OREANDA-NEWS. Fitch Ratings affirms Tucson Airport Authority, Arizona's (the authority) \\$53.3 million of outstanding subordinate lien airport revenue bonds at 'A'. The Rating Outlook is Stable.

The 'A' rating reflects Tucson International Airport's (TUS, or the airport) strong financial position, with robust cash balances, high debt service coverage ratios (DSCRs), negative leverage, and sizeable non-aeronautical revenue generation. The airport also benefits from a fully residual airline use and lease agreement (AUL) that has long provided for a solid cost recovery framework, and an affordable capital program. These strengths are somewhat offset by the airport's small enplanement base which contracted significantly since the recession and material competitive pressure from Phoenix Sky Harbor International Airport (PHX).

KEY RATING DRIVERS

Revenue Risk- Volume: Midrange
Small O&D Hub with Diversified Carrier Base: The airport's carrier base is moderately diversified with an origination and destination (O&D) traffic base equal to 98% of enplanements, providing a degree of stability compared to airports with higher connecting traffic loads. These strengths are balanced by TUS's small enplanement base which has contracted more than 25% from its fiscal 2008 peak levels and continued declining into fiscal 2015. Also, TUS operates in a competitive environment, with PHX serving more markets with greater frequencies.

Revenue Risk- Price: Stronger
Solid Cost Recovery Framework: The airport operates under a residual AUL, effective through fiscal 2016, which has allowed the airport to maintain an historically stable cost per enplanement (CPE), produce consistently strong DSCRs at or above 2x, and fund capital expenditures with surplus cash flows.

Infrastructure Development & Renewal: Stronger
Manageable Capital Needs: TUS's facilities are modern and its five-year capital improvement plan is affordably sized to \\$133 million with the vast majority of funding sources derived from federal, state, or restricted local sources. Beyond the five-year horizon, the authority anticipates capital costs of \\$113 million to complete an airfield safety project which is expected to be fully funded with grants, passenger facility charges (PFCs), or debt that would be fully paid with PFCs.

Conservative Debt Structure: Debt Structure - Midrange
The airport's senior bonds matured in fiscal 2013; however, additional senior-lien borrowings are still permitted under the bond documents. The outstanding subordinate debt is all fixed rate, fully amortizes, and matures in fiscal 2031. Annual debt service is flat through fiscal 2027, steps down significantly in fiscal 2028, and remains flat through maturity. The debt service reserve fund (DSRF) for the series 2006 debt is fully cash funded, while the series 2001 DSRF is met with a surety.

Strong Financial, Leverage Metrics: The airport's financial position is very strong, with 1,507 days cash on hand (DCOH) and debt service coverage in excess of 3.5x. Leverage is negative, indicating that available cash levels exceed outstanding debt.

Peers: Amongst its small airport peers at the 'A' rating level, such as Reno (NV) and El Paso, TUS exhibits stronger liquidity and debt service coverage, and lower single-carrier concentration. These strengths are somewhat offset by TUS's higher CPE.

RATING SENSITIVITIES

Negative:
-- A substantial increase in CPE and corresponding decline in regional competiveness, resulting in the loss of carrier service.
-- Severe financial deterioration, whether caused by a significant loss of enplanements, excessive leveraging, or other events.
-- A further substantial decline in enplanement levels or carrier diversification.

Positive:
-- The airport's small enplanement base and strong regional competition will likely prevent the rating from migrating upwards.

SUMMARY OF CREDIT

The airport's level of enplanements continued falling in fiscal 2015 by an estimated 1.9% to 1.6 million. Enplanements fell in six of the past seven years, reflective of airline supply reductions, the impact of the recession on the Tucson economy, strategic moves by airlines to consolidate operations at larger airports, and competition from PHX. Management believes these factors have largely run their course, and is cautiously optimistic that announced service additions and an improving local economy will result in a modest 1%-2% enplanement increase in fiscal 2016. Fitch views management's rationale as reasonable and the base case rating scenario, described below, assumes enplanement growth at the bottom range of management's expectations.

Audited total operating revenues fell in fiscal 2014 (ended September 30) by 2.9%, reflecting the formation of a carrier fueling consortium such that the airport no longer provides the service, and a reduction of debt service costs and related airline cost reimbursements due to the retirement of the airport's senior debt service. These factors were more than offset by a 3.1% expenditure reduction and reduced debt service costs, resulting in a DSCR increase in fiscal 2014 to 3.55x (3.52x excluding payments from an airline fund reflecting prior year operating surpluses) from 2.47x (2.25x) the year prior. DSCRs are estimated by management to improve further in fiscal 2015 to 4.02x (3.65x), reflecting a 5.6% revenue gain and a slight reduction in expenditures. Most of the revenue gain reflects a larger transfer payment from the airport's airline fund.

Audited fiscal year-end 2014 cash levels increased to a very high \\$119 million (1,570 DCOH) from \\$113 million (1,438 DCOH) the year prior. Approximately \\$35 million to \\$40 million of the unrestricted cash has been set aside to offset an environment remediation liability, per board policy. Management targets cash levels of at least 365 DCOH on top of the environmental reserve, which Fitch views as prudent.

Fitch's base case scenario, which uses estimated fiscal 2015 data and ongoing 1% enplanement growth, results in debt service coverage of 4.02x in all years and CPE that escalates gradually from \\$8.41 in fiscal 2015 to \\$9.17 in fiscal 2020. Fitch's rating case assumes that a typical recessionary environment results in 7.5% enplanement losses in both fiscal 2016 and 2017, followed by a recovery with 3% growth through the end of the forecast in fiscal 2020. The scenario also assumes management reduces costs, as it had in the prior recession, by 5% in fiscal 2016 and 2017, followed by growth of 3.5% annually through fiscal 2020. Due to the residual nature of the airport's AUL, the DSCR is held steady at 4.02x while CPE rises significantly to a peak of \\$10.74 in fiscal 2017 from \\$8.41 in fiscal 2015, declining thereafter.

SECURITY

The bonds are secured by a pledge of PFCs and a subordinate pledge of general airport net revenues. The bonds are additionally secured by debt service reserve funds.