Fitch Affirms Albuquerque's (NM) Airport Sr. Revs at 'A+'; Sub Revs at 'A'; Outlook Stable

Fitch Ratings has affirmed the 'A+' rating on the $12.4 million outstanding senior lien airport revenue bonds and the 'A' rating on the $7.5 million outstanding subordinate lien airport revenue bonds issued by the city of Albuquerque, New Mexico on behalf of the Albuquerque International Sunport. Fitch does not rate the airport's privately-placed $37.7 million senior lien parity airport revenue bonds. The Rating Outlook on all Fitch-rated debt remains Stable.

KEY RATING DRIVERS

The ratings reflect the airport's monopoly within the state combined with strong financial performance, competitive airline costs, extremely low leverage and a short amortization profile. The traffic outlook remains a primary concern as enplanements have steadily declined since 2008 and have continued through the most recent fiscal year. In the near term, traffic stresses are likely in light of the recent expiration of the Wright Amendment at Dallas Love Field. However, the airport's stable financial performance, rapid deleveraging, and strong liquidity position mitigate the operational challenges facing the airport.

Revenue Risk - Volume: Weaker

Limited Competition, Negative Traffic Trend: The airport provides primary commercial air service for the state of New Mexico, with limited competition. A degree of concentration risk exists with Southwest Airlines Co. (Southwest, rated 'BBB'/Positive Outlook by Fitch), representing 56% of the 2.5 million enplanements in fiscal 2014 (ending June 30); however, this risk is partially mitigated by a high O&D traffic profile, at approximately 92% of enplanements. Nonetheless, traffic has fallen 27% since the peak in 2008 and more losses are possible through at least 2016.

Revenue Risk - Price: Midrange

Hybrid Agreement, Manageable Costs: The hybrid airline use and lease agreement, which expires in 2016, provides relatively stable financial and operating results and airline cost per enplanement (CPE) levels. Management's effort to contain costs and maximize non-airline revenue has resulted in a relatively competitive airline cost profile, which should keep CPE levels under $9 over the next five years.

Infrastructure Development & Renewal: Stronger

Affordable Capital Improvement Plan: No additional debt needs are expected over the next five years to support the airport's $166 million capital program. Additional revenue from an increased passenger facility charge (PFC) rate (raised to the maximum rate of $4.50) provides further financial flexibility to support the airport's capital improvement needs on pay-as-you-go basis.

Debt Structure: Stronger (Senior Lien); Midrange (Subordinate Lien)

Conservative Debt Profile: All outstanding debt is fixed rate with a remaining weighted average life of 1.8 years.

Financial Metrics

Low Leverage, Robust Liquidity: The airport maintains sufficient balance sheet liquidity, at 512 days cash on hand, and low leverage, at $23 per enplaned passenger or 1.0x net debt-to-cash flow available for debt service (CFADS). Strong debt service coverage ratios (DSCR), at 2.4x on the senior lien and 1.5x at the aggregate level in fiscal 2014, are expected to be maintained given the airport's declining amortization profile.

Peer Group: The airport's peer group includes Boise, Idaho ('A+'/Stable Outlook) and El Paso, Texas ('A'/Stable Outlook). The airports each feature high DSCR, low leverage and a moderate CPE level commensurate with their respective carrier base. Additionally, Albuquerque and El Paso are both experiencing effects from the Wright Amendment expiration, which may result in additional traffic weakness in the near term.

RATING SENSITIVITIES

Negative - Traffic Performance: A steepening level in enplanement traffic declines, greater than moderate single-digit reductions currently anticipated by management, could pressure the rating;

Negative - Financial Metrics: Additional debt for capital projects, not currently expected, leading to either higher leverage metrics or a dilution in DSCR would have a negative effect on credit quality;

Positive: Given the airport's size and traffic profile, positive rating action is unlikely.

CREDIT UPDATE

The airport's traffic base continues to experience a downward trend as enplanements in fiscal 2014 fell 4.0% and have fallen an additional 3.7% in fiscal 2015 through January. Historically, connecting Southwest passengers accounted for approximately 11% of total enplaned passengers; however, this is expected to decrease to a level closer to 1.5% as Southwest is no longer required to stop in Albuquerque when flying to west coast destinations from Dallas Love Field. Furthermore, after accounting for the merger with AirTran, which resulted in a reconfiguration of flight frequencies and equipment, Southwest enplanements have fallen 15%, to 1.4 million, since fiscal 2012. Looking forward, Southwest enplanements are expected to stabilize at 1.1 million through 2020 - resulting in 2.2 million total enplanements.

Airport management has been proactive in marketing to new carriers in order to offset Southwest's declining enplanement base. Alaska Airlines (part of Alaska Air Group Inc., rated 'BBB-'/Stable Outlook) began daily nonstop service between ABQ and Seattle in September 2014 while Boutique Air commenced service to Silver City in January 2015, operating up to four flights daily. US Airways will introduce seasonal nonstop service to Charlotte, NC in June 2015, and JetBlue Airways Corp. (rated 'B+'/Stable Outlook) is expected to sign a use and lease agreement as a signatory carrier. However, the American-US Airways merger is expected to result in capacity reductions similar to those experienced with Delta-Northwest and United-Continental. Pacific Wings, serving flights to Carlsbad and Los Alamos, will cease all operations by June 30, 2015.

The weakening enplanement profile has affected the airport's operating margin moderately, as it has recently fallen below its historical average. Due to passenger level effects on non-airline revenue, total operating revenue decreased 2.3% in fiscal 2014 while operating expenses marginally increased 1.3% due to an increase in contractual services. The airport, however, is actively managing its cost profile and Fitch notes that expenses year-to-date are currently tracking 4% lower than over the same period in fiscal 2014.

Given the rating levels on the airport's debt as well as recent enplanement trends, Fitch focused on stressing the airport's operating profile. Fitch formulated a rating case that decreases enplanements in fiscal 2016 to 2.17 million with only minor recovery thereafter. Five-year growth rates in operating revenue and operating expenses are -2.5% and 3.2%, respectively, which incorporate some of the airport's projections for airline revenue but do not give the airport full credit for its ability to manage costs in a stressed traffic environment, and result in a -12% growth rate in CFADS. However, despite these stresses, this scenario still results in improving coverage and leverage metrics as the airport's debt service obligation over the forecast period decreases from $24 million in fiscal 2014 to $5.7 million in fiscal 2019. CPE in this scenario hovers around $9.

SECURITY

The bonds are secured by the airport's pledge of net revenues from operations.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Rating Criteria for Infrastructure and Project Finance' (July 11, 2012);

--'Rating Criteria for Airports' (Dec. 13, 2013).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682867

Rating Criteria for Airports

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725296

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983608

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