Fitch Rates Birmingham Airport Authority, Alabama's $44MM Revs 'A-'; Outlook Stable.

NEW YORK -- Fitch assigns an 'A-' rating to the Birmingham Airport Authority's (the authority) $44 million airport revenue refunding bonds, series 2007. Fitch also affirms its rating on the authority's $85 million of outstanding general airport revenue bonds. The Rating Outlook is Stable. The series 2007 bonds will be sold on or about June 18 via negotiation through a syndicate led by Morgan Stanley.

The 'A-' rating reflects 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 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.

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 supported by the presence of low-cost carrier Southwest Airlines (Southwest), which has held a roughly 37% 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 remained essentially flat. Second placed carrier, Delta Air Lines (Delta) has reduced its presence at the airport since 1998 and has seen its share drop from 32% in fiscal 2001 to 23% in fiscal 2006.

Enplanements stabilized in fiscal 2006 after recovering 11% in fiscal years 2004 and 2005. The small 2% drop this past year was attributed to passenger reaction to increased fares seen nationwide. Fitch expects that demand will improve significantly in fiscal 2007 due to the addition of new destinations and additional flights, including new service to Raleigh-Durham, NC, and New Orleans, LA by start-up carrier Express Jet. Long-term enplanements at the airport have increased at a 2.5% average annual rate from 1988 through 2006. The airport does not follow a formal long-term enplanement forecast but 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.

Overall financial results at the airport in the past ten fiscal years have been relatively stable. The airport recorded 38% operating margin for fiscal 2006, in line with trends since fiscal 1998, and a strong 1.96 times (x) coverage of revenue bond debt service. This reflects an improvement from the prior year when the operating margin equaled 29% and coverage equaled 1.4x as the airport's expense base stabilized after several years of required security and insurance enhancements. Financial results to date for fiscal 2007 show the airport on track to record a margin within to its historical norm of 35%-40%.

Airport management is currently in the process of developing a significant five year (2008-2012) CIP to address both modernization of its terminal facilities 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's). The new CIP totals $235 million in essential projects and an additional $107.3 million in projects to be implemented once external sources of funding are identified. Management expects that the higher operational and leverage costs associated with the terminal modernization will be counter-balanced 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 and re-orienting security lines to lower cost and increase efficiency.

Revenue bonds are expected to fund approximately 980% of the program, excluding the portion where funding sources have not yet been identified, with the airport anticipating the issuance of approximately $210 million in revenue bonds in late 2008. Federal grants (16%) and annual PFC collections (4%) will largely fund the remainder. The expected issuance of $210 million in additional debt may 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 $4.47 and $3.12 for fiscal years 2006 and 2005, it is below the average cost for comparable facilities.

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