OREANDA-NEWS. Fitch Ratings has affirmed the City of Colorado Springs, CO's (COS) outstanding $6.8 million airport revenue bonds at 'BBB+'. Fitch does not rate the airport's approximately $9.4 million in senior revenue refunding bonds issued in 2014. The Rating Outlook has been revised to Stable from Negative.

The Outlook revision to Stable reflects early signs of traffic stabilization, a solid five-year commitment from airlines under a new a hybrid airline use and lease agreement (AUL), which is projected to reduce cost per enplanement (CPE), and progressive deleveraging with the 2007 series bonds expected to be defeased in December 2016, while preserving a healthy liquidity position.

The 'BBB+' rating reflects the airport's small regional traffic profile with a protracted history of enplanement contraction, offset by strong liquidity, low leverage, and stable financial metrics with coverage over 1.6x debt service coverage ratio (DSCR) in fiscal 2015. Peers with comparable traffic profiles include Jackson Municipal Airport and Burlington, VT.

KEY RATING DRIVERS

Small Hub Constrained by Highly Competitive Market [Revenue Risk - Volume: Weaker]: The airport services a small origination and destination (O&D) traffic base of just over 600,000 annual enplanements. It is exposed to strong competition from neighbouring Denver International Airport (DIA, rated 'A'/ Outlook Stable), which is served by similar carriers and offers service to more destinations. United Airlines ('BB-'/Outlook Positive), which hubs at DIA, has high, approximately 50%, carrier concentration at COS. Following a 21% decrease in traffic due to Frontier discontinuing service in 2013, traffic has further contracted by an aggregate 9%; however, this trend appears to be reversing with year-to-date traffic up 5% over 2015.

Five-Year AUL with Enhanced Cost-Recovery [Revenue Risk-Price: Midrange]: The new airline agreement, which went into effect on Jan. 1, 2016, offers a hybrid rate-setting structure with stronger residual cost-recovery terms in the airfield and compensatory charges in the terminal. The AUA also includes a formalized Majority-in-Interest (MII) provision for signatory airlines regarding approval of the airport's capital plans. Signatory cost per enplanement (CPE) remains elevated at $7.80 for a small hub airport, which could constrain the flexibility to raise rates, but is expected to quickly decline to the $5 range given new AUA cost-sharing mechanisms, airfield revenue diversification, cost containment, and defeasance of series 2007 bonds, which comprise nearly 45% of debt outstanding. COS is also leveraging a new enhanced revenue sharing incentive program to air carriers providing new and up-gauged services for a two year period.

Modest Capital Program [Infrastructure Development and Renewal: Stronger]: The airport's 10-year capital improvement program (CIP), which totals $156 million, is primarily focused on airport repair and rehabilitation. With no plans to issue additional debt, the program is fully funded with grants and a structured PFC plan of finance, which has been further boosted by an increase in the PFC rate in 2016 to the FAA maximum allowable $4.50 limit.

Declining Debt Service [Debt Structure: Stronger]: Debt outstanding is senior fixed-rate, fully-amortizing and matures by 2023. Current annual debt service payments are flat at $2.6 million, but are expected to reduce to $1.4 million through maturity, as the airport is expected to utilize its cash reserves to defease the 2007 series bonds in December 2016, when the bonds become callable.

Cash-Positive Leverage, Strong Liquidity: Net debt to CFADS leverage metric was -1.21x in fiscal 2015, given the airport's strong liquidity position with over $19 million in unrestricted cash, equivalent to over 550 days cash on hand (DCOH). Coverage in fiscal 2015 was 1.63x, excluding the prepaid revenue fund, and 1.90x all-in. Signatory CPE was $7.80 and is expected to fall with debt service when the 2007 series bonds are defeased.

Peer Group: Comparable peers with a small O&D base, on-going traffic concerns, and elevated CPEs are Jackson Municipal Airport (MS) ('BBB+'/Outlook Stable) and Burlington, VT

('BBB-'/Outlook Stable), with Colorado Springs maintaining more favorable leverage metrics.