Fitch Affirms Alaska International Airport System Rev Bonds at 'A+; Outlook Stable

NEW YORK--()--Fitch Ratings affirmed the 'A+' rating on the Alaska International Airport System (AIAS, or the System) approximately $580.1 million revenue bonds. The Rating Outlook on the bonds is Stable.

KEY RATING DRIVERS:

--Air travel is essential in Alaska due to lack of alternative forms of transportation, which provides a stable origination & destination (O&D) base. AIAS operates the state's two major airports (Anchorage and Fairbanks), both of which are strategically located for air cargo activities along the great circle routes. As a result cargo revenue comprises the majority of AIAS's revenue but is vulnerable to global economic conditions as well as changes in trade policy and fuel costs.

--Carriers operate under a residual operating agreement enabling AIAS to set and adjust rates to ensure sufficient revenues to pay operating and maintenance expenses, fund reserves, and satisfy the rate covenant. The cost per enplanement (CPE) was approximately 9.90 times (x) in fiscal 2010, which puts AIAS slightly above its peers.

--The System has a reasonable amount of debt outstanding given its size with no additional debt currently anticipated. Over 90% of AIAS's outstanding debt is fixed rate. In recent years AIAS has used available cash to pay-down debt thereby lowering annual debt service, and AIAS maintains this option in the future.

--AIAS's healthy balance sheet helps to manage the financial metrics: net debt/cash flow available for debt service: 8.02; debt per enplanement: $198; days cash on hand: 660. Fiscal 2010 debt service coverage was 2.17x with the debt pay-down. Without factoring in the debt pay-down coverage would have been closer to 1x.

--The airport has a modest $259 million capital program through 2013 with no major projects planned due to the relatively new terminal facilities. The current capital plan is funded via a combination of grants, paygo, and previous bond issuances. The program is primarily focused on routine maintenance of the existing terminal and airfield.

WHAT COULD TRIGGER A RATING ACTION:

--Significant volatility in cargo and passenger enplanement activity and material changes in the system's internal liquidity.

--Management's ability to continue to successfully control operating costs and to complete its capital program within current forecast parameters will be important to rating maintenance.

SECURITY:

The bonds are secured by a net pledge of general airport revenues.

CREDIT UPDATE:

Air cargo operations are central to AIAS's operational and financial strength. Cargo has rebounded the last two fiscal years with gross takeoff weight growing 15.6% and 5.9% in fiscal 2010 and 2011 respectively. AIAS's fiscal 2011 gross takeoff weight for cargo was 24.5 billion. AIAS experienced declines in fiscal 2008 and 2009 of 6% and 25.4%, respectively, attributable to the downturn in the global economy. Prior to the downturn cargo gross landed weight grew at an average of 5.5% from 1999 to 2007.

Passenger enplanements have been stable over time showing very minimal volatility. Over the period 1999 to 2011, the airport system grew at a rate of 1.2%. Fiscal 2011 enplanements grew at 4.3% to slightly more than 2.9 million following declines in 2010 and 2009 of 4.3% and 3.8%, respectively. Enplanements had grown for six straight years prior to fiscal 2009. A slow summer tourism season in the state and the global economic slowdown are primary underlying reasons for the decline AIAS experienced.

Carrier concentration remains high with Alaska Airlines servicing 61% of traffic at the airports in fiscal 2011, up from 44% in fiscal 2006. While air carrier concentration is not a meaningful credit concern at this time, a sustained level of single-carrier dominance could pose future challenges for the System to pass on costs to passenger carriers to cover the reduction in cargo revenues in future years.

Revenues increased 10% in fiscal 2010 primarily driven by the pick-up in cargo activities. Revenues had fallen 20% in fiscal 2010 as both cargo and passenger activity declined. The airport's cargo component accounts for approximately 65%-70% of total operating revenues. Fiscal 2010 audited financials show unrestricted cash of $111 million or 630 days cash on hand. As of June 30, 2011, AIAS held $121 million in unrestricted funds or 660 days cash on hand. The airport generated coverage results ranging from 1.59x to 1.30x from 2004-2009. Coverage in fiscal 2010 was 2.17x due largely to management's decision to use available cash to pay down debt. Without the use of cash towards debt, 2010 coverage would have been closer to 1x. Given its large cash balance AIAS retains the option to use available cash to lower future year debt service.

Fitch scenarios contemplate conservative growth in cargo activity and enplanements in the near term. Meeting the minimum 1.25x debt service coverage ratio under the rate covenant could depend on the continued use of reserves absent a boost in operating revenues driven by growth in cargo and enplanement activities or through upward adjustments in airline fees and charges.

The airport's modest capital improvement plan totals $259 million and is primarily focused on enhancements to the airfield. The projects are funded from federal airport improvement program grants (AIP), passenger facility charges (PFCs), available cash, and bond proceeds from previous issuances. No future borrowing is currently anticipated.

Economic activity in the state is primarily focused on natural resource exploration; however, it is growing and diversifying. The state's unemployment rate for June 2011 was 7.5% compared to the national average of 9.1%. Alaska's strategic positioning on the Great Circle Route illustrates the geographic advantage of the System in serving principal passenger and cargo destinations of the national and international aviation systems.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance,' (Aug. 15, 2011);

--'Rating Criteria for Toll Roads, Bridges, and Tunnels' (Aug. 10, 2010).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

Rating Criteria for Toll Roads, Bridges, and Tunnels

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=646421

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Contacts

Fitch Ratings
Primary Analyst
Scott Zuchorski, +1-212-908-0659
Director
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson
Mike McDermott, +1-212-908-0605
Managing Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Scott Zuchorski, +1-212-908-0659
Director
Fitch, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Seth Lehman, +1-212-908-0755
Senior Director
or
Committee Chairperson
Mike McDermott, +1-212-908-0605
Managing Director
or
Media Relations:
Cindy Stoller, +1-212-908-0526
Email: cindy.stoller@fitchratings.com