OREANDA-NEWS. Fitch Ratings has assigned an 'A' rating to approximately $12 million series 2015 subordinate airport revenue bonds (GARBs) issued by the City of Boise, Idaho (the city) on behalf of Boise Airport (the airport or BOI). Fitch has also affirmed its rating on $29.2 million in outstanding senior GARBs at 'A+'. The Rating Outlook on all bonds is Stable.

KEY RATING DRIVERS
The ratings reflect BOI's strong financial metrics based on modest capital improvement needs alongside monopolistic air service in Idaho that somewhat mitigate risks associated with its small enplanement base. BOI's combined senior and subordinate debt service coverage ratios (DSCR) are expected to be maintained at around 2x over the next five years, providing sufficient financial flexibility in the event of full termination of SkyWest lease payments for its maintenance hangar.

REVENUE RISK - VOLUME: MIDRANGE
Small Strategic O&D Airport: BOI's unique geographic position, lack of material competition, solid carrier diversity and predominantly O&D traffic base, which accounted for around 95% of the airport's 1.3 million annual enplaned passengers in fiscal 2014 (ending September 30), mitigates some risk from relatively small scale of operations.

REVENUE RISK - PRICE: STRONGER
Strong Cost Structure: BOI's cost per enplaned passenger (CPE) is expected to remain low relative to peers, in the $5-$7 range. The airport's residual airline use and lease agreement (AUL) enables the airport to pass along most costs to signatory air carriers to the extent non-airline-related revenues are insufficient to cover costs and is expected to remain unchanged upon renewal later this year. SkyWest's maintenance hangar costs are not part of the airlines cost base.

INFRASTRUCTURE RENEWAL & DEVELOPMENT: STRONGER (FORMERLY MIDRANGE)
Modest Capital Program: Both runway and terminal facilities were recently improved. The airport's six-year $90 million capital improvement plan (CIP) is expected to be funded with a combination of debt, excess cash, and grants. The CIP includes $24 million for construction of the SkyWest maintenance hangar and existing taxiway improvements partially funded with this new issuance. Existing capacity at BOI accommodates potential future growth and prevents the need for significant expansion.

DEBT STRUCTURE: STRONGER (SENIOR LIEN), MIDRANGE (SUBORDINATE LIEN)
Conservative Debt Profile: The airport's senior debt has a flat annual debt service of $5.3 million through fiscal 2020 when series 2011 bonds mature and drops to $825,000 thereafter through final maturity in fiscal 2032. Aggregate maximum debt service of $6 million occurs in fiscal 2020 following the 2015 subordinate debt proposed issuance. The airport has $17 million in unrestricted cash in addition to a surety on the 2011 series as well as a cash-funded senior bond reserve for the 2012 series. All debt is fixed rate, and all other structural features are satisfactory.

LOW LEVERAGE AND HEALTHY COVERAGE: BOI's senior net debt-to-cash flow available for debt service (CFADS) in fiscal 2014 was near zero and well below peers and senior DSCR was a healthy 1.99x. Fitch's base case combined senior and subordinate coverage averages about 2.1x between fiscal 2016 and 2020. Under Fitch's rating case that incorporates a 10% decline in enplanements in fiscal 2017 followed by steady recovery, DSCRs and leverage do not materially vary from the base case, while CPE is also projected to remain under $7.

PEER ANALYSIS: The airport's peer group includes Albuquerque, NM ('A'/Stable Outlook) and Spokane County, WA ('A+'/Stable Outlook). The airports each feature monopolistic operations, high DSCR, low leverage and a moderate CPE commensurate with their respective carrier base.

RATING SENSITIVITIES

NEGATIVE - Enplanement declines leading to CPE above $10 and/or diluting all-in coverage below 1.7x DSCR;

NEGATIVE - Additional debt for unexpected capital projects that leads to either higher leverage or lower DSCR;

POSITIVE - The airport's size and traffic profile, coupled with inherent vulnerabilities to airline decisions, restricts the likelihood of a higher rating.

TRANSACTION SUMMARY
The City of Boise is issuing $12.2 million subordinate series 2015 GARBs that mature in 2040 to partially fund the purchase of a new SkyWest maintenance hangar facility at BOI. Total project cost cannot exceed $19.5 million and will be paid for from bond proceeds as well as up to $8 million in internal airport cash. Bond proceeds will also fund a subordinate debt service reserve fund at maximum annual debt service (MADS) ($845,000) and pay associated issuing costs.

The new maintenance facility is under construction, should open September 2015, and will be used for the new 76-seaters SkyWest flies for United Airlines. The facility will occupy 9 acres and include accessory offices at the airport for a total 133,000 square feet. Total leased land is around 12.14 acres on previously undeveloped airport property southeast of the airfield. The hangar itself will be a pre-engineered steel building, and the facility will include an aircraft parking apron of up to 103,000 square feet, a 103 stall parking lot, and will be accessed via a new driveway connecting directly onto Gowen Road. The hangar is outside flight zones and no material impacts or changes to flight procedures, aircraft traffic, or airport capacity are expected.

