OREANDA-NEWS. Fitch Ratings has affirmed Cleveland, Ohio's approximately $724.2 million of outstanding airport system revenue bonds at 'BBB+'. The Rating Outlook has been revised to Stable from Negative.

Cleveland also has $91.3 million in parity series 2013A and 2014AB bonds purchased by U.S. Bank National Association that are not rated by Fitch.

The Outlook revision to Stable is a result of a stabilization and solid rebound in enplanements following 16 months of enplanement declines due to United sharply reducing its flight operations at Cleveland starting in mid-2014. Enplanements have grown at an average monthly year-over-year rate of 15% between May-September 2015 and are on track to finish 2015 with positive growth in the 5% range. The entry of low-cost carriers backfilling routes and higher parking revenues from non-connecting passengers have helped maintain stable operating revenues. Furthermore, negotiations continue on an extension of the residual use and lease agreement that expires at year end. Fitch does not expect any material changes from the residual rate-setting policy with the new agreement.

The rating reflects a midsize airport market with uneven traffic performance, high average airline costs, and leverage offset by modest capital requirements, sound liquidity and stable coverage metrics. The recent shift to a regional origination/destination (O&D) airport has been supported by the entrance of low-cost carriers which has helped diversify the carrier options as the airport has shifted form 68% United in 2013 to only 31% today.

KEY RATING DRIVERS

Revenue Risk - Volume: Midrange
Midsize Market Transitioning: Cleveland's total traffic base is approximately 4 million enplanements and United remains the dominant carrier at Cleveland, although at lower concentration levels after its decision to eliminate its connecting-based operations as well as some O&D service. Low-cost carriers have entered the market, helping to backfill routes and lower average ticket prices.

Revenue Risk - Price: Midrange
Above-Average Cost Profile: Airline revenues represent a relatively high share of airport operating revenues. The high average airline cost structure ($21.56 CPE for 2014) is substantially a burden on United due to their special facility leases for Concourse C and D, through 2019 and 2027, respectively. The non-United carriers have more competitive CPE levels with which to operate from Cleveland. The existing airline agreement is residual-based rate-setting and provides ongoing revenue protections to volume fluctuations.

Infrastructure & Renewal Risk: Stronger
Moderate Infrastructure Plan: The airport's infrastructure is viewed to be in sound condition and the five-year capital improvement program (CIP) is estimated at $157.8 million funded through grants, existing bond proceeds, or private investment.

Debt Structure: Stronger
Conservative Debt Structure: The system's debt is approximately 84% fixed-rate debt and 16% unhedged variable-rate bonds. Bond documents provide for solid reserves and adequate coverage requirements.

High Debt and Strong Liquidity: The airport's total net debt-to-cash flow available for debt service (CFADS) is elevated at 8.53x. A strong balance sheet with reserves equating to 476 days cash on hand helps mitigate potential traffic and operating revenue volatility. Debt service coverage is stable in the 1.35x-1.40x range, including use of coverage funds.

Peer Group: The airport's peers include St. Louis, Missouri ('BBB+'/Stable Outlook) and Allegheny County, Pennsylvania ('A-' /Stable Outlook). Each airport had previously been a domestic hub and has transitioned to a primarily O&D airport. All three airports have a high CPE but Cleveland has both the highest leverage and CPE. Allegheny County's low leverage supported by a residual agreement separates itself into the 'A' category.

RATING SENSITIVITIES

Negative - Further traffic deterioration going beyond the connecting traffic;

Negative - Changes to the airline rate-setting methodology creating either weaker cost recovery terms or weaker financial metrics;

Negative - Significant uses in airport cash balances to subsidize airline charges or cover capital expenditures may impair financial flexibility;

Positive - Sustained traffic growth that allows for average airline costs to evolve to a more competitive range could support a consideration for a higher rating.

CREDIT UPDATE

In 2014, enplanements declined 16.1% to 3.8 million from 4.5 million in 2013 due to United's reduction in service. Low-cost carriers have begun operating at Cleveland (Frontier, Spirit, and JetBlue) and along with all incumbent airlines (except United) adding flights and seats has helped backfill routes. O&D percentage is currently over 90% reflecting the underlying strength of the local market. Traffic through the first nine months of 2015 has rebounded and is up 4.1%. United's market share is down to 31% from 51% in 2014, while American has increased to 17% from 7%, Frontier to 12% from 8%, and the 2015 new entrant Spirit at 8%.

The airport continues to work through their two-part negotiation process with the use and lease agreement that expires at the end of 2015. The first part is with United on their terminal location over the next 14 years through their Special Facility Leases while the second part is updating the basic terms of the agreement with all signatory carriers. The average CPE has risen so far from $13.77 in 2013 to $21.56 in 2014. These levels are amongst the highest for a domestic-focused airport. Fitch will monitor any changes in the agreement that could affect the airport's ability to recover costs.