OREANDA-NEWS. Fitch Ratings has affirmed Reno-Tahoe Airport Authority's (RTAA) approximately \$22.4 million of senior outstanding airport system revenue bonds at 'A'. The Rating Outlook is Stable. RTAA also has approximately \$8.9 million in Series 2011 subordinate lien notes outstanding that are not Fitch rated.

The rating reflects the airport's monopolistic position for air service in northern Nevada, serving a primarily leisure and business market with an enplanement base that has experienced steady declines over the past decade. The airport has relatively high carrier concentration, with Southwest Airlines continuing to carry the majority of passengers, while its recent market share decline is now expected to stabilize. RTAA's healthy balance sheet offsets some of the risks embedded in the nature of the enplanement base. RTAA's leverage ratio is currently well below peers at nearly zero, and RTAA's currently high debt service coverage ratio (DSCR) of 3.56x provides significant added financial flexibility, although this may reduce if RTAA decides to carry out future debt issuance for capital purposes.

KEY RATING DRIVERS

Revenue Risk - Volume: Weaker
SMALL HUB WITH VOLATILITY AND SOME CONCENTRATION: Reno Tahoe International Airport (RTIA) had 1.66 million enplanements in fiscal year (FY) 2014 (ending June 30), a decline of 5.6% year-over-year compared to FY 2013. Airline concentration risk exists as Southwest Airlines represents 49.2% of enplanements, down from 53.8% in FY 2013 with stabilization expected in FY 2015.

Revenue Risk - Price: Midrange
LOW HISTORICAL COST PROFILE AND STABLE FRAMEWORK: The airport's cost per enplaned passenger (CPE) remains moderate relative to peers at \$7.31 for FY 2014, increasing to the \$8.00 range for FY 2015. RTAA has a hybrid residual-compensatory use and lease agreement which is on-track for renewal through FY 2020 that provides the airport with a large cost recovery base, providing sufficient cushion to volume declines.

Infrastructure Renewal & Development: Midrange
MODERATE INFRASTRUCTURE PLAN WITH NEW DEBT: The five-year capital improvement plan (CIP) is modest at \$116 million and will be largely funded through the FAA grants, new senior bond issuance and passenger facility charge (PFC) monies, as well as minimal local proceeds.

Debt Structure: Stronger
STABLE DEBT STRUCTURE: All of RTIA's senior debt is fixed rate with debt service payments flat at approximately \$2.5 million through maturity. Covenants are standard for airports and the subordinate notes mature in 2017 and have no refinance risk.

LOW LEVERAGE AND STRONG LIQUIDITY: RTAA's senior net debt-to-cash flow available for debt service (CFADS) is near zero and well below peers. In FY 2014, the airport's senior lien debt service coverage ratio (DSCR) decreased to 3.56x from 3.78x in FY 2013 while subordinate DSCR decreased to 2.06x from 3.06x in FY 2013. The airport maintains healthy liquidity with \$38.2 million in unrestricted cash and 6.2 million in O&M Reserves as of FY2014, equivalent to 449 days cash on hand.

PEER ANALYSIS: Burbank-Glendale-Pasadena (CA) and Tucson (AZ)--all rated 'A'/Stable Outlook by Fitch--serve as comparable smaller hub airport peers in terms of strong coverage, high carrier concentration risk, and higher exposure to regional economics. Reno's moderate CPE and low leverage is more in-line with Tucson's metrics.

RATING SENSITIVITIES
Negative:
--TRAFFIC DECLINES: Continued volatility in enplanement levels leading to meaningful dilution of existing debt service coverage levels or resulting in CPE rising to above \$10 could result in a negative rating action;
--FINANCIAL METRICS: Additional leverage that would measurably increase debt metrics closer to 4.0x net debt/CFADS or sustainably dilute senior coverage much below 2.0x DSCR;
--LIQUIDITY AND COSTS: Inability to control costs, maintain revenues, or retain balance sheet liquidity to preserve historical levels of financial flexibility.

Positive:
--Given the airport's smaller operating profile and large exposure to leisure travel, positive rating migration is not anticipated at present.

CREDIT UPDATE
RTIA has a monopoly position for air service in Northern Nevada, with its nearest competitors being Sacramento International Airport (115 miles away), Oakland International Airport (180 miles), San Jose International Airport (190 miles), San Francisco International Airport (200 miles), and Las Vegas McCarran International Airport (350 miles).

Revenues were \$44.4 million in FY 2014 up from \$43.0 million in FY 2013. Airline revenues increased 8.6% primarily driven by a 17.9% rise in terminal building rental revenue due to an increase of average terminal rental rate. Operating expenses in FY 2014 were \$36.2 million, up 4.7% from \$34.5 million in FY 2013 mainly due to increased employee insurance and retirement contribution costs. Approximately 30% of RTIA's total operating revenue is supported by airlines. Non-airline revenues comprise the remaining 70% with the largest share derived from auto rentals and parking which account for 35% of total revenues.

RTIA's CPE in FY 2014 was \$7.31 up from \$6.39 in FY 2013. CPE is expected to rise to approximately \$8.44 in FY 2015 and should remain under \$9.00 over the next four years.

As a result of Southwest's reduction in service across some of its smaller hub operations, RTIA has experienced declines in enplanements over recent years. In discussions with RTIA, Southwest has expressed there are no plans for further service reduction in the near-term, resulting in possible stabilization to the enplanement base as year-to-date FY 2015 (9 months through March) is flat at 0.2%. Management has been working aggressively with a marketing incentive program to attract new carrier services, reflected in recent service additions to Guadalajara, Mexico and New York City. While risks remain for further Southwest reductions, Fitch believes the airport currently has a sound financial position to withstand volatility.

The authority currently has \$9.0 million outstanding in Series 2011B subordinate lien notes. RTIA is also considering borrowing \$19 million of bonds at the senior lien level to fund costs for a proposed southwest air cargo ramp. The borrowing will move forward only if a recently initiated cargo study shows sufficient demand from third-party developers and carriers. Previously, the cargo ramp was near full capacity from the addition of Amerijet cargo service last year, but operations ceased in Sept. 2014 which returned capacity to the airport. The bonds are expected to be covered by PFC revenues and would be planned for issuance in FY 2017, with debt service commencing in FY 2018 after the subordinate notes mature. RTIA is also in the process of retiring existing senior bonds to be replaced by a direct bank loan for interest rate savings, with anticipated close by Sept. 30, 2015.

The RTAA operates two airports, RTIA and Reno Stead Airport. RTIA is classified by the Federal Aviation Administration (FAA) as a small-hub airport and is located four miles southeast of Reno's central business district on 1,400 acres of land.

SECURITY

The bonds are secured by a senior lien on the net revenues of RTIA.