OREANDA-NEWS. April 13, 2015. Fitch Ratings has affirmed Jackson Municipal Airport Authority's (MS) \\$38 million airport revenue bonds at 'BBB+'. The Rating Outlook remains Stable.

KEY RATING DRIVERS

The rating reflects a small enplanement base and operational performance vulnerable to carrier decisions. The airport's financial performance has generally been stable due to fee increases despite the recent loss of Southwest Airlines Co. (Southwest, rated 'BBB'/Positive Outlook by Fitch). The authority maintains a conservative capital program and debt profile coupled with adequate liquidity and reserves.

Revenue Risk - Volume: Weaker
Small Enplanement Base: Jackson-Evers International Airport is the primary service provider for the Mississippi state capital region, serving mostly business-oriented travelers. The airport's enplanement level recently experienced an 8% decline in fiscal 2014 due to the planned loss of Southwest and some additional loss is expected to carry into fiscal 2015. However, Fitch expects some traffic level support given the airport's limited competition. Some remaining carriers have increased service, backfilling some of Southwest's vacancy.

Revenue Risk - Price: Midrange
Monthly Use and Lease Agreement: The airport operates under a short-term hybrid use and lease agreement, giving either party the ability to cancel the agreement with 30-days written notice. Forecasted cost per enplanement (CPE) levels in the \\$11-\\$12 range are above average compared to similarly sized airports and the airport increased landing fees by 15% in fiscal 2014 to offset future declines in revenue due to Southwest's departure.

Infrastructure Development & Renewal: Midrange
Major Capital Projects Temporarily Shelved: The airport has no major capital plans in the near- to medium-term. New management is in the process of revising its capital improvement plan to focus on revenue-generating projects and vital airport maintenance. The current assumption is that future projects will largely rely on available cash and grants as their primary source of funding as management is not anticipating additional debt within their forecast period.

Debt Structure: Stronger
Conservative Debt Structure: The airport's debt is entirely fixed rate with standard rate and issuance covenants of 1.25x. The flat debt service profile maintains annual payments of \\$3.3 million through 2026 before decreasing to \\$1.9 million through final maturity in 2035.

Financial Metrics
Strong Financial Profile: The airport maintains low leverage of 3.3x net debt-to-fiscal 2014 cash flow available for debt service (CFADS) and had approximately \\$15.7 million of unrestricted cash and operating reserves, equivalent to 406 days cash on hand. The airport's fiscal 2014 debt service coverage ratio (DSCR) of 2.4x, as calculated by Fitch, provided additional financial support.

Peer Group: The airport's peer group includes airports with similar enplanement base levels such as Colorado Springs, CO ('BBB+'/Negative Outlook) and Fresno, CA ('BBB'/Stable Outlook). However, Jackson differs as it serves a capital region with limited competition, accounting for its above-average CPE level. The airport's leverage and liquidity metrics are in line with its peers' ratings.

RATING SENSITIVITIES

Negative - Further Traffic Contraction: More enplanement losses or a lack of a traffic rebound supported by remaining carriers backfilling the loss of Southwest may pressure the airport's financial metrics;

Negative - Financial Metrics: Increased leverage metrics or a dilution of debt service coverage below the historical 2x level would pressure the current rating level;

Negative - Operational Performance: Rising costs which impact airlines' ability to maintain existing service levels may pressure the rating;

Positive: Given the airport's present enplanement size and service characteristics, positive rating action is unlikely.

CREDIT UPDATE

The airport began to feel the full brunt of the loss of Southwest beginning in June 2014 as enplanements in fiscal 2014 decreased 8%. Fiscal 2015 enplanements through February 2015 have extended this trend and are down an additional 12% compared to the same period last year. Remaining carriers have indicated some interest in backfilling Southwest's service and have increased flight frequency by 15% in fiscal 2015. Additionally, the airport continues to engage in active discussions with potential new carriers to fill in the vacancy.

Operating performance, measured by operating margin, fell to 20.5%, just below the airport's five-year average. Operating revenue increased 0.7%, to \\$17.8 million in fiscal 2014, from \\$17.6 million in fiscal 2013, led by increased landing and parking fees. Operating expenses, however, increased 6.9% in fiscal 2014, compared to a decrease of 0.8% in fiscal 2013, due to a one-time building maintenance project that accounted for 65% of the \\$906,000 cost increase as well as scheduled increases in employee benefits. The airport's fiscal 2015 budget forecasts a 6.9% decrease in operating expenses based on completion of the building project with no additional major operating expenditures. Based on this, Fitch-forecasted operating margin should moderately improve to 23%, in line with the average.

Concurrent with the loss of Southwest in 2014, Fitch formulated a base case which forecast an enplanement loss of 10% to approximately 544,000 enplanements. This, along with a non-aviation revenue drop tied to the enplanement loss, resulted in a CPE level of \\$10.85 and debt service coverage of 2x. Actual fiscal 2014 operating revenue performed slightly better than expected due to the increased fees, along with an enplanement level of 555,000, and resulted in a \\$10.58 CPE and 2.4x coverage level.

Fitch's updated base case incorporates the aforementioned year-to-date enplanement performance and estimates an annual enplanement loss of 5%, to a level just below 530,000 enplanements. Results under these assumptions indicate CPE would increase slightly to \\$11.50 while DSCR will decrease to just below 2.4x. It is important to note that the airport has shelved its plan to issue the \\$20 million in passenger facility charge (PFC) bonds. Because of this, CPE and DSCR levels over the five-year forecast period are better than previously estimated, ending up in the high-\\$11 range and 2x level, respectively. Leverage over this period decreases to below 3x.

Fitch's rating case is a sustained stress scenario that forecasts enplanements over the forecast period just above 510,000 while CPE and DSCR stabilize around the \\$12-\\$13 range and 1.8x level, respectively. Prolonged performance at these metrics, however, would ultimately lead to negative rating action.

SECURITY

The bonds are secured by the authority's pledge of net revenues from operations at Jackson-Medgar Wiley Evers International Airport, consisting of certain funds and accounts as described in the indenture. Customer facility charges, collected by the airport's rental car concessions, are also available for payment of parity airport bond debt service as a pledged revenue source. Some PFC revenue is pledged as security to the payment of PFC-eligible debt service, offsetting approximately \\$220,000 in annual debt service.