OREANDA-NEWS. Fitch Ratings has assigned a 'BBB+' rating to the city of Dayton, Ohio's approximately $23.7 million airport revenue bonds, series 2015A & B, and approximately $2.3 million airport revenue refunding bonds, series 2015C. Fitch has also affirmed the 'BBB+' rating on the $27 million outstanding parity airport revenue bonds. The city's airport revenue bonds were issued on behalf of the James M. Cox Dayton International Airport (the airport). The Rating Outlook on all bonds is Stable.

The rating reflects the airport's elevated traffic volatility, its vulnerability to economic factors in the air trade service area and, to a moderate extent, competition from larger airports in the state. Supporting the airport's rating are ample liquidity and a residual-style airline agreement which should help mitigate the expected leverage increase and rising net cost per enplanement (CPE) levels over the near term to support its capital improvement program (CIP). Tightening coverage levels over the mid-term could affect the rating should financial flexibility become pressured.

KEY RATING DRIVERS

Revenue Risk - Volume: Weaker
Weaker Service Area; Moderate Competition: The airport serves a mostly origination and destination (O&D) market with approximately 1.14 million enplanements. The airport's enplanement base, however, has demonstrated a historically volatile profile with single-year traffic shifts ranging from a positive 10% growth to 15% declines over the last decade resulting in a 10-year compounded annual growth rate (CAGR) of (2.3%). The airport mitigates some carrier concentration risk due to its largest carrier holding only 36% market share.

Revenue Risk - Price: Midrange
Full Cost Recovery: Carriers operate under an annual operating permit with a residual rate-setting methodology. Airline charges have remained relatively low in recent years, due to an airport subsidy, compared to other small hub airports; however, the net charges are expected to increase in the near term to as much as $11 as the airport phases out the subsidy.

Infrastructure Development & Renewal: Midrange
Manageable Capital Program: The airport's current CIP through fiscal 2019 totals $110.9 million and is funded via proceeds from parity revenue bonds (41%), airport improvement and other local grants (31%), cash (22%), customer facility charges (6%), and passenger facility charges (PFCs). The program has flexibility regarding timing and is focused on runway and parking lot rehabilitation, as well as improvements within the terminal.

Debt Structure: Stronger
Debt Structure: All outstanding debt will be fixed-rate and fully amortizing with aggregate level debt service payments expected to be just over $5 million, post-issuance of the series 2016 bonds. All aforementioned parity bonds are accounted for in Fitch's cases.

Increasing Leverage; Ample Liquidity: In conjunction with the expected new debt issuances, the airport's leverage will increase from zero to approximately 5x net debt-to-cash flow available for debt service (CFADS). Debt service coverage of 2.6x in fiscal 2014 is slightly lower than the prior year but provides ample financial cushion. The airport maintains strong liquidity with $27.5 million of unrestricted cash, equivalent to 372 days cash on hand.

Peers: Comparable peers include Fresno ('BBB'/Stable Outlook), and Rhode Island Airports Corporation ('BBB+'/Stable Outlook). Dayton's expected leverage and CPE levels should rise to levels comparable with its peers over the near term; however, it maintains stronger coverage and liquidity cushions. Fresno serves a significantly smaller service area than its peers.

RATING SENSITIVITIES

Negative - Traffic Base: Measurable contraction in passenger traffic below the 1 million enplanement-level may pressure revenue generation;

Negative - Operating Performance: Deterioration of the airport's non-aviation revenue that limits its ability to manage CPE levels;

Negative - Financial Flexibility: Leverage greater than the currently expected issuances through fiscal 2016 that materially dilute forecast debt service coverage will result in negative action;

Positive - Outlook: The airport's size and traffic profile, coupled with inherent vulnerabilities to economic activity, restrict the likelihood of a higher rating at this time.

TRANSACTION SUMMARY

The airport plans to issue approximately $21.45 million of revenue improvement bonds to fund its upcoming CIP. The series 2015A bonds are being issued for the reconstruction of a portion of the airports long-term and economy parking lots. The series 2015B bonds are being issued to fund a hangar replacement, a new sand storage facility and a new U.S. Customs building, as well as partially fund the construction of a new aircraft hangar. The airport is also issuing 2015C refunding bonds, the proceeds of which will refund the $2.39 million in outstanding series 2005A bonds. This transaction is currently estimated to provide the issuer with net present value savings of $117,000 (or 4.9% of refunded par). The transaction will not affect the average life of the outstanding debt; it will simply lower annual debt service requirements through maturity in 2020.

The airport is also exploring the possibility of an additional issuance in fiscal 2016 in an amount of $24 million to $26 million, contingent on the approval of a current PFC application with the Federal Aviation Administration. The issuance will be backed by the airport's net revenue, but ultimately repaid by the applied-for PFCs, and will fund additional terminal improvements, sewer rehabilitation and other energy conservation projects associated with the airport's CIP. The airport does not expect to issue any additional debt over the next five years following the parity bonds in fiscal 2016.

In conjunction with the new debt issuance, the airport plans to slightly alter the terms of its current annual operating permit. Historically, in an effort to reduce CPE from previously high levels and attract new carriers, the airport subsidized charges in the terminal through a cost center residual approach. In conjunction with the additional debt issuance, the airport no longer plans to fund expenditures in the terminal and will pass through these charges to the airlines.

The airport's enplanements continue to decline behind service cuts and reduced capacity by airlines. In fiscal 2014, enplanements dropped 8.7% to 1.14 million, and through July 2015, were down an additional 8.1%. Since the acquisition of AirTran, Southwest Airlines Co. ('BBB'/Positive Outlook) has cut approximately four flights per day from the airport. Additionally, carriers have transitioned to aircraft with fewer seats, indicated by an increase in load factors in 2014 to nearly 90%. Despite recent changes in operations by airlines, the airport has historically maintained a base level of at least 1.1 million enplanements in the past two decades.

Operating revenue increased 1.6% in fiscal 2014, driven by a 36% increase in passenger airline payments (landing fees, rentals, etc.). Fitch expects continued near-term increases in airline revenue concurrent with the increasing debt service requirements. Total non-aviation revenue fell 4.4% in fiscal 2014, coinciding with the decrease in traffic. Expenses remained flat in fiscal 2014, but have shown moderate growth over the last five years, indicated by five-year annual growth of 5.2%.

Fitch's five-year base case forecast assumes marginal annual enplanement growth and escalating costs of approximately 3% annually, resulting in declining coverage below the 2x range. Net CPE is forecast to increase annually to the low $11 range in fiscal 2019, as the airport phases out its subsidies in the terminal in order to fund the upcoming CIP. Fitch's rating case assumes a fiscal 2017 enplanement stress of 8%, with only slight recovery thereafter, and an increase in costs of 3.5% annually. Under this scenario, additional costs must be passed through to airlines in order to maintain rate-covenant coverage levels of 1.25x, demonstrating pressured financial metrics and operations should traffic continue trending down. CPE is forecast to increase to the high $13 dollar range through fiscal 2019 in the rating case.

SECURITY

The bonds are secured by a pledge of the net revenue of the airport's operations and certain funds under the bond resolution. PFCs are not pledged under the bond resolution but a portion of such receipts are applied to debt service.