OREANDA-NEWS. Fitch Ratings has affirmed its 'A+' rating for approximately $377.6 million of outstanding senior airport revenue bonds, issued on behalf of the San Diego County Regional Airport Authority (the authority). Fitch has also affirmed the 'A' rating on $555.4 million outstanding subordinate airport revenue bonds. The Rating Outlook for all bonds is Stable.

The Authority has $38.7 million in outstanding subordinate notes from a revolving line of credit on parity with the airport's long-term subordinate revenue bonds that is not rated by Fitch.

The rating affirmations reflect San Diego International Airport's (SDIA) role as an essential origin & destination (O&D) air service provider in a thriving metropolitan area. SDIA's diversified airline market share, various non-aeronautical revenue streams and robust liquidity position are expected to maintain the airport's strong financial position through economic downturns and capital expansions. While the airport has greatly exceeded Fitch's forecasts over the past several years and has extraordinary cost provisions, the ratings are currently constrained by the uncertainty related to SDIA's Airport Development Plan (ADP), which could potentially cause financial metrics to evolve downwards as additional debt is incurred.

KEY RATING DRIVERS

Revenue Risk - Volume: Stronger
Primary Airport in a Strong Service Area: The airport's strong enplanement base of 9.7 million is serviced by a diverse group of airlines and benefits from San Diego county's robust service area. Traffic has increased an average of 2.5% annually since fiscal year (FY, ended June, 30th) 2010, and growth is expected to continue given the area's consistent population and personal income growth.

Revenue Risk - Price: Stronger (revised from Midrange)
Generous Cost-Recovery Mechanisms: The airport has a hybrid use and lease agreement (AUL), which is residual on the airfield and compensatory on the terminal. Fitch notes that between costs recovered under the airport's AUL and revenues generated via passenger facility charges (PFCs), the airport's cost methodologies provide for a substantial portion of operating and debt service costs. Fitch views the airport's cost per enplanement (CPE) level ($10.26 in 2015) as reasonable in comparison to peers, with some capacity to evolve upwards given the level of air service demand in the San Diego market.

Infrastructure Development & Renewal: Stronger
Minimal Near-Term Capex, Future Spending Uncertain: The airport has minimal capital needs over the next few years, having approximately 55% of its 5-year capital plan already completed. The airport's near-term focus consists of the construction of a parking plaza at Terminal 2, and airfield maintenance and improvement projects. The ADP is still in the early stages of planning, though it is expected to accommodate San Diego's growing service area via the replacement of Terminal 1 and expansion of Terminal 2 West. Timing and costs are uncertain at this time.

Debt Structure: Senior - Stronger, Subordinate - Midrange
Conservative Debt Profile: The airport's capital structure is fully amortizing and fixed-rate consisting of 39% senior bonds, 57% subordinate bonds, and 4% of a revolving line of credit (not rated by Fitch). The airport does not expect any major debt issuances in the near-term; however, a small amount may be needed to fund the expansion of Terminal 2's parking facility.

Strong Financial Profile: The airport's net debt-to-cash flow available for debt service (CFADS) of 6.03 times (x) is modest relative to peers. Additionally, debt service coverage was strong in FY2015, at 4.03x senior (6.32x with PFCs as offsets to debt service) and 1.60x aggregate (2.24x with PFCs and BAB subsidy as offsets). The airport maintains a robust liquidity position at approximately 615 days cash on hand.

Peers: The airport's peers rated within the 'A' category by Fitch consist of strong traffic levels with diverse airline market shares. Hillsborough County (rated 'A+/A; Positive Outlook) is statistically the most similar to San Diego in terms of enplanements and carrier diversification, but benefits from both lower CPE and leverage. However, San Diego benefits from a stronger service area, a smaller capital plan, and higher days cash on hand (DCOH).

RATING SENSITIVITIES

Negative: Financial forecasts which indicate a significant weakening of key financial metrics as debt for the airport's ADP is incurred could pressure the ratings.

