OREANDA-NEWS. Fitch Ratings upgrades Allegheny County Airport Authority, PA's (ACAA) outstanding $225.3 million senior airport revenues bonds to 'A' from 'A-'. The Rating Outlook is Stable. The airport also has $1.9 million of outstanding subordinate lien airport revenue bonds series 2001 A&B, which Fitch does not rate.

The upgrade reflects the airport's rapidly declining debt burden under the current amortization profile, allowing for a very low leverage position as well as giving an opportunity to further reduce airline costs from historically high levels. The combination of stabilized traffic and debt coverage levels coupled with robust reserves and manageable near-term capital needs should allow the authority to maintain an improved financial and cost profile.

The rating reflects the airport's competitive position within the Pittsburgh metropolitan statistical area (MSA), a primarily origin and destination (O&D) traffic base of approximately 4.3 million passengers, and well-diversified airline market share. The rating further reflects the airport's fully residual airline agreement which allows for strong cost and debt service recovery, and a conservative debt structure that rapidly amortizes debt by 2019. The airport's current capital program remains manageable; however, new projects may be identified with an updated master plan in 2016.

KEY RATING DRIVERS

Volume Risk: Midrange

O&D Airport; Limited Competition - The airport serves a primarily O&D passenger base following the de-hubbing operations of US Airways ('BB-'/Stable Outlook), with no competing alternatives within the MSA. Traffic levels have shown some volatility in the past decade, averaging approximately 4.3 million enplanements annually. Moderate-to-low carrier concentration exists with US Airways/American Airlines accounting for approximately 34% market share.

Price Risk: Stronger (Revised from Midrange)

Subsidized Cost Per Enplanement (CPE) - The airport utilizes a cost center residual use and lease agreement that provides strong cost recovery terms through 2018. While CPE levels ($12.9 in 2015) remain slightly above average compared to other regional airports, the airport retains a solid coverage level and strong cash balances which could be used to offset airline costs, reducing CPE to a level consistent with stronger peers. Also, while dependent on the airport's successor airline agreement, airline costs will likely be further reduced as a large portion of the airport's debt matures.

Infrastructure Development & Renewal Risk: Stronger

Manageable Capital Program - The airport's capital improvement program (CIP) for 2017-2023 totals $188.3 million, approximately 63% of which is federal or state funded. The CIP is primarily focused on rehabilitation and maintenance of the airfield and terminal facility. No additional debt is anticipated to fund the near-term CIP, although an updated airport master plan could identify additional projects and funding needs.

Debt Structure: Stronger

Rapid Debt Amortization - The debt profile amortizes quickly, with approximately 79% of the current outstanding revenue bonds amortizing within the next five years. Debt service payments decrease to approximately $15 million in 2019, from the current profile of approximately $65 million. Bonds are fixed rate and fully amortizing, with standard covenants and reserve levels.

Low Leverage; Solid Liquidity - The airport has low leverage with net debt to CFADS of approximately 1.86x in 2015. Debt service coverage remains adequate at 1.42x, and Fitch expects coverage to remain in the 1.4x range going forward; however, leverage is likely to continue downward with future debt amortization. Fitch expects CPE levels are also likely to fall to a competitive $10 range, assuming the airport's current AUL terms remain intact. In 2015, the airport had a favorable unrestricted cash balance of $70.2 million, equal to a Fitch calculated 338 days cash on hand (DCOH).

Peer Group - The airport's peers include Cleveland, Ohio ('BBB+'/Stable Outlook), and Cincinnati, Ohio (Kenton County Airport Board; 'A+'/Stable Outlook). Each airport was previously a domestic hub and has transitioned to a primarily O&D airport. Traffic levels among the airport remain similar. Pittsburgh International Airport has low leverage levels similar to Cincinnati, despite a slightly elevated CPE. However, CPE is expected to further evolve down by 2019 as a substantial portion of the airport's debt matures. Pittsburgh's liquidity position remains favorable to Cincinnati, and slightly below Cleveland. However, Cleveland's leverage and CPE remain much higher than both Pittsburgh and Cincinnati. Pittsburgh is well aligned with peers at the 'A' rating from its strong financial metrics, a fully residual airline agreement, and rapid debt amortization, which offset slightly above average CPE.

FACT Tool: U. S. Airports (Opens in an Excel worksheet)

RATING SENSITIVITIES

Positive - Execution of a new AUL coupled with low debt levels that further reduce costs to airlines on a sustained basis;

Negative - Service reductions from airlines or cost increases leading to a sustained CPE levels above $14;

Negative - Additional leverage for future capital projects that has a material impact on current financial metrics.

CREDIT UPDATE

The airport's enplanements continued to grow behind increased frequency by airlines and stability of the Pittsburgh region. In 2015, traffic increased approximately 1.3% to 4 million, following a 1.5% increase in 2014. Traffic has further increased through June 2016, up an additional 1.6%. Management continues to focus its efforts on attracting new carriers to the airport, and increasing the frequency of current offerings. Near-term traffic reductions are partially mitigated as the airport maintains sufficient cash flow to service what will be a much less significant debt obligation, as a substantial portion of the current debt matures in 2018.

An increase in non-aviation revenue and management's ability to contain expenses had positive effects on financial performance in 2015. Non-aviation revenue increased 2% to $54 million, driven by a 3.8% increase in parking revenue. Other non-operating revenue applied to debt service, such as passenger/customer facility charges, gaming revenue, and gas drilling bonus payments also helped to offset costs charged to airlines. As such, total airline revenue declined 4.5% to $77.3 million, with CPE levels falling to $12.9 from $13.9 in 2014. Beginning in 2016, the airport will begin to receive royalty revenue from gas drilling on the airport's property, in addition to the bonus payments received through 2018. While royalty revenue will likely be used to further offset airline costs, Fitch notes that gas drilling is a volatile revenue source as it is subject to market-based pricing.

Expenses increased 2.9% in 2015 driven by growth in salaries/benefits, utilities, and maintenance. Any future cost savings could offset slightly above average airline costs, which coupled with a decline in debt service requirements, would further strengthen the airport's financial position.

The airport's current airline agreement expires in 2018, and when formulating its cases, Fitch assumed renewal of the agreement under similar terms through 2020. Fitch's base case assumes annual traffic growth of 1% and inflationary expense growth of 3%, consistent with the airport's recent results. Under this scenario, CPE is expected to decline to approximately $11 through 2018, as the airport continues to apply a strong portion of non-operating revenue to debt service. The rapid amortization of debt allows CPE to fall to the $7-$8 range in 2019 and 2020 in the base case.

Fitch's rating case assumes a sharp decline in traffic in 2017, followed by slight growth thereafter. Expenses are stressed 50 basis points above the base case. In this scenario, the airports CPE rises to the high $14 range, prior to falling to the high $13 range in 2018. Assuming a similar airline agreement, CPE averages around $10 in 2019 and 2020. Fitch did not include any royalty revenue from gas drilling on the airport's property in either of its cases, as such payments are subject to market-based pricing and have no proven history. Fitch also notes that the airport could use additional CFC, passenger facility charge (PFC), and gas drilling bonus payment revenue to offset additional costs to airlines in the event of a downturn. As such, the airport's CPE and other financial metrics are more consistent with peers at the 'A' rating level.

SECURITY

Bonds are secured by the net revenues generated from the operations of the airport.