Fitch Affirms $96.4MM Tucson Airport Authority Rev Bonds, Outlook Stable.

SAN FRANCISCO -- Fitch Ratings affirms the underlying 'A' rating on approximately $55.5 million of Tucson Airport Authority, Inc. (the authority) senior lien general airport revenue bonds and the underlying 'A' rating on approximately $40.9 million of subordinate lien general airport revenue bonds, which are supported by a pledge of passenger facility charges (PFC). The Rating Outlook is Stable.

The underlying 'A' rating reflects Tucson International Airport's (TUS, or airport) recovering enplanement levels, balanced airline market share concentration, high percentage of origination and destination (O&D) traffic, consistently healthy financial performance, and sound debt service coverage. After increasing by 26% following the arrival of Southwest Airlines (senior unsecured debt rated 'A', Stable Outlook by Fitch) at TUS during 1994, airport enplanements grew at a significantly lower average annual rate of 0.3% from fiscal years 1995-2003, peaking at 1.9 million during fiscal 2001. Enplanements dropped by 8.1% following the events of Sept. 11, 2001 (fiscal 2002); however, during 2003, levels rebounded by 2.2% to 1.8 million as demand for air travel slowly improved. Calendar year-to-date passenger enplanements are a promising 5.4% over 2003 figures.

Though Southwest Airlines enplanes the largest share of the Tucson market at roughly 25%, service offered by American Airlines (senior unsecured debt rated 'CCC+', Stable Outlook by Fitch; 21%), America West Airlines (8%), and United Airlines (6%), provides TUS with considerable air carrier diversity. As a percentage of total enplanements, O&D traffic is a strong 95%, thereby insulating the airport from the operating decisions of its airline tenants.

Solid growth (10.3%) in operating revenues, from $34.4 million to $37.9 million, offset by relatively flat operating expenditures ($25.4 million), yielded an operating margin of 33% during fiscal 2003, up from 27% during 2002. The improved revenue environment was attributable mainly to increased non-airline revenue, including both parking and car rental fees. Non-airline revenue typically accounts for greater than 60% of TUS's total operating revenues and affords the airport flexibility in setting airline rates and charges. The airport's cost per enplanement (CPE), consequently, was a moderate to low $6.09 in fiscal 2003. Reflecting the airport's sound fiscal 2003 financial results, coverage of debt service on senior bonds was 1.77 (x). PFC revenue, the main source of pledged revenue (beginning in 2004) for the subordinate bonds, was roughly $5 million, reflecting the increase in passenger levels.

Credit concerns include the moderate, though declining, rate of traffic leakage to Sky Harbor International Airport in Phoenix; the below-average wealth and income levels of the TUS service area, which have historically depressed long-term enplanement growth at the airport; and fairly significant near-term capital needs ($148.6 million capital improvement plan (CIP) through 2009). Fitch believes this size CIP may place pressure on the airport's cost structure. However, the authority indicates third-party funding sources will be sought for necessary runway rehabilitation. To the extent that third-party funding is not obtained, Fitch believes that the airport's currently moderate CPE ($6.09) and debt per enplanement ($55.00) will be put under pressure.