LOS ANGELES -- Standard & Poor's Corp. placed $317 million of Los Angeles Department of Airports revenue bonds on CreditWatch with negative implications Friday, citing the refusal of various airlines to pay a landing fee increase.
Tension has grown in recent weeks between the airport system and airlines over various issues, including the fee increase.
"These events raise both short-and long-term concerns regarding the department's ability to implement charges on a timely basis to provide the operational and financial flexibility consistent with its existing AA-minus rating," Standard & Poor's said in a release.
The Los Angeles department holds the agency's highest airport rating, the release says.
Airline agreements governing the airport system's financial operations expired last December. Through June of this year, the department continued to impose charges under extensions to the old agreement.
In July, however, the department increased rates based on a new cost allocation formula. The move roughly tripled landing fees, boosting them from $0.51 per 1000 pounds of landed weight to $1.56.
But more than 70 airlines serving Los Angeles International Airport, including all the larger carriers, have refused to honor the increase and continue to pay at the old rate, Standard & Poor's said. Among other things, the airlines' refusal reflects a belief that the fee increase is based on inappropriate cost methodology.
In late July, 40 airlines and the Air Transport Association filed a federal class action suit over the dispute. The lawsuit charges that the increase ignores federal laws and international agreements that prohibit the airport from imposing fees above those needed to operate the facility.
"These events, including disruption in negotiations of new airline agreements, could have credit implications," Standard & Poor's said. "The resolution of the landing fee conflict, especially if it occurs in court, could significantly alter how Los Angeles, and potentially other airports, charge for their facilities."
Airline officials have expressed concern that the city wants additional airport profits to fund police or other non-airport costs. City and airport officials say the airlines have benefited from artificially low landing fees, and they argue that the increase brings rates in Los Angeles in line with other major airports.
The dispute has played out against a broader political backdrop -- Mayor Richard Riordan has suggested privatizing the airport system's operations. Those political overtones have been laid on top of posturing between the city and airline officials.
"Regardless of the ~why' behind each side's position, it's still a problem" from a credit rating standpoint, said Peter Bianchini, a director of Standard & Poor's.
"The real point to us," Bianchini said, is the department's ability to impose new rates and collect charges in the face of an "unprecedented" refusal by airlines to pay the higher fees.
Debt service coverage could decline from current high levels, though the department "should not be impacted that dramatically" over the short run because of high fund balances and other financial strengths, Bianchini said.
Aside from the Los Angeles airport class action suit, Bianchini said, aviation officials nationwide are tracking an unrelated Grand Rapids, Mich., case pending before the U.S. Supreme Court. The case could determine whether airlines can receive credit for concession revenue generated at facilities they serve.
