Fitch Affirms Dayton, Ohio’s $74MM Airport Revs at ‘BBB+’; Outlook Stable

Fitch Ratings affirms the City of Dayton, Ohio’s (the city) $74 million outstanding airport revenue bonds at ‘BBB+’. The Rating Outlook is Stable. The airport revenue bonds are special obligations of the city payable solely from net revenues and pledged funds generated at the James M. Cox Dayton International Airport (Dayton or the airport).

The ‘BBB+’ rating is supported by the historical demand for air service from the airport’s air trade area, the growth of low fare service, and the airport’s limited future capital needs. The rating also acknowledges the credit concerns, which center on the significant level of competition from other regional airports, the demonstrated elasticity in demand to changes in ticket prices, which could affect the rate of long-term growth, and the challenges faced from the closure of the airport’s cargo hub.

Overall enplanements trends at the airport since 2002 have been positive, increasing 3% on average annually through 2006, but significant annual volatility is possible due to the significant degree of competition from other nearby airports. Passenger demand increased 10% in 2004, dropped 15% in 2005 and grew 7% in 2006. Enplanements through the first 6 months of 2007 show a 9% increase on the same period the prior year. The annual volatility is due in large part to the price-sensitive nature of the Dayton market, where local area passengers may opt between the airport, Cincinnati/Northern Kentucky International Airport (55 miles from the city) or Port Columbus International Airport (75 miles). Cincinnati/Northern Kentucky International Airport (Cincinnati) typically has a higher average fare than Dayton due to the availability of longer flights and also due to the dominant market held by Delta Air Lines but consumers may opt for Cincinnati because of the significantly larger number of destinations served from that airport.

Dayton benefits from a significantly more diverse airline base since its days as a regional hub for Piedmont Airlines and US Airways. As of 2007 Delta Airlines and AirTran Airways each held a 20% share, with the top five rounded out by US Airways (16%), American Airlines (12%) and United Airlines (12%). The arrival of AirTran in 1995 helped to stimulate additional demand through the availability of lower fares to many leisure destinations. Also mitigating the risks of Dayton’s fluctuating enplanement base are long-term management forecasts which projects a 1.3% annual growth rate through 2013, allowing for maintenance of current financial margins despite some reduction in near-term growth. Given the decline in its enplanement base, as well as the loss of its cargo hub, prudent and conservative management of capital projects and operating expense growth are strong factors in the airports’ credit rating and outlook.

Financial performance improved in 2007 compared to 2006. Operating revenues fell 2% in 2007 while operating expenses fell 21%, leading to a 50% increase in net revenues, to $15.8 million from $10.5 million in 2006. Debt service coverage rose to 2.36 times (x) in 2007 from 1.90x in 2006 and the airport’s 2008 budget calls for results comparable to 2007. The drop in revenues stemmed from the August 2006 closure of the airport’s cargo hub when UPS moved Dayton cargo operations to Louisville, KY. UPS had contributed approximately $3 million in annual landing fees and $675,000 in ground rent for the facility. Management responded to the UPS relocation by taking steps to curb operating expenses for unused portions of the facility and for the airport as a whole.

While the landing fees are lost, UPS maintains a lease on the facility through 2030 and is current on all ground lease payments. Airport management is currently negotiating a leasehold purchase from UPS to make the facility available to a third party and anticipates a transfer of the lease by the end of 2007. Fitch believes that the airport has seen the worst impact of the cargo hub closure and that conservative passenger forecasts and the demonstrated ability to contain costs should allow the airport to maintain stable financial margins going forward.

Airport management is currently reviewing the feasibility of a covered parking garage, a project that was initially planned for 2005 but delayed upon announcement of the cargo hub closure. If approved the project could cost an estimated $40 million and would provide up to 2,500 covered parking spaces at the airport. Construction would be funded through a revenue bond issued supported by both general airport revenues and the collection of a customer facility charge on airport rental car passengers. Aside from the garage project, the airport has approximately $55 million in discretionary projects planned through 2011 that would be implemented as revenues became available from either passenger facility charge revenues or federal grants.

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