October 27, 2008

Fitch Rates $224MM San Francisco (California) Int’L Airport Revs ‘A’

Fitch Ratings assigns an 'A' rating to $224 million Airport Commission, City and County of San Francisco, CA, San Francisco International Airport (SFO, or the airport), second series revenue notes, series 2008A AMT (subject to alternative minimum tax). Fitch also affirms its 'A' rating on the airport's $3.9 billion in outstanding debt. The Rating Outlook is Positive.

The series 2008A revenue notes are up to five-year serial notes with near mandatory redemptions (to be adjusted by market demand) for both principal and interest scheduled between 2010 and 2014. The market access risk presented by the revenue notes which assume a remarketing or take-out issue of a portion of the notes' par in each year is partially mitigated by near level annual mandatory redemptions, and the airport's solid liquidity position and high rating category. Nonetheless, a failed remarketing or inability to issue take-out bonds would pressure the airport's financial position.

Including these notes, approximately 15% of the airport's $3.9 billion outstanding debt is in a variable-rate mode, with approximately 9% synthetically fixed. The interest rate and term-out risk for the variable-rate debt is relatively low given the airport's sufficient available resources to accommodate any increased principal and interest requirements in the near term. The cure period for all standby agreements is 180 days. Bank rates are capped for the first 90 days at the base rate (defined as the higher of the prime rate plus two percent per annum or the Fed funds rate plus one percent per annum) and from the 91st day to the 180th day, bank rates are capped at base rate plus three percent. After 180 days the term loan rate begins (prime rate plus five percent per annum) and a 15-year principal amortization begins.

The Positive Outlook, revised from Stable on Jan. 24, 2008, continues to reflect the overall improved financial picture and the positive operating trends experienced at the airport. These trends have continued despite a slowing economy and the reduction of airline capacity across the region and nation. To date, SFO has been a net beneficiary of adjustments made by the airlines at the Oakland International Airport (OAK) and Norman Y. Mineta San Jose International Airport (SJC). Furthermore, management continues to improve airport profitability and reduce the airport's cost per enplanement, which is budgeted at $13.20 in fiscal 2009, down from a high of $19.62 in fiscal 2003. The Outlook also incorporates the potential for the addition of approximately $648 million in new debt, which, given interim debt repayment and revenue growth is not expected to substantially change the financial and debt metrics at SFO.

Preliminary passenger data for fiscal 2008 indicates strong enplanement growth of 8.4% over fiscal 2007. Between fiscals 2003 and 2007 international air service grew at a robust average annual rate of 7%, reflecting additional flights to Asia, South Asia, and throughout the Pacific. Over that same period, domestic service grew at a 3% average annual rate, reflecting some new low-cost carrier entrants that included JetBlue Airways (JetBlue Airways Corp.; long-term Issuer Default Rating (IDR) 'B-'; Outlook Negative, by Fitch), Virgin America, and a return of Southwest Airlines (Southwest Airlines Co.; long-term IDR 'A-'; Negative Outlook). Fitch will revisit the Positive Outlook during calendar 2009, with expectations of more certainty regarding the depth of the economic downturn, airline passenger demand, and a more complete feasibility study and financial model incorporating the new money debt.

The 'A' rating captures SFO's importance as a regional transportation provider for long-range domestic and international air service, as well as the San Francisco Bay Area's significant population base (in excess of 7 million), high wealth levels and diverse economy, which support the strong passenger demand for service. Additional strengths include the airport's stable and strong balance sheet and healthy financial operating ratios (43%, fiscal 2007). Offsetting credit factors include the airport's high cost structure and to some extent, air service market share concentration (44%) in United Airlines (long-term IDR 'B-'; Negative Outlook). This concentration is partially mitigated by the high level of origination & destination (O&D) enplanements, which represents 73% of total volume. Airport revenues derived from United Airlines represented only 25% of SFO's total operating revenues.

Moderate competition does exist between SJC and OAK and SFO, which provide short to medium-haul low-cost air service alternatives in the south and east bay. Fitch does not expect immediate changes in the airport's total passenger enplanements related to the Frontier bankruptcy, representing 1.6% of SFO's total enplanements and the recently announced merger between Delta (Delta Air Lines; Long-term IDR 'B'; Negative Outlook) and Northwest Airlines, representing a combined 9% of SFO's total enplanements. For a more detailed report, please see Fitch's full rating report issue dated Jan. 24, 2008 available at www.fitchratings.com.

The airport's $920 million five-year capital plan includes the potential for additional debt of approximately $648 million and the use of $166 million in grants, $70 million in PFC funds, $16 million in construction fund cash, $15 million in operating funds, and $4 million in excess reserve fund cash. While the addition of new debt could place upward pressure on the airport's cost structure, management intends to take a phased-in demand-driven approach, which should moderate and prevent any rapid cost escalation.

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