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Fitch Rates Milwaukee County's (Wisconsin) $13.7MM Airport Revs 'A+'; Stable Outlook

Posted on: Tuesday, 23 October 2007, 18:00 CDT

Fitch assigns an 'A+' rating to approximately $13.7 million Milwaukee County, Wisconsin, (the county) airport revenue bonds issued for an in-line baggage security project and other terminal improvements at General Mitchell International Airport (GMIA, or the airport). The 2007 bonds are secured by a pledge on the airport's net revenues, including passenger facility charge (PFC) revenues where eligible. The final maturity of the 2007 bonds occurs in 2032. Fitch also affirms the 'A+' rating on approximately $170.5 million in the county's outstanding airport revenue bonds. The series 2007 bonds are scheduled for a negotiated sale led by Lehman Brothers and Siebert Brandford Shank & Co., LLC on Nov. 1, 2007. The Rating Outlook is Stable.

The 'A+' rating reflects the strong and expanding economic base of the Milwaukee metropolitan area which generates significant local demand for air service; a diverse mix of carriers serving the airport; the airport's consistently sound operations and competitive cost structure; and the airport's minimal capital needs and moderate debt burden. Credit concerns include the airport's relative proximity to Chicago O'Hare International Airport, the increasing presence of Midwest Airlines, which carrier now represents more than 50% of enplanements, and the competitive nature of the US airline industry that may subject GMIA to route adjustments, and the pending need to renegotiate the airline use and lease in 2010. The Stable Outlook reflects the region's strong origination and destination (O&D) market and the airline's demonstrated commitment to serve the region.

The airport is located six miles south of downtown Milwaukee and serves the growing region of southeastern Wisconsin and neighboring northeastern Illinois. Airlines serving GMIA have systematically increased service to meet the needs of the service area between fiscal 2002 and 2006, as total enplanements grew at average annual rate of 5.3%; to finish at 3.6 million enplanements. O&D traffic over the same 5-year period grew at 3.7% average annually and is attributable to the growth in local demand and increasing competition among carriers at the airport as exemplified by the additional service offerings by AirTran. Gains in connecting traffic are attributable to the expansion of hubbing activity by Midwest and its regional affiliates Skyway and Skywest, with this segment growing at an average annual rate of 17.3% over the same period. However, even with Midwest's expansion and growing connecting traffic, originating passengers accounted for about 83%-85% of total enplanements between fiscal 2002 and 2006. As a result of all the additions, the airport ranked as the nation's 48th busiest airport in 2006, up from 53rd in 2002, based on data from Airports Council International-North America. After experiencing several years of healthy results, enplanements in 2006 were moderated as the airlines adjusted service to match demand and as traffic readjusted to a more natural growth rate, in line with the regional economy and population growth.

The airport is served by six major airlines and 11 regional commuter airlines, with Midwest and its affiliates Skyway and Skywest accounting for 58% of total enplanements for the six month period ending in June 2007. Midwest maintains its headquarters in Milwaukee and operates its largest regional hub at the airport. Northwest is the airport's second largest carrier with 13.7% enplanements, followed by AirTran with 5.1%. Northwest is a passive investor in a proposed acquisition of Midwest Airlines led by an affiliate TPG Capital LLC. In addition, Midwest and Northwest recently entered into a code-sharing agreement which expands the airlines reciprocal frequent flier relationship. Should the acquisition be granted federal regulatory approval, these two closely aligned carriers would account for approximately 71% of total enplanements at the airport. As a result, the airport's financial operations become increasingly reliant on the operational decisions of these two carriers.

The airport's use and lease agreement employs a cost center residual rate setting methodology that produces consistently sound financial results. The airport has historically generated strong debt service coverage ratios, in excess of the rate covenant set at 1.25 times (x), and estimates that net revenues will provide 1.60x coverage in 2007. GMIA projects future debt service coverage to remain strong through the forecast period, resulting in 1.36x coverage in 2012. GMIA also maintains a comparatively low cost structure, with a cost per enplanement (CPE) of $4.44 in 2007. Based on forecasted enplanement activity and expected operational costs through 2012, GMIA projects its CPE to peak at $5.52 in 2011, maintaining the airport's strong competitive position relative to other airports of similar size and scope of operations.

The airport's capital improvement program through 2012 includes an in-line baggage screening project and other terminal improvements totaling $292 million. The airport's modest capital improvement plan (CIP) seeks to upgrade and improve the existing facility while maintaining the airport's low cost structure. Funding for the CIP is expected to be funded largely through a mix of federal and state grants, PFC revenues, and airport funds, limiting the need for future borrowing to approximately $71.7 million, in airport revenue bonds and $57.7 million in PFC-backed revenue bonds, or 36% and 20% of the total program respectively.

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.

Source: Business Wire

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