OREANDA-NEWS. Fitch Ratings has affirmed the rating on approximately \$58.6 million of outstanding Kenton County Airport Board (the airport) Cincinnati/Northern Kentucky International Airport (CVG) series 2003B revenue bonds at 'A-'. The Rating Outlook has been revised to Positive from Stable.

KEY RATING DRIVERS
The rating reflects the airport's stabilizing origin and destination (O&D) traffic even through continued Delta dehubbing actions, limited capital needs, low leverage and limited cost pressures to airline rates. The Positive Outlook reflects potential improvement to the airport's financial profile in terms of net revenues, coverage, and fund balance growth under a planned movement to a new hybrid airline use and lease (AUL) agreement starting in fiscal 2016. Continued stable O&D traffic as well as maintenance of expected capital funding and airline costs would also support a higher rating.

REVENUE RISK - VOLUME: MIDRANGE (REVISED FROM WEAKER)
SHIFT TO O&D TRAFFIC BASE:
O&D enplanements have remained relatively steady just above 2 million over the last five years despite Delta's dehubbing and regional competition for air service. Delta's significant carrier concentration remains but is moderating down from 68% at fiscal year-end 2014 to an estimated 54% of total enplanements based on seat capacity as of June 2015. The airport has also increased service from low cost carriers which hold 18% of seats as of June 2015. Cargo operations from DHL's Americas hub also serve to diversify CVG's traffic and revenue base.

REVENUE RISK - PRICE: MIDRANGE
SOUND COST-RECOVERY STRUCTURE
The airport currently operates under a fully residual AUL generating stable coverage and cost per enplanement (CPE) levels. The AUL expires at the end of 2015, and the airport intends to shift to a hybrid compensatory rate methodology. CVG applies its passenger facility charge (PFC) collections to cover all debt outstanding, leaving carriers and non-airline revenues to cover airport operating costs. Annual PFC collections are well above the annual debt service obligations. Average CPE, which migrated above \$10 in fiscal 2013, dropped to \$8.81 in fiscal 2014 and should remain stable going forward even under a new agreement.

INFRASTRUCTURE DEVELOPMENT & RENEWAL: STRONGER
MODERN FACILITIES AND MANAGEABLE REQUIREMENTS
The modest \$276.9 million capital program through 2020 is expected to be managed without additional GARB debt, and the current plan of finance indicates funding from a mix of airport grants, pay-go PFCs, as well as other airport funds. No new GARB debt is anticipated, and management has allotted two-thirds of CapEx for a future CFC-funded on-airport consolidated rental car facility (CONRAC). Thanks to Delta, the airport has a modern Terminal 3 which now holds all passenger carrier operations as Terminals 1 and 2 will be demolished during fiscal 2015.

DEBT STRUCTURE: STRONGER
FAVORABLE DEBT PROFILE
Outstanding debt is structured as amortizing fixed rate bonds. A large portion of the airport's debt was retired in fiscal 2014 using internal funds, which has substantially reduced the airport's annual debt obligations to approximately \$5 millionfrom \$23 million in fiscal 2013. Maximum annual debt service (MADS) is reached this year at \$5 million.

SOUND FINANCIAL METRICS: Historically, the airport has achieved debt service coverage ratio (DSCR) of 1.25x through the residual agreement and maintains very low leverage which reflects low overall debt as well as significant operating reserves. Fitch expects coverage and liquidity to improve further as debt levels decline and operating revenues adjust to a new hybrid agreement. Fitch-calculated net debt-to-cash flow available for debt service (CFADS) for fiscal 2014 is very low at 0.93x, and days cash on hand amounted to an adequate 257 level.

PEERS: A comparable peer includes recently dehubbed and cargo-focused Memphis airport. CVG's liquidity and leverage compare favourably, but Memphis benefits from a slightly more diversified carrier base. CVG's CPE compares favourably, and Fitch expects CVG to maintain a competitive CPE going forward.

RATING SENSITIVITIES
Positive - A successful implementation of a new hybrid AUL that increases the airport's cash while maintaining a steady CPE.

Positive - A sustained trend of positive enplanements supported by carrier diversification.

