Fitch Rts $250MM San Jose Int'l Airport Rev Bonds 'A+'; Outlook Stable.

Business Editors

SAN FRANCISCO--(BUSINESS WIRE)--May 10, 2004

Fitch Ratings assigns an 'A+' to $250 million City of San Jose, California, airport revenue bonds series 2004 consisting of:

-- $70 million series 2004A variable rate bonds (AMT);

-- $70 million series 2004B variable rate bonds (AMT);

-- $79 million series 2004C (AMT) bonds; and

-- $31 million series 2004D (non-AMT) bonds.

The Rating Outlook is Stable. Citigroup Global Markets Inc. (Citigroup) and Lehman Brothers will co-manage the syndicate underwriting the auction and fixed rate bonds. The auction rate series 2004A and B bonds will price the week of June 15th via negotiation. Citigroup will be the broker-dealer for the series 2004A bonds selling initially in a seven day mode. Lehman Brothers will be the broker-dealer for the series 2004B bonds initially selling in a 35-day mode. The series 2004 C and D are scheduled to price the second week of June also through negotiated sale. Final maturity for the series 2004A-D bonds occurs in 2034.

The series 2004 bonds will be issued on parity with $263 million of outstanding general airport revenue bonds, secured by a pledge of net revenues. Fitch also affirms the outstanding $263 million in outstanding parity bonds at an 'A+'. Bond proceeds will be used to partially finance the cost of security related capital improvement projects including a north concourse building.

The 'A+' rating reflects Norman Y. Mineta San Jose International Airport's (SJC or the airport) sound financial position, competitive cost structure, and strong management. During fiscal 2003, 73% of the airports operating revenues were derived from non-airline activities such as parking and terminal concessions. Consequently the cost per enplaned passenger (CPE) equaled a low $4.36, though up slightly from $3.98 recorded during fiscal 2002. Management's skillfulness in controlling facility costs over the last several years supports the airport's healthy financial profile. Net revenues provided nearly 3.1 times (x) coverage of debt service during 2003, well in excess of the 1.25x rates covenant.

Additional credit strengths include the airport's high level of origination and destination (O & D) passenger traffic (95.2% in fiscal 2003) and a diversified carrier mix indicating a healthy air trade service area. Fitch Ratings views high O & D levels as a positive characteristic, because it demonstrates limited reliance on connecting airline activity. SJC's diversified airline market share is led by profitable low cost carrier Southwest Airlines (senior unsecured debt rated 'A', Stable Outlook by Fitch) at (36%), as well as American Airlines (senior unsecured debt rated 'CCC+', Stable Outlook by Fitch) (29%), United Airlines (9%), Alaska Airlines (9%) and America West Airlines, Inc. (5%). Recently, another low cost carrier, jetBlue announced service at the airport commencing in June of 2004.

Primary credit concerns include the airport's recent decline in enplanement levels, and additional capital needs. Enplanement levels remain below fiscal 2000 levels due to the events of September 11th, continued economic turbulence in the high technology sector, the war on terrorism, and air service reductions. Enplanements did, however, improve slightly (.08%) for the first nine months of fiscal 2004 compared to a similar period last year. The airport's master plan remains on hold pending improvements in passenger traffic. SJC is, however, embarking on federally mandated security projects totaling approximately $389.5 million. In doing so, total airport debt will increase to roughly $625 million or $118 per enplaned passenger. Fitch feels the rapidly increasing debt level, especially in an era of volatile enplanement activity, is a credit concern and will continue to monitor debt per enplaned passenger. At the same time the airport's use and lease agreements with the airlines begin to expire, the latest of which expires by fiscal 2007. Fitch hopes a renegotiated use and lease agreement will resemble the airport's current policy that supports strong debt service coverage, low CPE, good utilization of concessions and continued strong usage of the airport facilities.