Fitch Affirms Boise, Idaho's Airport Revenue Bonds at 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the 'A+' rating on $11.24 million series 2012 and $25.45 million series 2011 airport revenue bonds issued by the City of Boise, Idaho (Boise) on behalf of Boise Airport (the airport or BOI). The Rating Outlook on all bonds is Stable.

AFFIRMATION RATIONALE

The affirmation reflects the airport's very low leverage, flat to declining debt service coverage ratio (DSCR) profile, and flexible capital program, which together mitigate some risk associated with its small enplanement base. DSCR has trended above Fitch's base case expectations since the last full review and changes in the enplanement base appear to have softened. Fitch will continue to monitor airline services offered at the airport, airline capacity adjustments, developments regarding the AUL, and the airport's corresponding effects on financial flexibility.

KEY RATING DRIVERS

Small Strategic O&D Airport: Boise Airport's unique geographic position, lack of material competition, solid carrier diversity and predominantly O&D traffic base - which accounts for around 95% of the airport's total 1.3 million annually enplaned passengers - mitigate the risk presented by the relatively small scale of operations. Revenue Risk - Volume: Midrange

Strong Cost Structure: The airport's cost center residual methodology enables the airport to pass along the majority of its costs to signatory air carriers to the extent non-airline-related revenues, including passenger facility charges (PFCs), are insufficient to cover costs. Cost per enplaned passenger (CPE) remains low at $4.52 for fiscal year (FY) 2013 compared to the airport's peers, and Fitch thinks the AUL will remain unchanged upon expiration next fall. Revenue Risk - Price: Stronger

Manageable Capital Program: Both runway and terminal facilities have recently been improved. The airport has well-defined short-term needs and generates sufficient levels of excess cash flow in conjunction with available grant funding to meet its $56.1 million capital improvement program (CIP), portions of which are flexible and demand driven. The airport's currently low debt burden mitigates expected moderate debt needs going forward, and existing capacity to accommodate potential future growth protects against the need for significant expansion. Infrastructure & Renewal: Midrange

Conservative Debt Profile: All outstanding debt is fixed rate with flat annual debt service of $5.3 million through 2020, dropping to $825,000 in 2021 and remaining flat through maturity. Security provisions are considered standard. Debt Structure: Stronger

Low Leverage and Healthy Reserves: BOI demonstrates healthy balance sheet liquidity, with 523 days' cash on hand, and low net debt-to-cash available for debt service (CFADS) of 0.86x for FY2013. FY2013 DSCR was robust at 2.07x, though lower than previous years because of higher principal and interest requirements.

RATING SENSITIVITIES

Air Traffic Declines: Net reductions in service or capacity by individual airlines that lead to rising rates and charges.

Increased Leverage: Additional debt issuances that would meaningfully dilute coverage levels would lead to negative rating action.

Positive Outlook: The airport's size and traffic profile, coupled with inherent vulnerabilities to airline decisions, restricts the likelihood of a higher rating at this time.

SECURITY

The series 2011 bonds are secured by a pledge of net revenues of the airport including PFC revenues.

The city approved an amendment to the 2011 trust indenture in May 2013 allowing BOI to use PFC's in reserve in calculation of debt service coverage after PFCs are fully collected. The increase in eligibility of PFC's for debt service was due to an amendment with the FAA to include costs that were previously ineligible. This increased the amount included for debt service from approximately 76% to 79%. The airport's PFC authorization is scheduled to be fully collected by FY2016. Thereafter, the amendment allows the airport to use built-up PFC balance to pay down the 80% of annual debt service on the 2011 bonds.

Series 2012 bonds are also secured by a pledge of net revenues of the airport but do not have the additional pledge of PFC revenues. The 2011 bonds mature in 2020, at which time debt service reduces significantly.

CREDIT UPDATE

Enplanements declined in FY2013 by 1.8%, largely consistent with Fitch's base case expectations last year. The airport's solid 95% O&D base is serviced by three dominant airlines (25% Southwest, 28% Horizon, and 21% United). Indeed, as Southwest has cut back its service offering over the last few years, Delta and Horizon have backfilled some of freed-up capacity and markets.

The airport has negotiated a new concession contract beginning Oct. 1, 2014 under which BOI's entitlement of gross concession revenues (excluding alcohol sales) is increased from 10% to 13.75% and under which the minimum annual guarantee (MAG) is also increased which will go into effect May 1, 2015. The airport's airline agreement with passenger carriers employs a residual framework to recover airport costs which has kept CPE in the $4-$5 range since 2010 despite enplanement volatility - CPE was $4.52 in FY2013 and is budgeted for $4.50 for FY2014.

Regarding capital projects, the airport parking facility was funded from the 2012 series debt issuance and has been performing well, consistent with expectations. The Concourse A expansion, previously a part of the five year CIP, has been shelved indefinitely until demand warrants. As a result, no PFCs are currently allocated to future capital projects and BOI can apply its current PFC cash balances as well as future collections towards debt service and maintaining low airline costs. The current PFC collection authorization should be fully collected by FY2016. In Fitch's rating case, with enplanement declines and increased O&M, current balances and collections in fiscal 2015 and 2016 are still able to pay debt service on the 2011 bonds as it comes due, and resulting financial metrics are broadly in line with the current rating category. Passenger airlines contribute around 25% of total revenues through the forecast period, consistent with their past contribution.

Fitch notes Skywest has verbally requested to build office space and a maintenance hangar to service the airline's new United 76-seater planes, but no formal written agreement has yet been reached. If the project moves forward, once built, Skywest will sell the facilities to the airport which will then lease the space back to Skywest. Fitch will continue to monitor Skywest's interest in constructing a hangar at the airport and any effects on total airport leverage. Construction could amount to $17 million and the airport is still exploring funding options.

The airport is located about five miles southwest of downtown Boise, the capital and largest metropolitan statistical area in the state of Idaho. It is owned by the city of Boise and has been operated by the City of Boise Department of Aviation since 1939 as a self-sustaining enterprise fund of the city.

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

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840486

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Contacts

Fitch Ratings
Primary Analyst
Zane Latham, +1 415-732-5612
Associate Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Emma Griffith, +1 212-908-9124
Director
or
Tertiary Analyst
Emma Chapman, +1 312-368-2603
Associate Director
or
Committee Chairperson
Saavan Gatfield, +1 212-908-0542
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Zane Latham, +1 415-732-5612
Associate Director
Fitch Ratings, Inc.
650 California Street
San Francisco, CA 94108
or
Secondary Analyst
Emma Griffith, +1 212-908-9124
Director
or
Tertiary Analyst
Emma Chapman, +1 312-368-2603
Associate Director
or
Committee Chairperson
Saavan Gatfield, +1 212-908-0542
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com