OREANDA-NEWS. Fitch Ratings has affirmed the Susquehanna Area Regional Airport Authority's approximately $148 million senior airport revenue bonds at 'BB+' and the authority's approximately $8 million subordinate airport revenue bonds at 'BB+'. The Rating Outlook on all bonds is Stable.

RATING RATIONALE

The 'BB+' rating reflects the airport's small market, high cost per enplanement (CPE), high leverage and constrained liquidity and revenue generating capability. Forecasted all-in debt service coverage ratios are extremely low and below comparable investment grade peers. The authority faces strong competition from regional airports which has led to continued recent enplanement declines.

KEY RATING DRIVERS

REVENUE RISK- VOLUME: WEAKER
SMALL ENPLANEMENT BASE WITH SIGNIFICANT COMPETITION: Harrisburg International Airport serves primarily as an Origination and Destination (O&D) airport for the state capital region. State government, corporations, and universities create a small traffic base which faces significant regional competition particularly from Baltimore-Washington International Airport, Philadelphia International Airport, and Dulles International Airport.

REVENUE RISK- PRICE: WEAKER
HIGH COST STRUCTURE: A high passenger cost per enplanement (CPE) of $13.55 at FYE2014 limits pricing flexibility even though the airport operates under a new five-year hybrid use & lease agreement (AUL) which allows the authority to raise rates and charges to meet rate covenants.

INFRASTRUCTURE DEVELOPMENT AND RENEWAL: STRONGER
MODERN FACILITY WITH LIMITED CAPITAL NEEDS: Updated facilities allow the Authority to maintain an internally funded five year capital plan which totals $49.1 million funded primarily by federal and state grants and no near term debt.

DEBT STRUCTURE: STRONGER (SR), MIDRANGE (SUB)
CONSERVATIVE DEBT STRUCTURE: All senior and subordinate lien bonds are fixed rate, and aggregate annual debt service is flat through 2038. Debt service on senior lien bonds jumps in 2018 from $7.6 million to $12.4 million once the subordinate lien bonds mature, and no additional debt is expected near term.

THIN COVERAGE AND HIGH LEVERAGE:
Fitch's all in coverage calculation is 1.11x at FYE2014 which excludes the coverage account and considers PFCs as revenues rather than an offset to debt service (FYE2014 coverage was 1.27x with the coverage account). The Authority has a high debt burden and debt per enplanement ($227) driven by prior capital spending and is also highly leveraged at 11.16x total net debt to CFADS. $240,000 unrestricted cash at FYE2014 provides 116 days cash on hand when including maintenance & operation reserve and capital improvement reserve.

PEER ANALYSIS: Amongst its closest rating-level peers in the 'BBB' category, such as Burlington (VT), Fresno (CA) and Pensacola (FL), the airport demonstrates materially higher leverage and CPE, with weaker debt service coverage and liquidity.

RATING SENSITIVITIES

NEGATIVE: Measurable contraction or elevated volatility in passenger traffic as a result of airline service changes or competition from larger airports operating within the region;

NEGATIVE: Deterioration of the airport's non-aviation revenue that pressures its CPE levels.

POSITIVE: Material improvement in the airport's traffic base which generates higher operating revenue and stronger coverage levels may lead to a higher rating.

CREDIT UPDATE

Fitch notes the enplanement base has been relatively stable during the recession compared to other small market airports and has historically remained around 650,000 enplanements, only declining 1.3% during FY2014 to 649,543 enplanements because of continuing service changes from United Airlines and US Airways. However, enplanements declined 5.5% FYTD2015 to 301,331 through June because Frontier left Harrisburg Airport (MDT) in April 2015 and SARAA lost non-stop service to Denver and Orlando. Low cost carriers have established markets at nearby airports (PHL, BWI, and IAD) which are served by Southwest Airlines and are unlikely to serve SARAA but legacy carries retain a strong presence at MDT. After merging with US Airways, American Airlines remains dominant and should provide carrier stability at 38% of FY2014 enplaned passengers.

SARAA started a new five-year Hybrid AUL January 1, 2015 which includes an extraordinary coverage protection (ECP) from signatory airlines if SARAA doesn't meet the required 1.00x all-in rate covenant which Fitch views as a credit strength. The ECP allows SARAA to increase fees to signatories if the authority foresees a revenue shortfall and/or increased expenses that will prohibit meeting the rate covenant.

Per the new AUL, operating revenues FYTD2015 are 4.3% higher than the same period last year at $13.2M from significant increases in landing fees as well as concessions, parking, and facilities rentals following new agreements. Operating revenues declined 1% during FY2014 to $25.5M from a 12.7% drop in landing fees. In Fitch's view, the authority is managing expenses well which have grown at a 1.59% 5yr CAGR and are down 2.4% FYTD2015 to $7.5M mostly from decreased marketing and supplies.

However, Fitch notes that the authority has thin all-in coverage with slight flexibility to pass the majority of costs to airlines due to a high CPE of $13.55 at FYE2014 which considers only passenger airline revenues. They have a high debt burden and leverage is expected to remain elevated (around 10x) through the forecast period due to slow amortizing debt service schedule. FY2015 Senior coverage is estimated to be 2.33x (true coverage) and all-in coverage is estimated at 1.25x. The aggregate debt service schedule is flat, but the subordinate lien debt service will mature after 2017 and senior debt service will spike.

Fitch's base case and rating case both result in total debt service coverage near the 1.25x level through FY2020, requiring management to increase airline rates and charges starting in 2018 to meet the 1.25x all-in coverage requirement. The base case assumes moderate enplanement growth at a 0.8% five year forecast CAGR and inflationary cost escalation at 3% per year. The rating case assumes a near-term enplanement shock consistent with historical stresses and slightly greater cost escalation testing respective five year forecast CAGRs to -0.1% and 4%. In the base case, CPE migrates from $16 to $18 while the rating case's CPE increases further from $17 to $23. Leverage in both cases remains elevated at above 10x. Furthermore, the airport's overall performance and financial metrics with very narrow coverage levels marginally above 1x when excluding the coverage account and treating PFCs as revenue, preclude an investment grade rating.

SECURITY

The bonds are secured by airport net revenues.