amsterdam Airport Schiphol accounting for roughly 47% of passengers in 2001. This jumps to 64% if airline partners Transavia and Martinair are included. KLM owns significant portions of the latter two companies. Airline diversity is a key rating factor and Moody's has observed that those airports serving a variety of airlines are in a more favorable position to respond to cyclical economic or company induced changes in service schedules. Mitigating this dominance by KLM is the airport's adequate facility control under which KLM has limited control over gates and other airport facilities. Moody's sees the continued growth of low cost carriers and Amsterdam Airport Schiphol's active courting of new routes from these and other airline alliances as a positive trend.


SEPTEMBER 11TH PASSENGER DECLINES HAVE BEGUN TO STABILIZE


As with most large airports, Amsterdam Airport Schiphol saw a significant decline in passengers immediately after the events of September 11th although this trend has appeared to reverse in some categories in February and March. Total passengers were flat on a month over month basis in February and decreased by 0.6% in March 2002 relative to 2001. This reflects growth in the European passenger segment in February and March of 3.3% and 2.4%, respectively. This was the only segment to see any increase in passengers with the US-bound and other intercontinental traffic continuing to record declines, although at a lower rate. This follows the trend seen at other airports, particularly for North Atlantic travel, which has been hit particularly hard.


DECLINES IN OPERATIONS AND PASSENGERS HAS FORCED MANAGEMENT TO RECAST BUDGET AND CAPITAL PLAN

The decline in passengers and aircraft movements as a result of September 11th, the precarious state of the airline industry, and the economic recession has forced management to reevaluate the company's near term financial and capital plans. The 2002 budget was recast to reflect lower passenger numbers and spending as well as lower airline utilization. Capital investments have been delayed, particularly terminal expansion costing EUR154 million. Aeronautical charges are projected to increase, in part reflecting imposition of a security fee.


Group management has reviewed the capital program in light of the recent events, as have many other large airports undertaking large capital expansions. Given the labor intensive nature of these programs and the long time horizon of design, permitting and construction, Schiphol is not unique in continuing with certain key components despite the near term uncertainty over growth. The main capital expenditures in 2002 will be the continuation of the 5th runway, real estate purchases and security and baggage system improvements. The budgeted capital expenditures for 2002 are currently at EUR490 million. Airport officials have noted that investments in terminal expansion will only be carried out if justified by increased traffic.


PRIVATIZATION REMAINS UNCERTAIN, GOVERNMENT OWNERSHIP CONTINUES TO BE A POSITIVE CREDIT FACTOR.

Plans for privatizing Schiphol Group remain uncertain. The Dutch Parliament will not consider the bill until after the upcoming elections on May 15th, and even then only if there is sufficient interest. In Moody's opinion the prospect of privatization of Schiphol Group could have negative credit consequences, depending on, amongst other things, the outcome of any regulatory framework.


NEW AVIATION ACT LIMITS AIR TRAFFIC MOVEMENTS

In October 2001 the Dutch Parliament approved in principle a new Aviation Act that will become effective in 2003. The new regulations govern the growth of Amsterdam Airport Schiphol by limiting the allowable environmental impact of increased air traffic movements. Airport management currently projects that the airport will reach its cap by 2010. One solution to allow further growth within the noise and safety standards set by the act would be the construction of a sixth runway. In Moody's opinion management's ability to mitigate the potentially negative financial and operational effects of this growth cap will be a key ongoing credit consideration.


REVENUE DIVERSIFICATION REMAINS A CHALLENGING BUT IMPORTANT FUTURE CREDIT FACTOR

Management's ability to successfully diversify the Group's revenue stream away from Amsterdam Airport Schiphol is an important and challenging undertaking given the trends in the worldwide airport industry. To date the airport's two most significant overseas investments have been in the International Arrivals Terminal at New York City's JFK International Airport, through Schiphol USA, and at Brisbane International Airport, though Schiphol Australia. Both facilities have suffered as a result of the effects of September 11th, airline bankruptcy and consolidation, and the economic recession. The JFK IAT is not projecting any profits for some time given its current operational state. The debt was recently lowered to Ba1 and is on watchlist for further downgrade. Brisbane Airport Corporation's underlying Baa1 debt rating was recently affirmed not withstanding the effect of September 11th and the collapse of Ansett Airlines.


The Group has identified its development of Airport City properties adjacent to Amsterdam Airport Schiphol as a core activity. Rental income from this development is currently a relatively minor portion of total airport revenues in comparison to the retail and aeronautical charges.


REVENUE DIVERSITY SUPPORTS CREDIT

Airline related charges represented just under half, or 48%, of Group's operating revenues in 2001. The largest component of non-aeronautical revenues are the concession revenues which accounted for 18%; of this, duty free and other airport retail concessions excluding Schiphol Plaza accounted for just over 70%. Moody's views the airport's diversified revenue stream as a positive credit factor. The reliance on KLM as the major customer is somewhat mitigated by the issuer's billing collection procedures and monitoring of cash flow.


The Group's liquidity position could reduce its financial flexibility as company officials have reported current unrestricted cash at EUR25 million and unutilized committed lines of credit at EUR68 million. Later this month the company will be refunding approximately EUR245 million EMT notes that will be due this year. It is their intention to increase the maturities up to 10 years as well as to use a portion of the proceeds to bring cash reserves to roughly EUR100 million.
No Related Data.
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