Fitch Affirms Pensacola, Florida's Airport Rev Bonds, 'BBB+'; Outlook Stable.

NEW YORK -- Fitch Ratings affirms the 'BBB+' rating on approximately $35.5 million of city of Pensacola, FL (the city) outstanding airport revenue bonds. Net revenues generated from operations at Pensacola Regional Airport (the airport) secure the bonds. The Rating Outlook is Stable.

The 'BBB+' rating reflects the airport's role as the principal provider of air travel for the region; the stable nature of the regional economy and the presence of low-fare provider AirTran Airways (AirTran), which has stimulated traffic growth in recent years. Credit concerns center on the high elasticity in passenger demand to changes in ticket prices and on the dominant market share of Delta AirLines (Delta), currently operating under Chapter 11 bankruptcy protection.

The airport served a record 799,907 enplaned passengers during 2005, 8% above enplanement figures for 2004, also a record year. The surge in enplanements from fiscal year 2000 to fiscal year 2005 stands in stark contrast to the declining passenger counts of the late 1990's. Between 1997 and 2000, enplanements declined by a 1% average annual rate, to 530,517, as nearby airports in Mobile, AL and Okaloosa, FL (each about a one hour drive from the city) offered more competitive airfares due to the presence of low-fare airlines. Enplanements declined a further 1% to 524,000 in fiscal 2001. The city then successfully attracted AirTran away from neighboring Okaloosa Airport through a highly targeted incentive program, the principal component of which was the establishment of a $2 million travel bank.

AirTran currently serves a relatively low 12% of overall passengers, but the airline is credited with lowering the overall average fare at the airport and with stimulating additional travel demand. While the benefit from AirTran on airport operations has been extremely positive, it is Fitch's opinion that such high-growth periods are generally limited to the two to three years following the initiation of 'low-fare' service, with growth rates typically returning to historical norms following that period. Fitch recognizes the important role played by the travel bank in attracting AirTran service to the airport, though acknowledges the bank's limited ability to sustain such service over the longer term. Given the airport's enplanement volatility in the absence of low-fare service, Fitch expects future travel demand to be highly dependent on the continued availability of competitive airfares. Delta (including its regional partners) remained the largest carrier at the airport, enplaning 51% of passengers during 2005.

Data for the first 11 months of fiscal 2006 shows 3% enplanement growth compared to the same period last year. The slowdown from double digit growth seen earlier this decade is mostly attributable to the stabilization of the 'low-fare effect' and to several shifts in Delta's schedule early in the fiscal year. While none of the airport's destinations were dropped, Delta went through several rounds of dropping or adding flights to its Cincinnati and Atlanta hubs. Management reports, however, that Delta has restored the dropped flights and expects a net 4% increase in enplanements for fiscal year 2006, which is in line with the airport's long term forecast. While the airport's small enplanement base makes it especially susceptible to annual volatility stemming from the addition or loss of a single daily flight, Fitch acknowledges that the airport's nearly 100% O&D market is supported over the long term by the economic stability of the service area, rather than by the scheduling decisions of a single carrier.

The hybrid nature of the airport's airline operating agreement provides the basis for consistent financial operations. Net airport operating revenues for fiscal 2005 (excluding certain amounts on hand in certain funds) provided 1.47 times (x) debt service coverage. Coverage levels between 1999 and 2005 have generally matched the airport's rate covenant, ranging from 1.25x to 1.50x. Total coverage, as per the indenture and including coverage account funds, was 1.83x. The high rates of passenger growth since the initiation of AirTran's service have moderated the airline's per passenger cost, which equaled $5.31 in fiscal 2005 and was down from $8.00 in fiscal 2000. The airport's lease and revenue sharing provisions allow management to apply surplus revenues toward the reduction of airline landing fees and terminal rental rates in successive years.

Management is currently in the process of finalizing an update to its capital improvement plan (CIP) which will focus on expanding and modernizing the terminal. Ongoing projects include the resurfacing of runway 17/35, which is expected to be completed in spring 2007 and was largely funded with federal grants. Potential future projects may include the addition of three gates, expansion of the ticketing counter, installation of inline baggage screening machines, relocation of automobile parking areas and construction of new rental car facilities. Possible funding options for these projects include leveraging a portion of the airport's PFC revenues, leveraging the airport's current rental car customer facility charge, or issuing general airport revenue bond debt. The airport recently received approval from the Federal Aviation Administration to collect $106 million in Passenger Facility Charge revenues through 2032 to be used for terminal projects. Management expects to finalize its updated CIP in fiscal 2007.

The airport is located three miles from downtown Pensacola, FL (general obligation bonds rated 'AA-' by Fitch) and primarily serves the western Florida panhandle counties of Escambia and Santa Rosa. Per capita income levels are low, at 84% of the state and 80% of the national averages for 2004, but the unemployment rate (4% for 2005) has been historically low and better than both the state and the nation. Long know as the 'Cradle of Naval Aviation', the economy has long benefited from the historical presence of US Naval bases, which were estimated to have an annual economic impact of $2.0 billion in 2004.

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.