Fitch Rts $230.6MM San Francisco Intl Rev Rfdgs 'A'; Rating Watch Negative.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--March 15, 2004

Fitch Ratings assigns an 'A' rating to $230.6 million Airport Commission, City and County of San Francisco, California, San Francisco International Airport (SFO) second series variable rate revenue refunding bonds, Issue 31. The Issue 31 bonds are placed on Rating Watch Negative, reflecting continuing vulnerability associated with UAL's (United Airlines' parent corporation) bankruptcy and the airport's increasing fixed costs (debt service).

SFO expects to insure the bonds through a monoline insurance company whose insurer financial strength is rated 'AAA' by Fitch Ratings. Fitch Ratings also affirms the 'A' rating and Rating Watch Negative on the outstanding $4.3 billion of Airport Commission, City and County of San Francisco, California, San Francisco International Airport second series revenue bonds. All bonds are secured by a pledge of SFO's net revenues and mature in 2032.

The issue consists of five series of bonds:

-- $55,000, 000 series A, variable-rate bonds subject to the

alternative minimum tax (AMT);

-- $55,000,000 series B, variable-rate bonds (AMT);

-- $60,275,000 series C, variable-rate bonds (AMT);

-- $42,400,000 series D, variable rate bonds AMT; and

-- $17,875,000 series E variable-rate bonds (private

activity/Non-AMT).

The bonds are scheduled for negotiated sale the week of March 22, 2004, and will be initially offered in auction rate mode. A mandatory tender is required if the bonds are converted to another mode. Lehman Brothers will be the broker-dealer for both the series A selling initially in a 28-day mode with the intention to convert to a one-year mode and the series B initially selling in a 49-day mode with the intention to convert to a 35-day mode thereafter. Citigroup will be the broker-dealer for series C initially selling in a one-year mode with the early expectation of remaining in a one-year mode thereafter. Morgan Stanley will be the broker-dealer for series D that will initially be sold at a 42-day mode with the intention to convert to a 35-day mode thereafter. Series E will be sold by Morgan Stanley in a seven-day mode with the intention to convert to a seven day mode again thereafter.

The 'A' rating reflects SFO's significance as a major provider of long haul domestic and international service, its high origination and destination percentage, and location within the San Francisco California Metropolitan Statistical Area (CMSA). SFO remains the predominant provider of long-haul jet service to and from the bay area with 777 weekly departures in fiscal 2003, twice as many as its competitors, Oakland International Airport (OAK) and Norman Mineta International Airport (SJA), combined.

International enplanements represented 23% of total enplanements in fiscal 2003. During calendar year 2002, SFO was the fifth largest international airport in the United States and 24% of all passengers from Asia arrived at the airport, underscoring its significance as the Pan Pacific gateway. The airport's origination and destination (O&D) percentage is quite strong at 73.5%. This high O&D percentage partially mitigates United Airlines' (UA) service concentration of 46%, since local and regional demand supports air service not airline routing decisions. Lastly, the San Francisco CMSA, while emerging from an economic recession has strong local wealth levels and a population in excess of seven million.

Credit concerns center on the airport's declining enplanements and increasing fixed costs. SFO's fiscal 2003 enplanements were a substantial 14.6 million. Yet, the airport's enplaned passengers have continually declined since 2001 due to economic turmoil in the region, the events of Sept. 11, 2001, SARS, and the War on Terrorism. Overall enplanement activity declined 27.5% from a high of 20.2 million in FY2000. The passenger declines translate into decreased non-airline revenues and higher airline fees. During this same period, the debt per enplaned passenger increased to $284 in fiscal 2003 as debt issued for the capital improvement program was incorporated into the rate-base. As a result, cost per enplaned passenger (CPE) increased to $20.58 in fiscal 2003 from $9.28 in fiscal 2001.

Fitch also recognizes the credit risks relating to uncertainty surrounding UAL's bankruptcy and the potential for additional service reductions and lease rejection. However, UAL is current in its payments to SFO and has renewed its lease commitment for the maintenance operation center, one the largest in the nation. Additional credit concerns include the region's moderately competitive airport environment, as OAK and SJA provide viable alternatives on some routes.

Despite the above mentioned credit concerns, management is taking proactive steps to reduce costs and increase enplanements. Airport management reduced operating expenses during fiscal 2003 and continues to curtail all non-necessary capital projects. In an effort to reduce airline rates management is applying a portion of the passenger facility charge (PFC) collections to offset debt service for the international terminal complex. In fiscal 2003, SFO applied approximately $13 million in PFCs to total revenues for this purpose and designated $50 million in fiscal 2004. With the intent of increasing enplanements and encouraging new service or routes, management started the Aviation Market Stimulus Program. Airlines will receive a 50% reduction in landing fees for providing new nonstop service to a destination that the carrier is not currently serving from SFO. To qualify for the program a carrier must provide this new service for 12 consecutive months. Fitch will monitor the impact of this program.