Fitch Affirms Birmingham Airport Authority, AL Bonds 'A-'; Stable Outlook.

NEW YORK -- Fitch Ratings affirms the 'A-' rating on the Birmingham Airport Authority's (the authority) $82 million airport revenue bonds. The Rating Outlook is Stable. E[acute accent]The 'A-' rating reflects the Birmingham International Airport's (the airport) established service area, stable financial results and relatively low cost structure. Credit concerns center around the airport's upcoming significant capital improvement program (CIP) and on the expected near- to medium-term increase in associated operating costs and leverage ratios. Also factored into the rating is the moderate degree of market share concentration and the airport's reliance on a single airline for passenger growth. E[acute accent]The airport is the busiest airport in the state of Alabama and faces little in-state competition. Additionally, with no hubbing airline, the airport's origination and destination traffic is stable and not susceptible to the scheduling decisions of a particular carrier. Enplanement growth at the airport has been fueled by the presence of low-cost carrier Southwest Airlines (Southwest), which has held a roughly 35% market share at the airport since fiscal year 2000. Enplanements on Southwest have increased at an 8% rate on average annually since fiscal year 1998, while overall airport enplanements have increased only 3% on average annually for the same period. Second placed carrier, Delta Air Lines has maintained a stable enplaned passenger base since 1998 and has conversely seen its share drop from 30% in fiscal 2000 to 25% in fiscal 2005. E[acute accent]Enplanements in the past two fiscal years have begun to trend upward and return to historical growth levels. The airport recorded a 2% growth in enplaned passengers in fiscal 2004, 9% growth in fiscal 2005 and 6% growth for the first nine months of fiscal 2006. Long-term enplanements at the airport have increased at a 2% long-term rate from 1976 through 2004, and at a slightly higher rate of 3% in more recent years (1988-2004). While the airport does not follow a formal long-term enplanement forecast, management expects roughly 3% growth in the near- to medium-term based on the strength of the service area and the presence of Southwest, which Fitch considers reasonable. E[acute accent]Overall financial results at the airport in the past 10 fiscal years have been relatively stable. The airport recorded only a 29% operating margin for fiscal 2005, but its margins have averaged 40% since fiscal 1998. Debt service coverage of its senior lien was 1.42 times (x) in fiscal 2005 but has generally been higher over the past 10 fiscal years. Operating revenue decreased 6% in fiscal 2005 to reach $26.1 million, while operating expenses increased 12% to reach $20 million. The drop in revenues was due to planned rebates to tenant airlines for the prior year's surplus. The airport attributes declines in its margins and coverage levels to increased security and insurance expenses of the past two fiscal years, as well as to extraordinary repair and maintenance expenses associated with its aging terminal. Financial results to date for fiscal 2006 show the airport on track to record a margin closer to its historical norm of 40%. E[acute accent]Airport management is currently in the process of developing a significant five-year (2007-2011) CIP to address both modernization and deferred maintenance. The airport last implemented a bond-funded CIP in fiscal 1996 and in the interim has largely funded capital improvements and major maintenance through either federal grant funds or the approximately $4 million it collects annually in passenger facility charge revenues (PFC). The new CIP totals $130 million in essential projects and an additional $278 million in projects to be implemented once external sources of funding are identified. E[acute accent]Management expects that the higher operational and leverage costs associated with the terminal will be counterbalanced by greater airport efficiency and fewer spikes in repair expenses associated with the current, older facility. Significant projects include the development of post-security concessions, re-orienting security lines to lower cost and increase efficiency, and lengthening the airport's runway to attract additional air cargo service. The latter project is designed to better serve the automobile plants in the Birmingham metropolitan area, as air cargo currently destined for those plants is now routed through Huntsville. E[acute accent]Revenue bonds are expected to fund 90% of the program, and the airport anticipates issuing approximately $200 million in revenue bonds in late 2007. Federal grants (6%) and annual PFC collections (2%) will largely fund the remainder. E[acute accent]The expected issuance of $200 million in additional debt will add pressure on the airports leverage ratios and will require potentially significant rate increases on both passenger and airline cost centers. Rate and lease negotiations are underway with tenant airlines regarding the CIP. Fitch notes that the airport's current cost base is lower than average for other facilities, which gives management some flexibility with regards to increasing rates. The airport's cost per enplaned passenger has fluctuated over the last several fiscal years but, at $5.70 and $3.12 for fiscal years 2004 and 2005, it is below the average cost for comparable facilities. Furthermore, pricing and revenue generation opportunities exist in the airport's passenger cost centers, such as parking and terminal concessions. E[acute accent]Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.