OREANDA-NEWS. June 17, 2015. Fitch Ratings has affirmed the 'A+' rating on the Louisville Regional Airport Authority, KY's (the authority) approximately \\$249 million of outstanding airport revenue bonds. The Rating Outlook is Stable.

KEY RATING DRIVERS

The 'A+' rating reflects Louisville International Airport's (SDF) stable financial performance. Diversity is supported by a well-balanced enplanement base and the United Parcel Service of America's (UPS) strong and growing operational cargo activity. The airport maintains a competitive cost per enplanement (CPE) level around \\$6, with moderate and declining leverage. Stable non-airline revenues, gradual deleveraging, and strong liquidity further support sustained stable financial margins and coverage of debt service coverage.

Diversified Carrier Base & Some Cargo Exposure: Revenue Risk - Volume: Midrange
SDF's established service area with limited competition supports nearly the entire airport's origination and destination (O&D) enplanement base of 1.7 million in fiscal 2014 (fiscal year ends June 30). SDF's central role in the UPS air freight network and UPS's demonstrated commitment to the airport helps diversify SDF's revenue stream from relying on passenger carriers. However, it also exposes the airport to a cargo risk that fluctuates significantly with the economy. A moderate level of SDF's financial and operational concentration comes from UPS, which accounts for over 82% of landed weight and approximately 26% of operating revenues.

Strong Contractual Framework: Revenue Risk - Price: Midrange
The airline use and lease agreements, one for the terminal facilities and one for the airfield, coupled with strong non-airline revenue generation, provide adequate cost recovery terms. Agreements cover about 50% of the airport's total cost base. SDF's cost structure is comparatively low; CPE was \\$6.65 in fiscal 2014.

Modest Capital Needs: Infrastructure Renewal/Obsolescence: Stronger
The authority's five-year capital program of approximately \\$145 million is largely grant funded, with no plans to issue debt in the next five years.

Conservative Debt Structure: Debt Structure: Stronger
All debt is fixed rate with a descending debt service profile. Maximum annual debt service (MADS) of \\$27 million is scheduled for fiscal 2017, with debt service declining to approximately \\$16.4 million in fiscal 2024 and declining thereafter through maturity in fiscal 2038. All bond reserves are expected to be cash funded.

Low Leverage and Healthy Liquidity:
Healthy balance sheet liquidity (539 days cash on hand) and available reserves complement SDF's favorable net debt/cash available for debt service (CFADS) ratio of 4.45x. Fitch expects leverage to gradually decline given the lack of new debt needs over the next five years. Resolution-based debt service coverage was 1.73x in fiscal 2014, up from 1.69x the previous year, with net coverage from cashflow improving in fiscal 2014 at 1.39x compared with 1.32x in fiscal 2013. Future coverage ratios should remain at similar levels realized due to the declining debt service profile and adequate revenue base.

Peers:
SDF's closest peers include airports in Memphis and Alaska, both depend a large amount of cargo revenue. SDF maintains higher coverage, better liquidity than its peers, smaller capital improvement plan (CIP), and less debt obligations.

RATING SENSITIVITIES

Negative - Major changes in UPS's commitment to the airport for airfreight operations and/or significant unanticipated reduction in passenger airline services.

Negative - Authority's inability to manage the airport system cost profile, putting pressure on debt coverage metrics or raising CPE above expected levels.

Negative - Additional debt, not currently expected, leading to either higher leverage metrics or a dilution of debt service coverage.

Positive - Given average 'AA' category airport credit metrics and enplanement levels, SDF's near-term ability to positively migrate is limited.

CREDIT SUMMARY

Recent enplanement levels have begun to stabilize from experience a large 14% drop in 2009. The five year compound annual growth rate (CAGR) from 2009-2014 is flat despite enplanements declining 2.1% in fiscal 2014. Through nine months of fiscal 2015, enplanements are slightly up 0.16%. SDF maintains a diverse carrier mix, with Southwest Airlines (IDR 'BBB'/Positive Outlook by Fitch) as their main carrier, enplaning 33.7% of all passengers, and Delta Air Lines (IDR 'BB'/Positive Outlook) as the second largest carrier representing 28% of enplanements.

UPS Airlines' headquarters and central sorting depot for air freight operations compliments passenger operations. Airport cargo business has demonstrated resiliency to recent economic recessions, and UPS continues to invest significantly in infrastructure. UPS accounted for 98% of cargo passing through the airport and 82% of landed weight during fiscal 2014. Cargo operations were up by 3% in fiscal 2014. Management expects to see continued moderate growth in cargo volumes and expects UPS to continue to be in the 82%-83% range of landed weight.

Fiscal 2014 total operating revenues increased 1.5% to \\$62.3 million due to significant increases in both rental car revenues and parking revenues. The five year growth rate was positive at 0.6%. Non-airline revenue increased by 2.7% and accounted for 56% of total operating revenue, while airline revenues accounted for 44% and increased by 1.6%. Cargo and passenger airline revenues represented 44.7% of total operating revenues for fiscal 2014, with UPS contributing 26% of total operating revenue. Operating expenses increased 7.8% in fiscal 2014 due to increased professional and consulting services costs, while the authority was able to keep major maintenance costs down and under budget.

SDF's two use and lease agreements establish a hybrid rate structure, with a compensatory methodology used for terminal charges and a residual methodology used for the airfield. Collectively, these agreements provide adequate cost recovery at competitive costs to the signatory airlines. The airport's 2014 CPE of \\$6.65 was largely in-line with previous forecasts and below last year's level, but is expected to grow slightly to \\$6.74 in fiscal 2015 and be maintained in the near to medium term.

SDF has a revised five year CIP fiscal 2016-2020 that totals \\$145 million and includes airport grants (60%), funds (39%), and PFC's (1%). No near-term future debt issuances are planned, and no significant projects are deferred or being contemplated for deferral. The most significant projects are ongoing airfield improvements and terminal building rehabilitation.

Fitch's base case scenario assumes flat enplanement growth, with revenue and expense growth rates of 0.8% and 3.1%, respectively. Resolution-based coverage levels are maintained above 1.69x, while CPE remains at \\$6.74. Fitch's rating case stresses enplanements by 14% in fiscal 2016 followed by a moderate recovery from fiscal 2018 to 2020, resulting in a -2.4% growth rate over the five-year period. The case further assumes that non-aviation revenue follows enplanements and that the airport passes through some additional cost to airlines in order to compensate for the shortfall, resulting in CPE levels in the high-\\$6 to low-\\$8 range. Additionally, given the decrease in enplanements, the rating case also assumes that the airport delays some deferred maintenance items to manage costs, for an annual expense growth rate of 3.3%. Under this scenario, resolution based coverage remains above 1.57x, averaging 1.64x. Leverage in both the base and rating case evolves down to the mid-2x level. Results from the base and stress case illustrate performance within the 'A' rating category.

SECURITY
The bonds are secured by a pledge of net airport system revenues. The authority also applies PFC funds to pay debt service.