OREANDA-NEWS. Fitch Ratings has affirmed the 'BBB' rating on approximately \$54.1 million of outstanding airport revenue bonds. The Rating Outlook is Stable.

The 'BBB' rating is reflective of the airport's small market within central California's San Joaquin Valley and overall weak revenue volume framework driven by an O&D base that is susceptible to airline service cuts and overall weak structural economic characteristics despite recent strengthening. This weakness is partly mitigated by the airport's higher debt service coverage ratio (DSCR), satisfactory and growing liquidity, improving leverage levels, and modestly sized capital improvement plan (CIP).

KEY RATING DRIVERS

Revenue Risk - Volume: Weaker
Small, Economically Vulnerable O&D Base: Fresno Yosemite International Airport (FYI) serves a small yet captive 100% O&D passenger market in the Fresno region of California's Central Valley, which is economically disadvantaged and concentrated in agriculture. The region is benefitting from a cyclical recovery that helped push fiscal 2014 enplanement levels to a record-setting 717,024. However, management expects no enplanement growth in fiscal 2015 due to various airline service reductions, highlighting the volume risks inherent in such a small and geographically remote airport.

Revenue Risk - Price: Midrange
Volume-Dependent Revenues: The airport is highly reliant on passenger volume-dependent revenues, such as rental car and parking fees, with just a quarter of total revenues derived from airline fees. As a result, FYI's Fitch-calculated cost per enplanement (CPE) of \$8.04 remains competitive with significant passenger facility charges (PFCs) and customer facility charges (CFCs) offsetting landing fees.

Infrastructure and Renewal Risk: Stronger
Manageable CIP, No Debt Plans: The airport's CIP is modestly sized at \$59 million and predominantly financed with federal grants with no debt issuances planned. Given the airport's ample surplus capacity, most of the CIP reflects maintenance of existing assets, with no major construction projects planned.

Debt Structure: Stronger
Conservative Debt Structure: FYI's debt is entirely fixed rate and fully amortizing, though it escalates modestly. Debt service payments on the 2007 bonds are supported by CFC revenues and the 2013 bonds are paid with at least \$1.6 million of PFCs annually.

Improved Leverage, Liquidity: Rising net revenues boosted liquidity to an adequate 249 days cash on hand (DCOH) and increased FYI's indenture-based debt service coverage ratio (DSCR) to a solid 2.49x in fiscal 2014 from 2.04x the year prior. Net debt-to-cash-flow also improved, falling to 5.02x from 6.11x over the same period. Financial operations in fiscal 2015 are forecast by management to further improve these metrics, though conservative projections suggest some DSCR weakening beginning in fiscal 2016.

Peer Group: FYI's peer group includes airports with similar enplanement base levels such as Jackson, MS ('BBB+'/Stable Outlook) and Dayton, OH ('BBB+'/Stable Outlook). The one-notch distinction between FYI and its peers reflects FYI's lower liquidity and DSCRs and higher leverage levels.

RATING SENSITIVITIES
Negative: Material deterioration of the airport's financial performance. Financial metrics are most likely to be influenced by the airport's enplanement and expenditure growth or an unanticipated and significant expansion of its capital plan.

Positive: Sustainable and material improvement of the airport's key financial and debt metrics, such as liquidity, DSCRs, and leverage.

CREDIT UPDATE

The airport's enplanement base has benefitted from solid expansion over the past several years with fiscal 2014 growth of 4%. Recent years' growth reflects the region's continued economic recovery and population growth. Management projects flat enplanement levels in fiscal 2015, however, as continued favorable economic improvements have been offset by airline service reductions. United, Frontier, and Allegiant each eliminated certain routes due to changes in business strategy or other airports' pricing models. Management expects enplanement levels to return to growth beginning in fiscal 2016, driven in part by some airlines' plans to add seating capacity to existing aircraft and to switch to larger aircrafts.

The airport's costs are just adequately covered by airlines' use and lease agreement (AUL) rate-setting mechanisms, in effect through fiscal 2018, with residual rate-setting on the airfield and compensatory rate-setting on the terminal. Signatory airlines reflect less than half of the airport's passenger market share, heightening the risk that major non-signatory airlines, such as Envoy (21% of fiscal 2014 market share) and US Air (15%), could discontinue routes with no financial recourse for the airport, though no such service cuts are planned. The airport is heavily reliant on passenger volume-driven non-aeronautical revenues, such as rental car (15% of total fiscal 2014 gross revenues) and parking fees (23%), as airline revenues generate just a quarter of total revenues. The airport's large proportion of non-airline revenues has resulted in affordable costs per enplanement, which are Fitch-estimated at \$8.06 in fiscal 2014.

Solid revenue growth and cost containment resulted in expansion of the airport's indenture-based DSCR to 2.49x in fiscal 2014 (1.99x if PFCs are treated as a revenue, instead of a debt service offset, and excluding other available funds from revenues) from 2.04x (1.65x) the year prior. Liquidity has also improved, with the cash receipt of a major receivable and rising net income pushing unrestricted cash to a satisfactory \$9.7 million at fiscal year-end 2014, or 249 DCOH. Liquidity is expected to grow to sound levels of over 365 DCOH, management's targeted level, by fiscal 2016. Management projects DSCR to expand to 2.72x (2.07x) in fiscal 2015 due predominantly to higher PFC contribution levels, as required per the 2013 refunding bonds' indenture. DSCR is projected by management to decline significantly in fiscal 2016 to 2.01x (1.63x) and then stabilize, though Fitch acknowledges that the projections include quite conservative assumptions and actual results are likely to outperform.

Under Fitch's base case scenario, which assumes flat enplanements in fiscal 2016 followed by 1.5% growth thereafter, DSCR falls to 1.86x (1.54x) in fiscal 2016 and rises thereafter. The base case also adds 1% growth to management's 2% expenditure growth assumptions and assumes the airport does not receive federal airport improvement program (AIP) grants for its capital projects management unit (CPMU), as is consistent with management's projections. Although AIP grants for the CPMU are anticipated to fall in fiscal 2016 compared to historical levels, management expects the airport to receive approximately \$300,000-\$400,000 annually.

Under Fitch's rating case scenario, which assumes enplanements drop 10% in fiscal 2016 followed by 2% growth thereafter, DSCR falls to a trough of 1.73x (1.45x) in fiscal 2016 and grows significantly thereafter. The ratings case also assumes that the expenditure growth rate is lowered by 2% from management's projections in fiscal 2016, in recognition that the airport likely would reduce the pace of expenditure growth in a stressed enplanement environment as was consistent with management's response to the prior recession. Subsequent years' expenditure growth is assumed to return to Fitch's elevated base case rate.

The airport's five-year CIP is manageably sized at \$59 million and will be predominantly funded with federal AIP grants. The airport benefits from proceeds from a county-wide sales tax that generates approximately \$650,000 annually that is used to satisfy grant matching requirements. As an airport with ample surplus capacity, the CIP consists largely of refurbishment and replacement of existing assets rather than more costly expansion projects. Management's projections indicate that airport revenues will fund just \$1.4 million to \$1.8 million of capital spending annually, except for a parking lot project that drives total capital spending to \$3.3 million in fiscal 2016. Management does not plan to issue debt in the foreseeable future.

SECURITY

The bonds are payable from net revenues generated by the airport, with eligible portions of outstanding debt receiving additional support from PFC and CFC revenues. The series 2007 and 2013A&B bonds are additionally secured by a surety and a cash-funded debt service reserve fund sized to the IRS maximum, respectively.