OREANDA-NEWS. Fitch Ratings has affirmed the 'A+' rating on the Louisville Regional Airport Authority, KY's (the authority) approximately $232 million of outstanding airport revenue bonds. The Rating Outlook is Stable.

KEY RATING DRIVERS

The 'A+' rating reflects Louisville International Airport's (SDF) continued stable operational and financial performance as well as its moderate costs and declining leverage. Diversity is supported by a well-balanced passenger carrier mix supplemented by United Parcel Service of America's (UPS) strong presence and growing operational cargo activity. Passenger airline cost per enplanement (CPE) remains at a competitive level of around $6 while the authority's financial profile is well positioned, with declining leverage, stable non-airline revenues, sound debt service coverage ratios (DSCR) and a strong liquidity position. Comparable peers to SDF include Alaska and Memphis airports, both with strong, established cargo hubs as part of the aviation operations.

Revenue Risk - Volume: Midrange
Diversified Carrier Base & Some Cargo Exposure: SDF's established service area with limited competition supports nearly all of the airport's predominantly origination and destination (O&D) enplanement base of 1.7 million in fiscal year (FY) 2015 (ending June 30). SDF's central role in the UPS air freight network as well as UPS's demonstrated commitment to the airport helps diversify SDF's revenue stream from reliance on passenger carriers. However, it also exposes the airport to cargo sector risk that fluctuates significantly with the economy. While Delta Air Lines (IDR: 'BB+'/Positive Outlook) when including its regional affiliates represents just over 30% of passenger traffic, SDF still retains some operational concentration from UPS, which accounts for over 82% of landed weight and approximately 26% of operating revenues.

Revenue Risk - Price: Midrange
Adequate Contractual Framework: The airline use and lease agreements, one for the terminal facilities and one for the airfield, run through FY21. Rate setting utilizes a hybrid compensatory approach, which coupled with strong non-airline revenue generation, provides adequate overall cost recovery terms. Agreements cover about 50% of the airport's total cost base. SDF's airline charges are comparatively low with CPE of $6.56 in FY15.

Infrastructure Renewal/Obsolescence: Stronger
Modest Capital Needs: The authority's five-year capital program (FY17-FY21) of approximately $147.8 million appears manageable in size and flexible in execution. Funding is largely dependent on grants and internal resources, with no plans to issue debt in the next five years.

Debt Structure: Stronger
Conservative Debt Structure: All debt is fixed rate with a descending debt service profile. Maximum annual debt service (MADS) of $27 million is scheduled in fiscal 2017, with debt service declining to approximately $16.5 million in fiscal 2025 and declining thereafter through maturity in fiscal 2038. Covenants are generally standard for airport sector credits and all bond reserves are expected to be cash funded.

Fiscal 2015 Financial Metrics:
Low Leverage and Healthy Liquidity: SDF has a favourable net debt/cash available for debt service (CFADS) ratio of 3.50x complemented by healthy balance sheet liquidity (632 days cash on hand) and available reserves. Fitch expects leverage to gradually decline given the lack of new debt over the next five years. Resolution based DSCR, taking into account SDF's coverage fund and debt service offsets, was 1.93x in FY15, up from 1.73x the previous year, with net coverage from cash flow improving in FY15 to 1.60x compared with 1.39x last year. Fitch expects future coverage ratios to remain at similar levels due to the declining debt service profile and adequate revenue base.

Peers:
In Fitch's view, SDF's relevant peers include airports in Memphis ('A'/Stable Outlook) and Alaska ('A+'/Stable Outlook) as both also depend on a large amount of cargo revenue. SDF currently maintains higher coverage levels, better liquidity, a smaller capital improvement plan (CIP), and less debt obligations.

RATING SENSITIVITIES

Negative - Major changes in UPS's commitment to the airport for airfreight operations and/or significant reduction in passenger airline services.
Negative - Authority's inability to manage the airport system cost profile, putting pressure on debt coverage metrics or raising CPE above expected levels.
Negative - Additional debt, not currently expected, leading to either higher leverage metrics or a dilution of debt service coverage.
Positive - Given the airport's enplanement base and volume risk profile, a higher rating is not expected in the near-term.

