OREANDA-NEWS. September 29, 2015. Fitch Ratings has affirmed the 'A' rating on Memphis-Shelby County Airport Authority, Tennessee's (the authority) outstanding \\$334 million general airport revenue bonds (GARBs). The Rating Outlook is Stable.

Rating Summary: The 'A' rating is supported by Memphis International Airport's (the airport) low to moderate leverage and stable financial operations, buoyed by residual airline use and lease agreements (AULs) and the long-term presence of Federal Express (Fedex). The airport is used by Fedex as its largest cargo operation and worldwide headquarters. Although Delta's de-hubbing in recent years resulted in substantial enplanement losses and rising costs per enplanement (CPE), the process is substantially complete and Fitch expects modest enplanement gains in future years and CPE stabilization, albeit at high levels for a smaller airport.

SECURITY

The bonds are payable by net revenues of the airport.

KEY RATING DRIVERS

Revenue Risk- Volume: Midrange
O&D Airport with Sizeable Cargo Operations: The airport benefits from moderate carrier diversification, limited competition from other airports in the region, and a nearly 100% O&D traffic profile. Delta's de-hubbing of the airport is substantially complete, and Fitch expects modest enplanement growth moving forward based on O&D market growth and positive carrier capacity trends. Passenger volume risks are mitigated by the long-term and expansive presence of Federal Express (FedEx) cargo operations, which make up about 90% of the airport's total landed weight.

Revenue Risk- Price: Midrange
Residual AUL with High CPE: Fitch views positively the airport's fully residual AUL, renewed through fiscal 2017, enabling it to fully recover net operational costs from carriers. Recent years' substantial enplanement losses more than doubled CPE to \\$11.76 in fiscal 2014, which is high for a small airport but has not yet meaningfully deterred airlines from launching new routes or maintaining existing ones.

Infrastructure Renewal and Development: Stronger
Manageable CIP in Flux: The airport's capital needs historically have been manageable with no debt financing needs. Management is in the process of updating its capital improvement plan (CIP) and will need to contend with a major statutory reduction of jet fuel taxes that funded a state airport grant program. Should the updated CIP include material debt issuances, Fitch may reconsider its stronger assessment.

Debt Structure: Stronger
Conservative Debt Structure: The airport's debt is 100% fixed rate, fully amortizes, and steps down in stages through maturity. The debt service reserve fund is sized to the maximum allowed by the IRS and is predominantly cash-funded.

Low Debt with Stable Financial Metrics
The airport benefits from low leverage levels, with unaudited actual fiscal 2015 net debt to cash flow available for debt service (CFADS) of 2.4x. As is consistent with many airports that use residual AULs, the debt service coverage ratio (DSCR) is below average for a small airport at 1.47x (1.21x excluding a rolling coverage account); however, DSCR tends to be quite stable.

Peers
Louisville ('A+'/Stable Outlook) and Indianapolis ('A'/Stable Outlook) are comparable to Memphis given their large cargo operations, with Memphis benefitting from the largest presence. Louisville's higher rating level reflects significantly lower CPE levels and stronger financial metrics. Indianapolis exhibits lower carrier concentration and a larger O&D base than Louisville, though these advantages are offset by higher leverage levels.

RATING SENSITIVITIES
Negative: Material changes in the scope or funding sources of the airport's CIP, leading to a sizeable bond issuance, may lead to negative rating action.

Negative: A significant CPE increase from already high levels, leading to a demonstrable loss of competitiveness.

Negative: A material and sustained reduction of the airport's O&D enplanement base or cargo volumes.

Positive: Due to recent years' substantial deterioration of the airport's enplanement base and CPE, Fitch views positive rating action over the short-to-intermediate term as unlikely.

CREDIT PROFILE

The airport's enplanement base shrunk in fiscal 2015 for its sixth consecutive year, falling to 1.79 million from 1.96 million the year prior (an 8.5% loss). Enplanements fell 30% in fiscal 2014 and are down a substantial 68% from fiscal 2008, predominantly reflecting Delta's decision to de-hub the airport. The de-hubbing process was nearly completed in fiscal 2015, with just 1% of enplanements stemming from connecting traffic, compared to about 60% in fiscal 2011. As a result, Delta's market share fell to a moderate 39% in fiscal 2015 from a concentrated 77% as recently as fiscal 2013.

Now that de-hubbing is substantially complete, Fitch expects enplanement levels will likely stabilize and grow modestly based on expectations of continued yet measured O&D growth following two consecutive years of O&D gains. Also, carriers have been backfilling routes cut by Delta and have been increasing capacity by up-gauging aircraft. Despite expectations of modest growth, management is conservatively projecting a small enplanement decline in fiscal 2016 followed by no growth through its five-year forecast. Fitch views the airport's enplanement projections as prudent for budgeting purposes and has included them in the base case projections below.

While enplanements have declined dramatically in recent years, the presence of FedEx balances the airfield operations of the airport and provides some cushion, which makes the airport unique from other airports that have been de-hubbed. Memphis has been the worldwide leader in air cargo tonnage throughput most of the past twenty years. Total enplaned cargo increased 4% in fiscal 2014 to 4.8 billion pounds from 4.6 billion the year prior. The lease agreement with FedEx runs for 30 years from 2007 with two 10-year renewal options. FedEx accounted for 99% of total cargo volume at the airport in fiscal 2014, and has represented at least 92% of such activity since fiscal 1992.

The authority's five-year AUL expires in June 2017 and signatories include every major passenger and cargo airline. The extension of the agreement in the midst of the Delta de-hubbing suggests airlines are willing to tolerate rising CPE through the 2017 AUL expiration, at which point debt service will drop by \\$12.8 million and CPE will drop in lock-step.

Fiscal 2014 financial operations performed well, with a modest 0.9% revenue gain and a 4% operating expenditure reduction. Operating income before depreciation increased to \\$57.8 million from \\$54.4 million the year prior, reflective of a healthy 51% operating margin. Unaudited fiscal 2015 financial performance was also solid, with revenues and expenditures out-performing budgeted financials.

Debt service coverage of 1.52x (1.27x excluding a rolling coverage account) in fiscal 2014 roughly matched prior year expectations. Unaudited actual financial performance for fiscal 2015 points to a slightly lower DSCR of 1.47x (1.21x). The authority projects coverage of 1.25x (inclusive of a rolling coverage account) moving forward as is consistent with the residual nature of the AUL. Cash levels have increased over the past several years and, at 293 days cash on hand, Fitch considers cash levels to be sound for the rating level.

Fitch's base case scenario is derived from the authority's projections, which incorporate conservative enplanement projections noted above and a high 3.5% expenditure growth rate from fiscal years 2015 - 2020. The authority calculates that CPE will fall to \\$10.98 in fiscal 2017 from \\$13.00 in fiscal 2016, due to declining debt service, and will increase modestly thereafter. Leverage (net debt to CFADS) is projected at a low to moderate 3.02x in fiscal 2016 and drops to low levels thereafter.

The airport's financial metrics hold up adequately under Fitch's rating case scenario, which assumes a hypothetical recessionary 10% enplanement loss in fiscal 2016 followed by 2% annual growth through the remainder of the forecast period. Under this scenario leverage would remain at moderate to low levels and decline over time. Fitch-calculated CPE would rise to a peak of \\$15.01 in fiscal 2017 and decline thereafter. Fitch notes that the authority uses a different basis to calculate CPE that would have resulted in a moderately lower CPE ratio under Fitch's rating case.