Fitch Affirms Fresno, California's Airport Revenues; Outlook Stable

Fitch Ratings affirms its BBB rating on the City of Fresno, California's approximately $57 million in outstanding airport revenue bonds series 2000 and series 2007 issued on behalf of Fresno Yosemite International Airport (Fresno or the airport). The Rating Outlook is Stable.

Key Rating Drivers

--Small and Economically Limited Service Area: Fresno serves the captive origination and destination passenger base of California's vast agricultural-based central San Joaquin Valley; however, the airport's service area exhibits low wealth levels and very high unemployment rates. Further, Fresno's relatively small enplanement base of 605,732 in fiscal year 2011 (ended June 30) leaves the airport vulnerable to airline decisions to reduce/discontinue service that can result in volatility in air passenger service levels and enplanements.

--Revenues Highly Dependent on Passenger Volume: While the air carriers account for only 24 percent of operating revenues, the airport is highly reliant on passenger volume to generate revenues. Fresno had a competitive cost per enplanement of $7.83 in FY 2011 due to the high contribution of passenger facility charges and customer facility charges which are both passenger-driven non-airline revenues.

--Conservative Debt Structure: Fresno's debt is 100 percent fixed rate with a relatively flat and fully amortizing debt service profile. Reserves are fully funded, predominantly with cash, though the series 2007 bonds are supported by a surety from Syncora Guarantee Inc.

--Low Overall Leverage and Liquidity: Fresno's net debt-to-cash flow available for debt service of 2.6 times is low relative to peers. In FY 2011, the airport's indenture based debt service coverage decreased to 1.76x from 1.84x; however, it is expected to remain at 1.72x or higher through the forecast period. However, Fresno does not maintain an adequate level of unrestricted cash. This risk could be exacerbated should the airport be held accountable for Fresno Air Terminal Redevelopment Area expenditures.

--Modest Infrastructure Needs: Fresno made terminal and concourse improvements in 2000 and built a consolidated rental car facility in 2008. The five-year capital improvement plan is modest at $104 million and will be predominantly funded with airport improvement program grants with no additional borrowing planned. Only $1.5 million is funded annually from rates and charges to the airlines and the projects are generally discretionary.

What Could Trigger a Rating Action

--Erosion of coverage levels that become inconsistent with current rating levels.

--Increased volatility in enplanements.

--Utilization of a rate setting framework with carriers that limits cost recovery in the event of adverse business performance.

--Failure to build a larger liquidity base that can provide financial flexibility to cover unexpected declines in operating revenues.

Security

The bonds are secured by a pledge of net revenues from the airport, with eligible portions of outstanding debt receiving additional support from PFC and CFC revenues.

Credit Update

Fresno served a 100 percent O&D enplanement base of 605,732 passengers in FY 2011, up nearly 1 percent despite the loss of international service from August 2010 through April 2011. As a result of AeroMexico's and Volaris' replacement of bankrupt Mexicana, enplanements are up year-over-year each month since April 2011 between 6 percent-11 percent. Year-to-date FY 2012 enplanements through October are up 7.5 percent over the same period the year prior and management projects the year to end with 5 percent growth followed by 1.3 percent growth thereafter. While enplanements are improving, the relatively small base leaves the airport more susceptible to carriers' scheduling decisions and passenger volatility.

The airport has diversified its revenue stream with non-airline revenues currently accounting for approximately 76 percent of operating revenues. Fitch is concerned that the high percentage of non-airline revenues leaves the airport vulnerable to fluctuations in enplanement volumes. Rental income (at nearly 28 percent of operating revenues) is the largest contributor mainly as result of the fully operational CONRAC facility. Operating revenues increased 1.7 percent in FY 2011 while operating expenses decreased 0.8 percent resulting in net income growth of more than 10 percent. Operating revenues are expected to grow more rapidly in FY 2012 as a result of increased enplanements and Fresno's CFC rate change to $4.50 per transaction day up to a five day maximum from $10 per transaction, beginning Jan. 1, 2012.

Fitch notes that despite the net income growth, the airport's indenture based DS coverage decreased slightly in FY 2011 to 1.76x from 1.84x. Fitch views this as a credit positive, however, as the airport is relying less on PFCs to meet its DS obligations. Further, when treating PFCs as revenues instead of DS offsets, coverage actually increased in FY 2011 to 1.43x from 1.41x in FY 2010 and is projected by management to increase again to 1.47x in FY 2012 before stabilizing in the 1.6x to 1.7x range throughout the forecast period. Management is forecasting indenture based coverage in the 2.0x range.

Liquidity remains a concern for Fitch, given that unrestricted cash could be depleted should the airport not receive reimbursements related to FATRA expenses paid on behalf of other parties. Adequate reserves provide some degree of financial cushion since the airlines cover only a fraction of Fresno's operating expenses. However, the airport's leverage is moderate and net debt-to-CFADS is low relative to peers at 2.6x. Further, no new debt is anticipated as the airport's $104 million five-year CIP is modest and will be funded primarily with AIP grants and local Measure C taxes. Additionally, the airport made recent improvements to its terminal and concourse in 2000.

Additional information is available at 'fitchratings.com'.

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