OREANDA-NEWS. Fitch Ratings has affirmed its 'A+' ratings for approximately \$379.6 million of outstanding senior airport revenue bonds, issued on behalf of the San Diego County Regional Airport Authority, CA (the authority). Fitch has also affirmed its 'A' rating on \$564.1 million outstanding subordinate airport revenue bonds. The Rating Outlook on all the bonds is Stable.

The authority has \$44.9 million in outstanding subordinate notes from a revolving line of credit on parity with the airport's long-term subordinate revenue bonds. The revolving line of credit is not rated by Fitch.

RATING RATIONALE

The rating reflects the airport's high-volume, predominately origin & destination (O&D) enplanement base in a growing market. With continued positive operational performance, the airport maintains sound coverage levels that have the ability to withstand declines in the financial profile moving forward. A diverse airline market share and little competition from other airports are also strengths. However, the airport remains susceptible to increases in operating costs as it nears completion of its robust capital improvement plan (CIP).

KEY RATING DRIVERS

Revenue Risk-Volume: Stronger
Primary Airport in Strong Service Area: San Diego International Airport is the primary air service provider for the San Diego area with an enplanement base of 9.1 million in fiscal year (FY) 2014. The airport's enplanement base is 94% origin & destination (O&D), and is serviced by a diverse group of airlines (including Southwest with 37% of total enplanements, United 13%, and Delta 10%). Traffic in fiscal year FY 2014 continued to grow, up 3.9% from FY 2013. Fitch expects improvements in traffic moving forward (FY 2015 up 6.5% through seven months) given the evolving economic conditions occurring in the San Diego region.

Revenue Risk-Price: Midrange
Hybrid Airline Agreement: The airport has a hybrid use and lease agreement, which is residual on the airfield and compensatory in the terminal. The previous agreement expired in June 2013 and was renewed through FY 2018. The airport's cost per enplanement (CPE) was \$10.49 in FY 2014, expected to rise to the \$11 range in the near term.

Infrastructure Development: Stronger
Sizable Capital Plan Nearing Completion: The airport has completed over \$1.1 of its \$1.7 billion CIP stretching through FY 2019. Recent completions of the CIP include: a dual-level roadway at Terminal 2, expanded security, additional parking, 10 new gates, a ticket lobby, and expanded shopping and dining options. Major projects in the near term include a \$316 million dollar car rental facility.

Debt Structure: Stronger (Senior), Midrange (Subordinate)
Sizable Fixed Rate Debt Profile: The airport's debt is entirely fixed rate with a flat-to-declining amortization profile. Bond reserves are cash funded.

Considerable Leverage, Strong Financial Profile: The airport's total net debt-to-cash flow available for debt service (CFADS) of approximately 8 times (x) is elevated relative to peers. Senior and aggregate coverages for FY 2014 remain indicative of strong financial performance, at 6.62x and 2.88x, respectively. The airport maintains a healthy level of \$149.7 million in unrestricted cash as well as restricted O&M and R&R reserves, providing an approximate 592 days cash on hand (DCOH).

Peers: The airport's peers rated within the 'A' category by Fitch consist of strong traffic levels with diverse airline market shares. Hillsborough County (rated 'A+/A', Outlook Stable by Fitch) is statistically the most similar to San Diego in enplanements and carrier diversification but benefits from both a lower CPE and leverage. However, San Diego mitigates elevated CPE and leverage with stronger debt service coverage and days cash on hand (DCOH).

RATING SENSITIVITIES

Negative - Inability to contain expenses at or below estimates causing material changes in the financial profile;
Negative - Lower enplanement growth leading to reduced PFC collections and lower concession spending may pressure revenues;
Positive - Material deleveraging while maintaining comparable financial metrics could lead to upward rating movement.

CREDIT UPDATE

Enplanements increased by 3.9% to 9.1 million in FY 2014 and have shown continued improvement through January of FY 2015, up 6.5% year over year. The airport's traffic base is 94% O&D and has benefited in the past year from continued economic recovery in the San Diego metropolitan statistical area (MSA). Air carrier service at the airport remains stable, with Southwest accounting for 37% of enplanements in FY 2014.

The airport operates under a hybrid use and lease agreement that is residual on the airfield and compensatory in the terminal. Airlines also pay other fees and charges to cover costs relating to security, terminal apron parking and overnight charges.

The capital improvement plan that stretches through FY 2019 is nearing completion, with \$1.1 of the \$1.7 billion dollar project finished. The CIP included expansion of Terminal 2, which introduced 10 new passenger gates and a dual-level roadway. Other portions of the CIP, such as expanded shopping and dining offerings were completed in 2014. Current improvements include a new parking plaza to be completed in 2017. In addition to the current improvements, the airport has begun preparing its future CIP, the Airport Development Plan (ADP), which will meet demand through FY 2035. Very early cost estimates for the ADP range as high as \$2.6 billion.

FY 2014 operating revenues increased 10.3% to \$195.7 million. Following an increase in traffic, revenue growth is largely driven by concession and parking revenues, which account for over 44% of total revenue. Non-airline revenues are dependent upon traffic levels and, as such, revenues may be pressured if enplanement growth falters. However, this trend has continued in FY 2015 through January, with non-airline revenues up 9.5% over prior year actuals.

Coverage levels remained strong in FY 2014 at 6.62x for senior debt and 2.88x for subordinate debt. Though, due to the recent completion of major terminal upgrades, the airport is seeing a rise in operating costs, driven by maintenance and utilities. In FY 2014 expenses increased \$136.8 million, up 7.9% from the prior year. FY 2015 budgets include a 12% increase, up \$16.7 million from FY 2014 actuals. To help mitigate these costs, the airport has entered into a 20-year power purchase agreement (PPA), with a second PPA under negotiations. The PPA's will provide 8 megawatts of photovoltaic power.

SECURITY

The bonds are special obligations of the authority, secured by and payable from a senior and a subordinate lien on the net revenues of the airport system and, under certain circumstances, investment earnings and certain other funds and accounts.