NEW YORK--(BUSINESS WIRE)--May 17, 2006--Fitch downgrades the rating on Susquehanna Area Regional Airport Authority's (the authority) approximately $75.2 million of outstanding subordinate airport system revenue bonds (subordinate bonds) to 'BBB-' from 'BBB'. At the same time, Fitch affirms the 'BBB+' rating on the authority's approximately $133.5 million of outstanding senior airport system revenue bonds (senior bonds). A pledge of subordinate net revenues of the airport system secures the subordinate bonds, while a pledge of airport system net revenues secures the senior bonds. Additionally, receipts of a Federal Aviation Administration Airport Improvement Program (AIP) grant are pledged to repay a portion of subordinate lien debt service and passenger facility charge (PFC) revenues are irrevocably committed to offset a portion of senior lien debt service. The Rating Outlook is Stable.
The rating downgrade to 'BBB-' on the subordinate bonds reflects an increasingly constrained financial picture stemming from the continued loss of scheduled seats and passenger traffic at Harrisburg International Airport (MDT), the authority's primary revenue generating asset, as a result of air carrier decisions to redeploy capacity away from MDT to larger hub markets. These downward trends began during mid 2005 and continued into 2006, with airline seats and passenger volumes down roughly 20% and 16%, respectively for the month of March 2006 compared to the same month in the previous year. As a result of this loss in traffic, financial margins for 2005 are tighter than previously expected yielding coverage of senior and subordinate bonds debt service (total debt service) well below levels originally forecast. Though the airport's weakening business profile also impacted the 'BBB+' rated senior bonds, the lower leveraged nature of this lien makes the operational declines far more manageable.
Credit strengths which continue to support investment grade ratings on both the senior and subordinate bonds include the airport's highly origination & destination oriented traffic base and economically diversified service area, home to the state capital of Pennsylvania, which provides for a base level of airport traffic, albeit small, over time; a hybrid use & lease agreement which allows the authority to raise airport rates and charges to meet bondholder covenants thereby lending a degree of stability to airport financials independent of traffic trends; sound coverage of debt service on senior bonds and adequate coverage of total debt service; and experienced management, highlighted by their ability to secure significant federal and state funding support for MDT's recently completed terminal redevelopment and their financial prudence in operating the airport system. Key credit considerations include significant regional competition for air service, particularly from Baltimore-Washington International Airport (Passenger Facility Charge (PFC) revenue bonds; rated 'A' by Fitch) and Philadelphia International Airport (general airport revenue bonds; rated 'A' by Fitch), both of which house a sizeable operation for Southwest Airlines (senior unsecured debt; rated 'A' by Fitch) and other low fare carriers; and an above industry average airline cost per enplaned passenger (CPE).
The Stable Rating Outlook is based upon Fitch's expectation for stable financial performance and debt service coverage, supported by enplanements at or near current levels.