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Fitch Upgrades Allegheny County Airport Authority, PA's $586MM GARBs to 'BBB+' From 'BBB'

Posted on: Friday, 19 May 2006, 18:02 CDT

Fitch upgrades Allegheny County Airport Authority, Pennsylvania's $586 million outstanding general airport revenue bonds to 'BBB+' from 'BBB'. The Rating Outlook is Stable. The bonds financed terminal and other improvements at Pittsburgh International Airport (the airport), and are secured by the net revenues generated from the operations of the airport.

The upgrade reflects several positive developments at the airport over the past two years despite the retrenchment of US Airways, the airport's main tenant. These developments include: the addition of service by incumbent and new entry carriers, including Southwest Airlines (Fitch Issuer Default Rating (IDR) of 'A'), American Airlines (Fitch IDR of 'CCC'), and, most recently, JetBlue Airways (Fitch IDR of 'B+'), which have served to lower airfares in the market and stimulate origination and destination traffic at the airport; the improved financial condition of USAirways (Fitch IDR of 'CCC'); the application of passenger facility charge (PFC) revenue to offset debt service and reduce direct airline costs; and management's proactive approach to its financial position, which resulted in stable operating expenses for the past five years. These additional financial resources, along with the cost restraints adopted by management, place the airport in a much better position to absorb any further reduction in service by US Airways should its merger with America West result in the reallocation of resources as the carriers' staffs and route network are combined.

Credit concerns center on the future operations of US Airways, as they currently lease 40 of their 50 gates on the airport on a non-signatory basis, allowing them to give back these gates on 30-days notice should the make additional changes in their operations. Despite its recent service reductions, US Airways still accounts for approximately 65% of the airport's revenue base. Also, as a result of the diminished passenger flow, the airport's cost per enplaned passenger remains moderately high in comparison to similarly sized domestic facilities.

The Stable Rating Outlook reflects the more balanced mix of O&D to connecting passengers, which increases the airport's financial reliance on demand created by the local market rather than the operational decisions of a single airline, a declining debt burden and modest future capital needs, and the passage of state legislation providing the airport with $150 million of revenue derived from the establishment of legalized gaming in the state. While gaming has taken longer to establish than originally thought, the airport should benefit from these additional revenues which will further reduce airline costs by offsetting debt service.

The airport served 5.2 million enplaned passengers in 2005, a 21% decline from 2004 reflecting USAirways second significant schedule readjustment late in 2004 during its second bankruptcy period. While USAirways continues to tweak its schedule at the airport, overall its operations have stabilized in the past year. USAirways remains the airport's largest carrier, representing 56.5% of total passengers for the first three months of 2006, down from 76.2% in 2004.

As a result of USAirways' retrenchment other carriers have either increased or initiated service to the airport. As a result of the increased competition and concomitant decline in airfares, O&D traffic has increased at a 5.2% average annual rate since 2002, to a record 3.9 million enplanements in 2005. Most prominent has been the entrance of Southwest, which initiated service in May 2005 with 10 flights to 4 cities. The carrier now operates 19 daily flights to six cities and accounted for 10.4% of total traffic at the airport through the first three months of 2006. Other carriers that have increased service include Midwest Airlines with flights to Kansas City, and American to New York LaGuardia. Additionally, JetBlue plans to commence service on June 30 with flights to both New York Kennedy and Boston Logan International airports.

The airport's residual use and lease agreement allowed the airport to maintain sound financial performance in the face of USAirways struggles. Net revenues, including reserves as allowed under the indenture, equaled 1.38 times (x) in 2005, in line with previous years. Operating revenues declined slightly in 2005, as the airport began applying PFC revenue to debt service payments, reducing the direct cost passed on to the airlines. Management's focus on cost containment held expenses in line with 2004 levels. As a result, the airport's cost per enplaned passenger declined to $10.96 in from $11.03 in 2004.

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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