OREANDA-NEWS. August 04, 2015.  Fitch Ratings has affirmed the 'A-' rating on approximately \\$189.6 million of outstanding airport revenue bonds issued by the Birmingham Airport Authority, AL on behalf of the Birmingham-Shuttlesworth International Airport. The Rating Outlook remains Negative.

The rating reflects the airport's established service area with a recent history of traffic contraction, rising airline costs to support prior debt-funded capital investments, manageable future infrastructure needs and sound financial results. The Negative Outlook reflects potential cost and coverage risks should the recent enplanement base erosion continue.

The airport is starting to realize a more stabilized traffic profile over the past year, and its leverage is likely to evolve to a lower level should debt coverage and liquidity metrics remain at current levels. Still, the effects of service cuts by the airport's main carrier, Southwest Airlines Co. (Southwest, rated 'BBB'/Positive Outlook by Fitch), does limited economic flexibility in the near term as the airport's cost per enplanement (CPE) level is high for the rating category.

Should traffic levels show continued signs of stabilization that also allows for maintenance of current cost and financial metrics, the Rating Outlook would likely return to Stable. To the extent debt coverage levels trend lower or airline costs need further upward adjustments in reaction to more traffic losses, a lower rating is likely.

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange
Established Service Area, Uneven Traffic Performance: The airport serves a market that is essential to the state of Alabama. Its predominantly origin and destination (O&D) enplanement base, however, has experienced some softening since peak levels in 2008, declining to the 1.3 million range. The airport experiences no material airport competition but is exposed to carrier concentration; with Southwest and Delta Air Lines (Delta, 'BB'/Positive Outlook) accounting for 34% and 33% of the airport's enplanements, respectively.

Revenue Risk - Price: Midrange
Adequate Cost Recovery Structure: The compensatory airline use and lease agreement (AUL) rate methodology does provide adequate cost recovery, but CPE has risen from \\$9.36 in fiscal 2013 to \\$12.44 in fiscal 2015, representing an elevated level for a small regional airport. Furthermore, the agreement's one-year rolling term exposes the airport to future renewal risk, or uncertain rate setting strategies, should traffic and revenue performance materially change.

Infrastructure Development and Renewal: Stronger (revised from Midrange)
Large Capital Program Winding-Down: The airport assumed additional leverage with the 2010 bond issuance to help fund its \\$369 million capital improvement program, largely focused on the modernization of the airport's aging terminal facility. The bulk of the program is now complete, with the terminal project opening August 2014.

Debt Structure: Stronger
Conservative Debt Structure: The airport benefits from a fixed-rate debt structure with passenger facility charge (PFC) revenue irrevocably committed to a portion of the 2010 debt service. The debt service reserve is 92% cash-funded, and coverage covenants are set at a 1.25x requirement.

Financial Metrics Stabilizing: Leverage quickly evolved down to 5.7x net debt-to-cash flow available for debt service during fiscals 2014 and 2015, from 8.3x in fiscal 2013 during Fitch's 2014 review; however it is anticipated that this level will be maintained for at least the next five years in Fitch's base case. Additionally, now that debt service is due on the 2010 issuance, average debt service coverage ratios (DSCRs), including fund transfers and PFC receipts as revenue, are forecast to be at the 1.55x level during this same five-year period. Liquidity continues to be a positive attribute, with 585 days cash on hand (DCOH).

Peer Group: Birmingham's peers include Virginia's Capital Region Airport ('A-'/Stable Outlook) and Jackson, Mississippi ('BBB+'/Stable Outlook). All three state-capitol airports have experienced softening traffic levels but still maintain sufficient liquidity and leverage levels. Capital Region's CPE, in the \\$6 range, is more favorable than its peers at the \\$11 to \\$12 level.

RATING SENSITIVITIES

Negative - Sustained Traffic Declines: Continued service reductions by the airport's major carriers that cause enplanements to become more volatile or fall below 1.3 million for a sustained basis;

Negative - Sluggish or Volatile Operating Performance: Revenue underperformance, driven by either continued enplanement declines or non-airline revenue growth which does not meet expectations; or management's inability to effectively control costs;

Negative - Stressed Financial Metrics: DSCRs falling below a 1.5x level, or CPE stabilizing above \\$13, on a sustained basis;

Positive: The airport's traffic profile and financial metric forecast make positive rating action, other than restoring the Rating Outlook to Stable, unlikely in the near term.