Negative: A sustained decline in enplanements which pressure revenues and coverage levels could cause the ratings to become inconsistent with the current rating levels.

Positive: Uncertainty related to the financial plan, timing and sizing of the ADP prevent upward rating movement at this time. To the extent that the strength of financial metrics is maintained as potential debt for the ADP comes on line, the ratings could migrate upwards.

CREDIT SUMMARY

In FY 2015, enplanements increased by 6.9% to 9.7 million and have exhibited continued growth through the first six months of FY 2016, up 6.9% year-over-year. The airport attributes robust passenger growth to the airline's use of larger aircrafts and greater load factors, which have increased load factors from 82.3% in FY 2015 to 86% in FY2016 YTD. Fitch views SDIA's strong service area characterized by growing personal incomes and limited competition as key credit strengths, as these factors contribute to the airport's favorable performance. Moreover, enplanements are currently at their highest levels since Fitch has rated the airport, and passenger growth has surpassed Fitch's base case estimates by approximately 6% in FY2015.

FY 2015 operating revenues increased 7.5%, as a product of a 4.6% growth in airline revenues and 10.5% growth in non-airline revenues. Most notably, the airport has undertaken several initiatives in recent years to bolster non-aeronautical revenues. Particularly, the Concession Development Program, which expanded food and retail operations at SDIA, contributed to 10% growth in concession revenues in FY2015. Parking and ground transportation revenues also grew nearly 7% in 2015 as a result of expanded parking capacity following Green Build completion, increased traffic, and a 5% parking rate increase. In addition, the airport's new rental car center opened in January 2016, and is anticipated to contribute to non-airline revenue growth in FY2016 via license fees and rentals.

The airport's hybrid AUL expires in 2018, with all major carriers being signatory. Airline payments via landing fees, terminal rents, and PFCs, cover a significant portion of the operating and debt service costs, providing extraordinary cost recovery to the airport. Fitch views SDIA's level of PFC collections in excess of PFCs applied to debt service costs favorably, as it provides assurance that debt offsets would not be affected in the event of a moderate decrease in passenger traffic. Fitch also considers the airport's diversity of non-aeronautical revenue streams as a credit positive, as growing divisions such as concessions and ground transportation provide extra financial cushion to the airport's operating profile. Lastly, the airport has maintained CPE levels which are considered competitive for the region, providing SDIA with a level of economic flexibility to adjust rates upward if necessary.

The airport is expecting minimal capital needs over the next several years, with 55% of its $814.2 million capital improvement plan already completed. The near-term focus for the airport will be the construction of a parking plaza at Terminal 2 (expected completion in 2017). The ADP is expected to increase capacity and enhance the passenger experience at SDIA via the replacement of Terminal 1 and expansion of Terminal 2 West. Funding of the ADP will likely involve several issuances of debt starting in FY2019 at the earliest, though exact timing and amounts are uncertain at this time as the airport is still in its planning phase. Fitch expects to review the airport's financial forecasts over the next year.

In Fitch's base case, coverage levels have remained strong at averages of 4.24x senior (7.0x with PFCs as debt service offsets) and 1.61x aggregate (2.18x with PFCs and BAB subsidy as offsets). Leverage on a net-debt to cash flow available for debt service basis evolves down to 4.05x by FY2020, while CPE rises to $11.75. In Fitch's rating case, which includes a 3% drop in enplanements in FY2017 with a modest recovery, averages coverage levels of 3.97x senior (6.51x with PFCs as offsets) and 1.53x aggregate (2.03x with PFCs and BAB subsidy as offsets). Leverage evolves down to 5.08x and CPE grows to $12.31 by FY2020. Fitch notes that SDIA's metrics are currently higher than its present ratings; however, the ratings are currently constrained due to the uncertainty of how future ADP-related debt issuances may pressure metrics.

SECURITY

The bonds are special obligations of the authority, secured by and payable from a senior and a subordinate lien on the net revenues of the airport system and, under certain circumstances, investment earnings and certain other funds and accounts.