September 25, 2008

Fitch Affirms Metro Washington Airports Authority (District Of Columbia) at ‘AA'; Outlook Stable

Fitch assigns an 'AA' rating to the authority's $175 million series 2008 B (AMT) bonds and affirms the 'AA' long-term underlying rating on the Metropolitan Washington Airports Authority's (the authority) approximately $4.2 billion of outstanding airport system revenue bonds. The Rating Outlook is Stable. The bonds are secured by a senior lien on net airport revenues generated at Dulles International Airport (Dulles) and Regan National Airport (National). Proceeds from the 2008 B bonds will be used to fund a portion of the authority's ongoing capital construction program (CCP).

The 'AA' rating reflects continued international service additions at Dulles, which strengthens its role as an international gateway airport, the sustained strong and stable financial operations of the airports, an improving concessions program that should enhance its financial flexibility, the strong and growing air trade area, and the demonstrated ability of management to guide a complex capital program. The rating also reflects the authority's competitive position and complementary service offerings of both Dulles and National and conservative forecasting practices that demonstrate sound coverage of debt service through the capital program. Primary credit concerns include the moderate airline concentration risk at both authority airports and the significant amount of debt issued to support of the CCP, and the resultant rising costs passed onto the airlines. The rating also reflects the projected volatility in enplanements at Dulles beginning in the fourth quarter of 2008.

Given the announced capacity reductions nationwide by U.S. carriers and the expected reductions of 6.5% at Dulles, the authority has significantly reduced its CCP program from $7.06 billion to $4.84 billion, which covers the period from 2001-2016. Of this figure, $3.1 billion has already been spent. Major elements of the program include a new runway and automated people mover at Dulles; however, similar to management actions in response to depressed travel levels post 9/11, plans for a new Tier 2 concourse and a consolidated rental car facility were deferred in July 2008 from the overall plan. The authority expects to issue an additional $377 million in debt in support of the program through 2016. In 2008, signatory airline costs per enplaned passenger (CPE) were $13.83 at Dulles and $10.90 at National. The authority expects the CPE to rise dramatically in 2009, with a system-wide increase to $17.04 from $12.93 in 2008, largely reflecting the near completion of the authority's large capital plan being absorbed into the rate base. However, the authority expects to partially mitigate the large increase in CPE by executing 2009 budgetary controls. To date, a 10% reduction in over time, a freeze on operating costs, and a hold on staffing needs have been implemented to maintain financial flexibility and manage the cost base that the airlines are exposed to.

The authority consistently generates healthy financial results, with an operating ratio near 40% on an annual basis. Debt service coverage is consistently well above the rate covenant of 1.25 times (x), with the authority generating coverage of 1.72x for fiscal 2007 (Dec. 31 year end). Similarly, in 2008 the authority expects debt service coverage to be 1.62x and decline to 1.4x range in 2011, originally forecasted to remain above 1.6x through 2016 (the forecast period). The decline in debt service coverage is a credit risk. However, consistent with past practice Fitch expects the authority to continue to manage operations within a more constrained financial profile and implement adjustments to maintain credit metrics commensurate with the current rating. Reductions beyond those projected could further pressure the CPE and debt service coverage given that management has already taken significant action to reduce costs.

Passenger activity has been stable at Dulles after rebounding strongly at Dulles in 2007 from a significant decline in activity following the January 2006 demise of Independence Air (Independence) which stimulated demand in the market through its aggressive pricing strategy. The initiation of service by Independence, the former Atlantic Coast Airways and operator of United Express service at Dulles, in 2004 spurred a 60% increase in enplanements from 2003-2005. With Independence leaving the market in 2006, enplanements declined by 15% for the year. However, the level of demand identified by Independence resulted in other carriers initiating or adding service including United Airlines (United), jetBlue Airways (JetBlue) and Southwest Airlines (Southwest). As a result, Dulles experienced an 8% increase in enplanements in 2007 over 2006; however, enplanements from January through July 2008 indicate an overall decline in current passenger volumes by 2.5%, which is mainly attributable to softening of the U.S. economy and the trend of airlines to cut low yielding flights in order to restore profitability. Declines in domestic enplanements of 5.7% from January through July 2008 are being offset by an 8.4% increase in international traffic.

United and its affiliates remain the largest carrier at Dulles, representing 64% of enplanements. The carrier has acted to increase international service at the airport, exploiting its dominant position in the nation's capital with adding service to Beijing, China; Rome, Italy; and Rio de Janerio, Brazil in 2007. In 2008 despite significant turmoil in the industry, United continues to expand with new service to Dubai in October 2008 followed by new service to Moscow in 2009. Foreign carriers have also increased service to Dulles, with Iberia Airlines initiating service to Madrid, Spain; Aer Lingus serving Dublin, Ireland; Qatar Airways serving Doha, Qatar; and Copa Airlines serving Panama.

National has also experienced a significant gain in enplanements, with 2006 traffic volume up 30% from 2003 as carriers used larger aircraft, experienced higher load factors, and were able to add a limited number of flights. Enplanement activity through 2008 has been relatively stable at National, as airport activity is restricted by federally imposed flight limitations. Declining traffic trends continued through first quarter 2008, with enplanements through July of 2008 down 3.4% as compared to the first quarter of 2007. Going forward, the authority expects a decrease of 3.2% in 2008, 1.4% decrease in 2009 and relatively flat enplanement growth post 2010. US Airways and its affiliates remain the largest carrier at National, with 41% of the market in 2007. While the concentration levels of United and US Airways present some credit concern, the level of concentration is less pronounced when viewed on an overall basis, as United represented 39% of total system enplanements in 2007 while US Airways accounted for 19%.

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