CREDIT UPDATE

The airport is the main air transportation facility in the state of Alabama and faces little in-state competition. The vast majority of traffic is O&D, providing a relatively stable traffic base with moderate exposure to underlying economic conditions. However, the airport is susceptible to service decisions by its carriers. Enplanements increased 1.7% in fiscal 2015, to 1.33 million, following a 7.2% drop in fiscal 2014 and representing 19% deterioration from levels reached in fiscal 2008. At this point-in-time, enplanement levels are 13.5% below the 2010 bond issuance forecast, which were projected to be 1.54 million in fiscal 2015. The forecast further projected 1.68 million enplanements in fiscal 2018, representing 2.9% annual growth.

Airport management expects flat-to-minor incremental enplanement growth in fiscal 2016 after factoring in service changes, the opening of a new Federal Inspection Station and the addition of a Bahamas flight. The airport offered 18 non-stop destinations in fiscal 2015, down from 19 after losing a Minneapolis route, while daily departures remain unaffected at 54. Seat capacity is down 2.7% year-over-year as a result of Southwest cutting 6% of its capacity. In Fitch's opinion, the airport remains vulnerable to carrier service decisions.

Revenue performance at the airport continues to grow, despite traffic underperformance, registering a 3.5% annual growth rate since fiscal 2008. Parking revenue, historically the primary driver of revenue at the airport, has extended its sluggish performance in line with enplanements, maintaining flat revenue generation over the same time period. Space rentals, in line with expectations, increased 15% in fiscal 2015, following 38% growth in the prior year, as portions of the new terminal opened. It is imperative for the airport to generate healthy non-airline revenue growth at the new terminal so as to preserve financial metrics.

Management has effectively contained costs despite now operating in the larger terminal. Fiscal 2015 operating costs were 15% below those projected during the 2010 bond issue, and maintained levels achieved in fiscal 2014; a year in which the airport's cost profile grew 12% concurrent with the new terminal opening. As expected, materials and supplies, and utility costs were the line items that experienced the most year-over-year growth. Operating margin, however, has improved since 2008, as costs only registered 1.2% annual growth over this period.

Debt service coverage met expectations of 1.6x in fiscal 2015 and is further forecast to approximately maintain this level as the 2010 debt becomes payable. CPE of \\$12.44 in fiscal 2015 was also in line with expectations and is further expected to maintain this level as well. Nevertheless, if enplanements do not materially stabilize, or if non-airline revenue does not grow, CPE could migrate above \\$13 and lead to a rating action.

With the new terminal now open, management does not expect to issue additional parity debt as the remaining portions of the \\$194 million five-year capital improvement plan have been funded from a combination of state and federal grants, passenger and customer facility charges and local funds. The airport is currently working with rental car agencies to determine the scope of a proposed CONRAC facility and began collecting a customer facility charge in 2012 to finance this project.

In Fitch's five-year base case forecast, enplanements are projected to grow 1% annually, resulting in 2% annual revenue growth. Operating costs are forecast to grow 2% annually, resulting in an average DSCR, including fund transfers and PFC receipts as revenue, of 1.55x and average CPE of \\$12.45. Fitch's five-year rating case forecast layers in a 7% enplanement stress in fiscal 2016 and nearly 3% annual cost growth, resulting in an average DSCR of 1.50x and average CPE of \\$13.23. Sustained performance at the rating case level would result in rating action; however, Fitch notes that this scenario does not give airport management credit for its ability to contain cost growth in a stressed traffic environment. Fitch further notes, however, that the airport is fully applying its \\$5 million in PFC receipts to offset debt service, and this reliance could lead to further financial pressure should enplanement levels drop. In both cases, leverage evolves down to 5x cash flow.

Birmingham-Shuttlesworth International Airport is located four miles northeast of downtown Birmingham in Jefferson County, Alabama within the city limits of the City of Birmingham. It occupies approximately 2,200 acres of land, of which approximately 350 acres have not yet been developed. The new passenger terminal consists of 424,000 square feet, of which approximately 46% has revenue-producing potential. 13 gates are currently leased (four in concourse B, nine in concourse C) while six are used for charters/overflow. It is classified as a Federal Aviation Administration small hub airport, and opened for commercial service in 1931.

SECURITY

The bonds are secured by a net revenue pledge and certain funds under the bond indenture. A portion of the series 2010 bonds includes an irrevocable commitment of approximately \\$5 million in PFC funds annually. However, the PFC account is not subject to the lien of the indenture, and any amounts held therein are not included within the meaning of net revenue or otherwise pledged as security for any outstanding bonds.