Fitch Affirms Tucson Airport Auth's (AZ) Sub Revs at 'A'; Outlook Stable

NEW YORK--()--Fitch Ratings affirms the 'A' rating on approximately $55.9 million outstanding Tucson Airport Authority's (TAA), Arizona, subordinate lien airport revenue bonds. The Rating Outlook is Stable.

KEY RATING DRIVERS

The 'A' rating reflects TAA's strong financial performance, with revenue diversity supported by a balanced enplanement base and sizable non-airline revenue generation that has allowed the Tucson International Airport (TIA or the airport) to maintain stable airline costs and consistently robust financial metrics, considering the 25% aggregate enplanements decline since the peak in 2008. The rating also incorporates TAA's robust liquidity position, with over 1,400 days cash on hand, minimal capital requirements and gradual deleveraging provide a cushion to its smaller scale of operation. TAA's rating is currently limited to the current rating level due to the size of its enplanement base, traffic profile, and competitive environment.

Small O&D Hub with Diversified Carrier Base: Revenue Risk: Volume - Midrange

TIA maintains a reasonably well diversified mix of carriers, dominated by American/US Airways combined market share of 36.6% and Southwest Airlines market share of 35.8% of 1.66 million enplanements in fiscal 2013 (ended Sept. 30). A declining traffic trend, observed almost every year since fiscal 2009, continued into fiscal 2014 with traffic down by 2.4% for 11 months of the fiscal year. However, TIA's mainly origination and destination (O&D) traffic base, 98% of enplanements, adds some comfort, with stabilizing volumes anticipated over the near term. However, TIA competes directly with Phoenix Sky Harbor International Airport, which serves more markets with greater frequencies.

Solid Cost Recovery Framework: Revenue Risk: Price - Stronger

The airport operates under a residual airline use and lease agreement, recently extended through fiscal 2016, which has allowed the airport to maintain a stable cost per enplanement (CPE) of $7.89 in fiscal 2013, produce consistently strong debt service coverage levels at or above 2.0x historically, and fund capital expenditures with surplus cash flows.

Manageable Capital Program: Infrastructure Development/Renewal - Stronger

The airport's facilities are modern and its five-year capital plan is very modest at approximately $40 million, with no additional debt plans. Projects are expected to be primarily grant funded and most are deferrable based upon availability of grant funding.

Conservative Debt Structure: Debt Structure - Midrange

The airport's senior bonds matured in fiscal 2013; however, additional senior-lien borrowings are still permitted under the bond documents. The outstanding subordinate debt is all fixed rate, fully amortizing and maturing in 2031. Annual debt service requirements are mostly flat at $5.4 million through fiscal 2027, declining thereafter to $2.8 million and remaining flat at that level through maturity. Series 2006 debt service reserve fund is fully cash funded at $2.6 million, while series 2001 reserve requirement is surety funded.

Low Leverage Characterized by Strong Liquidity: The airport's debt burden is extremely low due to the airport's substantial cash reserves and minimal leverage. The airport's net debt to cash flow available for debt service is negative (-2.69x in fiscal 2013) and is expected to remain so in the future. TIA held approximately 1,438 days cash on hand with approximately $112.5 million in unrestricted cash and investments as of fiscal 2013.

Peers: Amongst its peers within the 'A' rating level, such as Reno (NV) and El Paso (TX), TIA exhibits stronger liquidity, lower leverage and comparably strong debt service coverage. While CPE is slightly higher, it is within a reasonable range. In addition, single carrier concentration is lower compared to both airports.

RATING SENSITIVITIES

Negative:

--Material contraction or elevated volatility in traffic base or carrier composition;

--Deterioration of the non-airline revenue that limits the airports ability to manage CPE levels;

--The dilution of debt service coverage for a sustained period below 2x;

--Significant dilution of the airport's strong liquidity balances;

--Additional borrowings or spending requirements that would pressure the airline cost position.