The 25-year lease between the city and SkyWest is effective when the subordinate series 2015 bonds are issued, and the city will purchase the hangar for actual construction cost once the hangar is completed. SkyWest can opt out of the lease after 12 years, but SkyWest will owe the city the unamortized portion of total purchase price as a lump sum payment.

SkyWest can renew the lease for 13 years within the 25-year term as well as extend 25-year term for seven additional years. SkyWest pays all hangar operations and maintenance (O&M) costs as additional rent to city and is responsible for all hangar activity. If the lease is extended for 13 years, the annual ground rental rate adjusts for 8% of appraised fair market value of leased premises. Lease payments are equal to subordinate series 2015 bond debt service and amortization of the airport's cash contribution at a 4.5% interest rate (known as the facility rate) plus a ground lease rate at $110,500 per year. Management expects the facility rate average income to be $1.39 million per year throughout forecast and total hangar revenues to average around $1.5 million per year through final maturity in fiscal 2040.

BOI's top markets are medium- to long-haul destinations. It faces no material competition, with there being no other airports within 400 miles, giving BOI a large air service monopoly with strong O&D volume at 95% of total enplaned passengers. Fiscal 2015 year-to-date enplanements are up 7% through May to 913,700 following a 3.2% increase over fiscal 2014 but prior years of enplanement declines produce a -0.8% five-year CAGR. Airlines continue to add service, and total average daily scheduled departing seats have increased 18.4% since June 2012 through June 2015, reflecting Alaska and Delta expansions and new service from Allegiant. Southwest and Alaska hold the highest airline market shares at 24.5% and 29.3%, respectively. Management is trying to serve increased markets and reports recent services added are now full which means more new services are needed to continue to grow enplanements. Fitch will monitor the development of the AUL.

A new six-year $90.3 million capital improvement plan (CIP) extends to fiscal 2021 and prioritizes the new maintenance hangar at $19.5 million or 22% of the total CIP. AIP grants and internal cash are the main sources of CIP funding at 42.7% and 34.3%, respectively. The city will initiate additional projects in response to identified demand. It has discussed a potential CONRAC but has collected enough CFCs to fully fund a facility without additional CFC-backed debt. Fitch notes airfield and terminal facilities have been recently improved. Short-term needs are well defined and high level of excess cash flow in conjunction with grant funding available and its low current debt burden mitigates expected modest additional debt needs.

Management forecasts are based on actual financial results from fiscal 2012 through fiscal 2014. Management forecasts airline and non-airline revenues based on fiscal 2015 year-to-date actual results and concession as well as parking revenues increase alongside enplanements. Management expects moderate growth through fiscal 2021 for enplanements (+1.5% CAGR), OpEx (+2.2% CAGR), passenger airline revenues (+1.1% CAGR), non-airline revenues (+2% CAGR), and CPE and does not expect any increase in annual O&M from the hangar as costs will be SkyWest's responsibility. SkyWest annual ground lease and facility rate payments to the city are included in non-airline revenue management forecasts.

The primary risk with the hangar is SkyWest's continued ability to meet rental obligations. SkyWest's business model depends on contracts with larger, national airlines, mostly upon continuing United Airlines and Delta Airlines agreements scheduled to expire between 2022 (Delta) and 2026 (United), within the terms of the 12-year lease agreement. As mentioned, if the renewal option is not exercised, SkyWest would pay the city any unamortized cost of the facility as a lump sum payment.

Fitch base, rating, and alternative cases tested less enplanement growth as well as removing SkyWest rental revenues. In the Fitch base case, enplanements grew at 0.5%/year and OpEx grew at 2.5%/year in line with inflation. In this scenario, CPE averages $5.44, DCOH remains stable at around 315, DSCR stays above 1.94x, and net debt/CFADS remains below 1x. In the Fitch rating case, the enplanement compounded annual growth rate is -0.1%/year due to a -10% enplanement drop mid forecast; furthermore, higher OpEx at 3% every year (except for the year with less traffic). CPE is slightly higher, averaging $6.13, while other metrics are not materially different from the Fitch base case. Fitch also ran a sensitivity scenario removing SkyWest rental revenues; in this scenario the minimum DSCR falls to around 1.75x, while other metrics remain broadly in line with the Fitch base and rating cases.

SECURITY
The series 2011 bonds are secured by a first lien on airport net general revenues as well as PFC revenues. The series 2012 bonds are secured by a first lien on airport net general revenues. The series 2015 subordinate bonds are secured by a subordinate pledge of airport net general revenues.