CREDIT SUMMARY

Recent enplanement levels demonstrate more stable performance in contrast to a large 14% drop in FY09. Enplaned passenger levels were slightly under 1.7 million in FY15, down 0.2% compared to the prior year, although the five year compound annual growth rate (CAGR) remains a modest positive 0.3%. Through February of FY16, enplanements are also up a very modest 0.7%. SDF maintains a diverse carrier mix, with Delta Air Lines (IDR: 'BB+'/Positive Outlook) as their main carrier when including regional affiliates, enplaning 30.3% of all passengers, and Southwest Airlines (IDR: 'BBB+'/Positive Outlook) as the second largest single carrier representing 29.8% of enplanements.

UPS' headquarters and central sorting depot for air freight operations at SDF complements its passenger operations. Airport cargo business has demonstrated resiliency to recent economic recessions, and UPS continues to invest significantly in infrastructure. UPS accounted for 98% of cargo passing through the airport and 82% of landed weight during FY15. Cargo flight operations were up by 4%, and cargo volume increased 3% in FY15. Management expects to see continued moderate growth in cargo volumes and expects UPS to continue to be in the 84% - 85% range of landed weight.

FY15 total operating revenues increased 4.8% to $65.2 million due to significant increases in both rental car revenues and parking revenues. The five year CAGR was positive at 2.58%. Non-airline revenue increased by 8% and accounted for 57.5% of total operating revenue, while airline revenues accounted for 42.5% and increased by 1%. Cargo and passenger airline revenues represented 43.2% of total operating revenues for FY15, with UPS contributing 26% of total operating revenue. Operating expenses declined by -2% in FY15 due to decreased administrative costs. FY16 year-to-date operating revenues are nearly flat while operating expenses are up +2% due to salaries and contract services compared to the same months in FY15.

SDF's two use and lease agreements establish a hybrid rate structure, with a compensatory methodology used for terminal charges and a residual methodology used for the airfield. Collectively, these agreements provide adequate cost recovery at competitive costs to the signatory airlines. The airport's FY15 CPE of $6.56 was largely in-line with previous forecasts and below last year's level, and is expected to decline to and be maintained at the $6.30 level over the near-to-medium term.

SDF has a revised five year CIP FY17-FY21 that totals $147.8 million and includes mostly federal grants (59%) and authority funds (40%), with PFC's/CFC's making up the remainder. No near-term debt issuances are planned, and no significant projects are deferred or being contemplated for deferral. The most significant projects are ongoing airfield improvements and terminal building rehabilitation.

Fitch's base case scenario assumes enplanements to grow at a nominal 1% five-year CAGR, with revenue and expense growing at CAGRs of 0.3% and 2.3%, respectively. Resolution-based DSCR remains stable compared to current levels at more than1.8x, while CPE also remains in the competitive $6.10 to $6.30 range. Fitch-calculated coverage, which excludes the authority's coverage account and counts PFCs as revenues, remains above 1.55x. Fitch's rating case stresses enplanements by -4% in FY17 followed by a moderate recovery from FY18 to FY20, resulting in a 0% growth rate over the forecast period. The rating case further assumes that non-aviation revenue follows enplanements with total operating revenues posting a slight decline with a five-year CAGR of -0.1%. Additionally, given the decrease in enplanements, the rating case also assumes that the airport defers some maintenance items to manage costs resulting in a 3.6% five-year operating expense CAGR. Resolution-based DSCR is maintained above 1.72x, while CPE remains below $6.58. Fitch-calculated coverage would remain above 1.46x. Leverage in both the base and rating case evolves down below 2.0x. Results from the base and rating cases demonstrate performance in line with the 'A' rating category.

SECURITY
The bonds are secured by a pledge of net airport system revenues. The authority also applies PFC funds and customer contract fees to pay debt service.