Positive:

--The airport's scale of operations, traffic profile and competitive pressures restrict the likelihood of a higher rating at this time.

CREDIT UPDATE

TIA's enplanements have proven to be moderately volatile over the last five years, decreasing at a five-year compounded annual growth rate (CAGR) of 5.5%. Enplanements declined by 9.3% in fiscal year (FY) 2013, following relatively modest decreases of 0.7% and 0.9% in fiscal 2012 and 2011, respectively. The decline in fiscal 2013 came as a result of Southwest Airlines' service reductions, which were largely in-line with management's projections for the year. Fiscal 2014 has seen continued effects of Southwest's service cuts in the first half of the year; however, capacity increases by U.S. Airways and new Alaska Airlines service to Portland have partially offset declines, with overall enplanements down 2.4% for 11 months of the fiscal year. Overall, the airport benefits from a balanced airline market share of legacy and low-cost carriers serving short- to medium-haul flights. While the airport's 98% O&D traffic base provides a stable base of service, the presence of nearby Phoenix Sky Harbor airport approximately 100 miles north, with sizeable low-cost carrier offerings and serving a greater variety of markets, will likely constrain strong traffic gains and/or any shifts in passenger market share.

TAA's operating revenue decreased 11% in fiscal 2013 to $42.6 million largely due to lower passenger activity. Non-passenger airline revenue generated 69% of total revenue and is well-diversified. In addition, the TAA discontinued general aviation fueling operations in November 2012, which led to reduced fuel revenues. The decline in revenues was partially offset by lower operating costs, with total operating expenses down 2.5% to $28.6 million in fiscal 2013. Fiscal 2013 CPE slightly increased to $7.89 from $7.32 in the prior year as a result of lower enplanements. CPE is anticipated to rise to closer to $8.00 and is expected to remain at that level as passenger traffic stabilizes.

In fiscal 2013, TAA generated an aggregate debt service coverage ratio of 2.47x. Similarly, in fiscal 2012, the airport's all-in debt service coverage was 2.52x. Senior lien coverage grew to 5.16x in fiscal 2013 and the senior debt has now fully matured. TAA continues to benefit from sizeable balance sheet liquidity. The authority's unrestricted cash and investment balance of more than $112 million equates to more than 1,400 days cash and translates to almost double its outstanding debt. As a result, leverage continues to be negative and compares favorably to peers.

Fitch's Base case scenario, which assumes year-to-date performance for fiscal 2014 and no enplanement growth coupled with reasonable cost escalation between fiscal 2015 and 2018, results in minimum debt service coverage of 2.80x. The Rating case assumes a 15% near-term enplanement shock, consistent with recent stresses, followed by 2% recovery, and greater cost increases. This scenario results in minimum debt service coverage of just above 2.20x while CPE migrates north of $9. In both cases leverage remains negative through the forecast period.

The airport's five-year capital improvement plan is very modest at $39.8 million and no new borrowings are anticipated. Funding is expected to come predominantly from AIP grants (91%) with the remainder split between state (4.5%) and local funds (4.5%). Most of the projects are deferrable, if necessary, to coincide with the availability of grant funding and TIA has a PFC reserve balance of $23.6 million.

SECURITY

The subordinate lien bonds are secured principally by a pledge of available passenger facility charges (PFC) and a subordinate pledge of general airport net revenues. The airport's senior bonds recently matured; however, additional senior-lien borrowings are still permitted under the bond documents.

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=889974

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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
Jeffrey Lack, +1 312-368-3171
Associate Director
or
Tertiary Analyst
Tanya Langman, +1 212-908-0716
Director
or
Committee Chairperson
Scott Zuchorski, +1 212-908-0659
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

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
Jeffrey Lack, +1 312-368-3171
Associate Director
or
Tertiary Analyst
Tanya Langman, +1 212-908-0716
Director
or
Committee Chairperson
Scott Zuchorski, +1 212-908-0659
Senior Director
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com