Fitch Rates Louisville Regional Airport Auth, KY's $38.1MM 2011 Rev Rfdg Bonds 'A+'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns an underlying 'A+' rating to Louisville Regional Airport Authority, KY's (the authority) approximately $38.1 million in airport revenue refunding bonds, series 2011 A and B.

Fitch also affirms its underlying 'A+' rating on approximately $345.1 million of the authority's outstanding airport revenue bonds.

The Rating Outlook on all bonds is Stable.

The series 2011 A and B bonds will be long-term fixed-rate bonds and are expected to sell via negotiated sale on April 5, 2011. Bond proceeds will be used to refund certain maturities of the authority's outstanding airport revenue bonds, series 1998A, 2001A, and 2001B.

RATING RATIONALE:

--Louisville International Airport's (SDF) established and diversified primary service area supports its's 100% origination and destination (O&D) traffic base, and it benefits from a well balanced airline market share.

--SDF's central role in United Parcel Service of America's (UPS) air freight network helps diversify the airport's revenue stream from a reliance on passenger carriers.

--Historically stable operating margins and healthy debt service coverage levels of at least 1.45 times (x) over the last five fiscal years (through fiscal 2010) and a comparatively low cost structure relative to peers; high debt burden ($210 per enplaned passenger or 7.79x net debt/cash flows available for debt service) leaves SDF more vulnerable to traffic declines or changes by UPS.

--The authority's demonstrated ability to manage costs through a weak economic environment helped mitigate SDF's enplanement fluctuations.

--The authority's capital program is manageable with no plans to issue debt in the next five years.

--SDF's dependence on the package freight business, which can fluctuate with the economy, is also a credit concern. A moderate level of SDF's financial and operational concentration comes from UPS, which accounts for approximately 82% of landed weight and approximately 27% of operating revenues.

KEY RATING DRIVERS:

--Major changes in UPS' commitment to the airport for its airfreight operations;

--Downsizing of aircraft presently serving the airport or a substantial reduction in service by individual airlines that would affect the cost structure resulting in rising rates and charges;

--Deterioration of the authority's financial margins and coverage of debt;

--Additional leverage.

SECURITY:

All of the authority's revenue bonds are secured by the net revenues of the authority, primarily generated by the operations of SDF. A portion of the authority's series 2001 bonds are payable first from passenger facility charge (PFC) receipts, approximately $4.7 million annually, which is expected to continue after this refunding.

CREDIT SUMMARY:

SDF's O&D traffic base and diverse carrier mix insulates it from one tenant carrier. Nevertheless, the airport is susceptible to changes in passenger demand due to the small size of its passenger market. Between fiscal years 2005 and 2010, SDF's enplanements declined at a compound annual growth rate (CAGR) of 1.6%, largely driven by an enplanement decline of 14% in fiscal 2009. The decline reflects the state of the economy and resulting airline capacity reductions. Traffic declined another 1.9% in fiscal 2010 to approximately 1.65 million enplaned passengers; however, the last six months of the fiscal year were up 2.1%. Enplanements grew on an average by 2.7% in fiscal 2011 year-to-date (through February), reflecting some signs of recovery. Management anticipates traffic patterns (through February) to continue through the end of the fiscal year, with more flights, seat capacity and routes added by the airlines. Fitch expects slow enplanement growth in the medium term as enplanements recover from depressed levels, reflective of the region's economic growth.

Fitch notes SDF's diverse carrier mix with all of the airlines maintaining a market share below 33% despite its relatively modest passenger base. Southwest accounted for the largest share of the airport's enplaned passengers in fiscal 2010 at 32% while Delta/Northwest was the airport's second leading carrier, representing 26% of enplaned passengers, followed by US Airways at 14% and American Airlines at 12%.

