Fitch Rates Cleveland, Ohio's 2006 A&B Airport System Revs 'A'; Outlook Stable.

SAN FRANCISCO -- Fitch Ratings assigns an 'A' rating on the City of Cleveland, Ohio's airport system revenue bonds, series 2006, consisting of the following:

--$66,755,000 series 2006A (Non-AMT);

--$12,015,000 series 2006B (Taxable).

Both series of bonds are an advance refunding targeted to achieve net present value savings. The series 2006 bonds are expected to price on a negotiated basis led by UBS Investment Bank on Nov. 1.

Coinciding with this sale, $149 million of series 2000C variable-rate demand obligations will be converted to a fixed rate from a daily mode, thereby creating variable rate debt capacity. Fitch also assigns an 'A' rating to $947 million outstanding in parity revenue bonds. The Rating Outlook is Stable for all bonds.

The City of Cleveland, Ohio's Department of Port Control operates Cleveland Hopkins International Airport (CLE) and Burke Lakefront Airport. Bondholder security is provided by net airport system operating revenues.

Fitch's rating reflects the stable service area demographics of the Cleveland metropolitan statistical area (MSA), high origination and destination (O&D) passenger base (75% in FY2005), strong liquidity for an airport with a residual rate-making methodology, stable operating margin and proven ability to generate healthy non-airline revenue levels. Offsetting credit factors include CLE's high cost structure and lower than average utilization levels, market share dominance (61% in fiscal-year 2005) by Continental Airlines (IDR rated 'B-' with a Stable Outlook by Fitch) and connecting traffic levels.

The airport system serves Northeast Ohio and the Cleveland MSA with a 2004 population of 2.9 million. Furthermore, the MSA's wealth levels are 110% and 104% of the state and nation, respectively. A strong stable population base is important, as CLE is primarily an O&D airport facility.

While overall enplanement levels have stagnated since FY2001, the airport experienced a 17% increase in O&D passenger activity during this time period due to rising demand from the service area and the competitive response of airlines serving the airport to the introduction of low-cost air service at nearby Akron-Canton Regional Airport. However, connecting traffic declined by 37% during the period due to routing decisions made by Continental Airlines, which operates its smallest domestic connecting hub at CLE, following the downturn in passenger traffic in the aftermath of the events of Sept. 11, 2001.

Although CLE's finances are quite strong, with 440 days of cash on hand, 57% of its revenues generated by non-airline sources, and a strong 43% operating margin, the airport's cost structure is considerably higher than Fitch's average, partly as a result of the decline in connecting passengers. The airport's fiscal-year 2005 cost per enplaned passenger was $11.13. Although management has historically utilized a residual rate-setting methodology, resulting in debt service coverage slightly above the 125% rate covenant, changes effective January 2007 should result in greater airline utilization of the terminal, growth in non-airline revenues and the ability to renegotiate should any dire connecting traffic scenario occur.

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.