Fitch Affirms Kenton County Airport Bd's (OH) Airport Revs at 'BBB+'; Outlook Remains Stable

NEW YORK--()--Fitch Ratings affirms the 'BBB+' rating on approximately $174 million of outstanding Kenton County Airport Board's (OH) (Cincinnati/Northern Kentucky International Airport) airport revenue bonds. The Rating Outlook is Stable.

KEY RATING DRIVERS:
--Moderately Stable O&D Base--Origination & destination (O&D) enplanements have stayed relatively steady, though there exists significant Delta carrier concentration of 74% and competition from other airports within or close by the service area. Connecting traffic, 81% lower than its peak in 2004, remains uncertain amidst Delta's continuing hub realignment process.
--Sound Cost Structure--Strong legal framework of a fully residual airline use and lease agreement, somewhat limited by high fares at the airport, which influence airport decisions to use fund balances to maintain a more competitive cost structure.
--Favorable Debt Profile--Low debt burden of $75 per O&D enplaned passenger ($44 per enplaned passenger). A large portion of the airport's debt will mature in 2015, substantially reducing the airport's annual debt obligations to $5 million from $25 million.
--Adequate Financial Metrics--Debt service coverage of 1.25 times (x) through the residual agreement and cost per enplanement (CPE) of $9.69. The airport also maintains low leverage and healthy operating reserves, with Fitch-calculated net debt to cash flow available for debt service (CFADS) of 2.37x and days cash on hand of 302.
--Updated and Modern Infrastructure--Manageable capital improvement program and reduced scale of airport operations requiring no future debt needs before the end of 2015.

WHAT COULD TRIGGER A RATING ACTION:
--Substantial change in the airport's O&D traffic base. Fitch expects continued volatility in Delta traffic, but fund balances and the immense decline in debt service provide a level of stability to the current rating.
--Shift in the airport's cost structure and financial flexibility and/or increases in the airport's expense profile.
--Material changes in the airport's future debt needs.

SECURITY:
Pledge of all funds derived from direct or indirect use of the airport, including all rentals, landing fees, minimum airport use charges, Airport Use Agreement income, concession revenues, motor vehicle parking fees and charges and interest earnings on funds available for operations and on sinking fund and bond reserve funds.

CREDIT UPDATE:
From 2008 through the present, Delta Airlines (Delta; Fitch IDR of 'B-'; Outlook Positive) has undertaken substantial capacity reductions in its hubbing operations at the Cincinnati/Northern Kentucky International Airport (CVG). Despite these reductions, Delta carrier concentration remains a risk for the airport as the airline serves the majority of total traffic at a projected 82% for year-end fiscal 2011, down from 91% in 2007. As a result of Delta's capacity cuts, CVG's overall traffic dropped sharply in fiscal 2009 by 22.1% and further in fiscal 2010 by 24.8%. Airport management projects enplanements to decrease in 2011 by another 12.4%, again largely due to additional Delta connecting decreases of 15%. With these adverse developments in the traffic profile, the airport has reached a new traffic base of an estimated 3.5 million enplanements (of which 2.3 million represents O&D traffic). In comparison, the airport served 8.1 million enplanements in 2006. O&D passengers account for an estimated 65% of total traffic demand, a percentage which has increased with the large loss in connecting traffic from Delta's domestic hub resizing. Fitch will continue to monitor the stability of CVG's O&D traffic base as fares remain among the highest in the nation and competition exists from airports in Dayton, Louisville, Columbus and Indianapolis.

The volatility and uncertainty of the airport's traffic profile can potentially constrain the airport's future operating and financial flexibility, and Fitch notes that the airport's traffic performance ranks as among the weakest during the recession. Still, the airport's residual agreement and moderate debt levels partially mitigate the weakness in operational performance. The presence of DHL's cargo hub, re-established at CVG in 2009, also provides stability to approximately 11% of the airport's revenue stream, with cargo landed weights having increased to a projected 2.8 billion pounds at the close of fiscal 2011, a compound annual growth rate (CAGR) of 139% since 2008.

Historical financial margins and metrics remain stable and consistent with a residual rate-setting methodology. Previously, management has taken proactive measures to manage the announced capacity cuts by controlling administrative and operating costs through the mothballing of Concourse C and the temporary closure of Concourse A. The airport plans to close Terminal 2, consolidate all operations into Terminal 3 and re-open Concourse A by the summer of 2012. This consolidation provides the opportunity to demolish older facilities and save up to an estimated $3 million annually in operating costs. The Terminal 3 consolidation and Concourse A reactivation project will cost an estimated $31 million and is expected to be passenger facility charge (PFC)-eligible.

The airport's declining debt profile and maturity of the majority of its debt in 2015, coinciding with the expiration of the airport's use and lease agreement, will also help alleviate cost pressure on carriers, resulting in a lower cost base than exists now. The airport has also been making use of surplus funds to help subsidize airline costs and maintain the airport's attractiveness to carriers. Management transferred $2.6 million into its operating fund in fiscal 2009 and $2.9 million in 2010 and plans to transfer $3.5 million at the close of 2011. Cost per enplaned passenger stood at $7.29 in fiscal 2009, one dollar higher compared to fiscal 2008, and $8.55 in fiscal 2010. With declining enplanements, CVG management projects that CPE for fiscal 2011 will increase to $9.69 after a credit back to the airlines for over-collection of landing fees during the year.

Despite the change in traffic profile, the airport's cost structure remains competitive but could be pressured in a scenario during which the airport undergoes a complete de-hubbing. Fitch forecast scenarios for connecting hubs contemplate a partial and full loss of connecting traffic. While under such a stress scenario there is potential for a material rise in CPE from its current level should Delta pull out most or all its connecting-based service from Cincinnati, CVG management maintains the flexibility to pay down debt from existing debt service reserve balances, as 65% of the current debt outstanding matures in a little over three years. The airport's capital improvement program of $150 million running through 2014 does not call on any major capital spending and will be largely funded by PFC collections, AIP grants and airport funds. Management does not foresee the issuance of new debt prior to 2015.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Rating Criteria for Infrastructure and Project Finance,' (Aug. 16, 2011);
--'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=648832
Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=578745

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Contacts

Fitch Ratings
Primary Analyst:
Charles Askew, +1-212-908-0644
Analyst
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Emma Griffith, +1-212-908-9124
Director
or
Committee Chairperson:
Mike McDermott, +1-212-908-0605
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Charles Askew, +1-212-908-0644
Analyst
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst:
Emma Griffith, +1-212-908-9124
Director
or
Committee Chairperson:
Mike McDermott, +1-212-908-0605
Managing Director
or
Media Relations:
Sandro Scenga, +1-212-908-0278
sandro.scenga@fitchratings.com