Complementing the passenger operations at the airport is the presence of UPS' headquarters and central sorting depot for its air freight operations. UPS recently completed a second $1 billion expansion of WorldPort, increasing its size under roof to 5.2 million square feet and its sorting capacity to 416,000 packages an hour. UPS accounted for 98% of cargo passing through the airport during fiscal 2010 with associated fees representing approximately 27% of total airport operating revenues. The airport's cargo throughput grew at a CAGR of 3.7% between fiscal years 2005 and 2010. Despite declines of 1.6% and 6.7% in fiscal years 2008 and 2009, respectively, cargo operations were up 10% in fiscal 2010 compared to 2009, and increased by another 6% in the first seven months of fiscal 2011 (through January). Cargo business at the airport has demonstrated resiliency to the global economic recession supported by significant infrastructure investments and commitment by UPS.

Over the last five fiscal years, approximately 47% of the SDF's total operating revenues have been supported by passenger and cargo airlines, with revenues from cargo airlines comprising more than half of total airline revenues. Non-airline revenues comprised the remaining 53%, with parking and ground transportation revenues contributing on average 71% of total non-airline revenues.

SDF's two use and lease agreements, one for the terminal facilities and one for the airfield, establish a hybrid structure of rate setting, with a compensatory methodology used for terminal charges and a residual methodology used for the airfield. Despite enplanement volatility, the agreements have provided for relatively stable financial and operating results. Operating revenues grew to $57.5 million in fiscal 2010 from $51.1 million in fiscal 2005, a CAGR of 2.4%, while operating expenses increased by a CAGR of 3.5% over the same period. In fiscal 2010 management's cost-saving initiatives curtailed revenue pressures that resulted in an 8% decline in total operating expenses. To help boost its operating revenues, effective July 1, 2010, the authority increased its parking rate by $1 per day in both areas of the parking garage. As a result of the rate increase and rise in passenger-related revenues, the authority exceeded its budgeted and actual operating revenues by 4.9% and 2%, respectively for the seven-month period ending in Jan. 2011 over the same time period in fiscal 2010. Total year-to-date (through January) operating expenses came in under budget by 10%, resulting in a moderate 2.8% increase over the same time period in fiscal 2010.

SDF's cost structure has historically remained below $8.00, with CPE at a competitive $6.94 in fiscal 2010. In 2011, the airport is projecting a similar CPE (about $6.98) due to anticipated cost savings. This CPE is below average relative to peer airports, which helps support SDF's low-cost carrier base. In addition, Fitch believes that the airport's healthy liquidity position (435 days of cash on hand in fiscal 2010) and a recently increased PFC rate ($4.50 as of January 2011) help make it more competitive and provide further financial flexibility.

Debt service coverage on a resolution basis, including fund balances of at least 25% of maximum annual debt service (MADS) and net of the PFC-eligible portion of series 2001A debt service, has been healthy ranging from 1.45 times (x) to 1.79x since fiscal 2005. Fiscal 2010 coverage was solid at 1.62x. Going forward, Fitch is projecting coverage levels to decrease to 1.57x in fiscal 2011 and 1.51x in fiscal 2012, as MADS of $34.4 million occurs in fiscal 2012. Should expenses exceed the budget and revenues fall short, the authority's financial metrics could become inconsistent with the current rating.

SDF's management indicated that its capital program (CIP) totals $161 million for fiscal years 2012 through 2016, with approximately 69% supported by grant funds. The airport's manageable CIP calls for a continuation of the federally funded soundproofing program, ongoing airfield improvements, refurbishment of the passenger boarding gates and maintenance of the terminal area. Relocating the FedEx ramp will allow the authority to complete the construction of Taxiway A over the next two years, which would put the infrastructure in place to accommodate Group VI aircraft and better position it for industry needs. Fitch notes the authority has made terminal and apron renovations and airfield improvements over the last five years. Fitch believes that additional leverage in the near to medium term, which is not currently expected, and/or a reduction in enplanements or cargo activity at the airport could adversely impact credit quality.

The airport serves as the primary commercial airport for the 13-county Louisville MSA and is situated on 1,200 acres about five miles from Louisville's central business district. The authority owns and operates the airport and Bowman Field, primarily a general aviation and air traffic reliever airport to SDF, together as a system.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (Aug. 16, 2010);

--'Rating Criteria for Airports' (Nov. 29, 2010).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=548345

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745

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