Fitch Rates St. Louis Airport's $250MM 2007A Revs 'BBB+'; Outlook to Positive.

CHICAGO -- Fitch Ratings has assigned a 'BBB+' rating to the city of St. Louis, Missouri's $250,000,000 airport revenue refunding bonds series 2007A (not subject to the federal alternative minimum tax [AMT]) and $104,000,000 airport revenue refunding bonds series 2007B (AMT) for Lambert - St. Louis International Airport (Lambert).

The series 2007 bonds are scheduled for negotiated sale on or about December 11. The series 2007A bonds will be offered through a syndicate led by Lehman Brothers and JPMorgan. The 2007B bonds, which have a forward delivery of April 2007, will be offered through a syndicate led by Merrill Lynch & Co. and M.R. Beal & Company. The bonds are secured by the net revenues of Lambert and, if pledged in a supplemental indenture for a specific series, eligible passenger facility charge revenue. Proceeds of the bonds will refinance a portion of the airport's outstanding debt for economic savings of at least 3%.

Fitch has also affirmed Lambert's $847.1 million in outstanding parity debt and revised the Rating Outlook to Positive from Stable.

The 'BBB+' rating reflects the broad economic base of the St. Louis metropolitan area and resultant demand for air service; the financial effects to Lambert of American Airlines' (IDR rated 'B-' by Fitch) 2003 decision to significantly reduce its level of connecting service at Lambert; and the airport's rising fixed costs associated with its recently completed capital program, which included a new parallel runway that opened earlier this year.

The Outlook revision to Positive is based on Lambert's successful negotiation of a new use and lease agreement, the adoption of new reserves that should enhance the airport's liquidity, increasing in enplanement activity since American's service adjustments, and Lambert's greater reliance on the local market rather than airline scheduling decisions to drive enplanement activity.

Continued gains in enplanement activity, improved revenue generation from non-airline sources, and the fulfillment of Lambert's additional reserves are factors that may lead to a rating upgrade in the next two-to-three years. However, additional reductions in service by American in response to competitive pressure in the airline industry or Lambert's pursuit of a more significant terminal redevelopment plan than currently envisioned by Fitch are factors that may constrain credit quality over the same period.

Lambert served 7.3 million enplaned passengers in 2005, a 9.8% gain over 2004, but remains 28% below the 2003 level, the last year American operated its full connecting hub schedule. Local demand for air service remains strong, with originating enplanements increasing by 6.7% in 2005, and now representing 76.3% of total enplanements. American remains the leading carrier in the market, accounting for 51.7% of total enplanements in 2005, followed by Southwest Airlines' (IDR rated 'A' by Fitch) at 22.9%. Lambert has seen year-over-year gains in enplanements in 14 of the past 16 months, with 2006 running 4.5% ahead of 2005 through October.

The renegotiation of the use and lease agreement reduces the immediate risk of additional restructuring by American, as the agreement runs through June of 2011. However, with the airline industry potentially facing a period of realignment should the recently proposed US Airways - Delta Air Lines merger pressure other carriers to implement strategic initiatives of their own, further adjustments to American's schedule at St. Louis cannot be ruled out. The new agreement incorporates the hybrid rate setting methodology of the previous agreement, compensatory in the terminals and residual on the airfield. The agreement also includes the approval of Lambert's modest $152.8 million capital improvement program through 2011, and offers a $40 million landing fee mitigation program should the airlines in total maintain or increase landed weights above the fiscal year 2005 level.

Lambert's financial position is driven by enplanement activity and the provisions of the use and lease agreement. Operating revenues declined at a 3.3% average annual rate from fiscal 2003 through fiscal 2006 (ended June 30), largely reflecting a 13% average annual decline in concession revenues. In response to the reduced activity levels, Lambert did implement cost reductions, with operating expenses declining by 2.9% over the past three years. As a result, debt service coverage improved to 1.5 times (x) in fiscal 2006 from 1.3x in fiscal 2003, while Lambert's cost per enplaned passenger (CPE) rose to $8.93 from $6.00.

Lambert's feasibility consultant projects debt service coverage to remain between 1.3x and 1.4x through fiscal 2011, while the CPE is forecast to rise to $10.99 in fiscal 2011, reflecting the increased operational and debt service expense related to the new runway. Fitch considers this cost level to be slightly above average for similarly sized airports. In addition to the landing fee mitigation program, Lambert also instituted a debt service stabilization fund to enhance its liquidity and partially mitigate the increased costs at the airport. Lambert expects to build this reserve over the next five years to an amount equal to 35% of maximum annual debt service. Lambert has already placed $5.8 million in this account.

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