Negative - A substantial reduction in the airport's O&D traffic base below 2 million enplaned passengers.

Negative - Deterioration in the airport's cost structure or sluggish non-airline revenue growth could push the airport's CPE upwards, making it a less attractive for airlines.

Negative - Issuing new debt without a corresponding increase in O&D traffic, leaving the airport higher levered.

CREDIT SUMMARY

Total enplanements grew in fiscal 2014 for the first time since 2005, increasing 3.1% over fiscal 2013 to 2.9 million. A 5.9% increase in O&D traffic offset a 5.4% decline in connecting traffic. Through April (fiscal year end Dec. 31), fiscal 2015 year-to-date enplanements are up 2% over the same period last year, with O&D traffic up 9.7%. Despite significant service cuts since 2008, Delta still holds the majority of both O&D and total traffic (58.5% and 68% respectively for fiscal 2014), which keeps the airport exposed to significant carrier concentration. However, Delta's O&D market share has declined in fiscal 2015 year-to-date to 51.9%. The airport is benefiting from low cost carriers Frontier and Allegiant which both continue to add service and diversify CVG. By June 2015, low cost carriers are expected to account for 18% of CVG's market, with seats up 8.3% over June 2014, and Delta's total market share is expected to be reduced to 53.9% from 2014 fiscal year end.

DHL continues to invest in their Americas hub at CVG, which Fitch views positively because DHL eases the burden of airfield costs placed on passenger carriers and stabilizes CPE metrics. DHL announced last month an additional \$108 million investment to meet expected international volume growth, with completion expected in late 2016. Improvements will include building additional gates to handle more aircraft, bringing new equipment to enhance sorting/loading capacity, and increasing warehouse space. While cargo is volatile, DHL's presence serves to diversify revenues, with fiscal 2014 cargo increasing 10.2% over fiscal 2013 to 722,431 tons (all from DHL) and comprised 51% of the airport's fiscal 2014 landed weight. The facility sorts 92% of all of DHL's U.S. shipments as well as Canadian, Mexican and Latin American activity.

The Kenton County Airport Board governs airport operations, and next month, will consist of 13 voting members (up from seven all appointed by the Kenton County Judge-Executive) which the airport believes will offer continuity as many new members will likely come from the non-voting advisory board which will no longer exist after June 30, 2015. Fitch has been following airport board development (see Fitch NRAC 'Fitch Monitoring Kenton County Airport Board Governance', dated Sept. 16, 2014), and believes the additional board members will continue to strengthen airport operations.

The Fitch cases forecasted the airport's financial and operational performance under the current residual AUL but removed PFC revenue and connecting traffic which would still reflect improved metrics. PFCs cover remaining debt service obligations in the 1.5x-1.6x range without charging any remaining debt costs to the carriers.

The Fitch base case tested a 26% year-over-year decrease in connecting traffic, 1% O&D growth, flat non-airline revenues, concession revenues following O&D enplanements, and 2% yearly expense increase in line with inflation. The Fitch rating case dropped connecting traffic completely and had one year of significant decline in O&D traffic with revenues same as the base case but tested 3% yearly expense growth. In both cases, leverage would remain below 1x from reduced debt service obligations, DCOH around 200, but average CPE to meet 1.25x DSCR would increase slightly in a more stressful situation.

Despite Delta's reductions, CVG's DSCR has remained stable at 1.25x pursuant to the residual AUL, and coverage should increase under a hybrid AUL given available PFCs to cover debt service obligations. CVG has also maintained moderate CPE despite connecting enplanement declines by holding non-airline revenues steady, controlling OpEx, and transferring ample liquidity balances to carriers. As a result, leverage net of unrestricted cash as well as O&M and debt reserves should migrate well below 1.0x by 2019 due to decreased outstanding debt. Even with significant traffic stress, CPE would still be consistent with other medium and large hub airports rated 'A-.'

Furthermore, there is potential for coverage and cash balances to significantly increase once a new hybrid AUL is in place. Should the airport see improved metrics together with a stable CPE under the new agreement, Fitch expects an upgrade may be warranted.

SECURITY
The bonds are secured by a pledge of net airport revenues, and PFC monies can be applied to the full amount of debt service on the 2003B bonds.