Fitch rates Denver International Airport, Colorado's $115MM Revs 'A+'; outlook stable

The series 2010A bonds will be issued as fixed-rate tax-exempt bonds with proceeds to be used to refund or defease the airport's series 2008A-2 term bonds. The par size for the series 2010A bond issue may be adjusted higher should the city elect to defease all or a portion of the outstanding airport system revenue bonds series 2008A3 and 2008A4 bonds. Separately, the city may issue up to two additional series of airport revenue bonds for refunding opportunities, subject to market conditions. Fitch will rate the additional series of bonds prior to issuance.

In addition, Fitch affirms the 'A+' rating on the city's approximately $4.1 billion in outstanding airport system revenue bonds. All airport system revenue bonds are payable from the net revenues of the airport system. The Rating Outlook on all bonds is Stable.

The 'A+' rating reflects the large and diverse economy of the Denver Metropolitan Area, the favorable balance and resiliency of DIA's origination and destination (O&D) and connecting passenger traffic, the airport's geographic location that positions Denver favorably for ongoing domestic hubbing activity, the growing presence of low-cost carriers that continues to moderate United Airline's (UAL, Fitch Issuer Default Rating of 'CCC') large market share, and favorable rate setting provisions under use and lease Additional information is available at 'www.fitchratings.com'.agreements that consistently produce sound financial results. Credit concerns include the already high and still increasing debt levels coupled with the potential upward trend in airline costs associated with the implementation of the current multi-year capital program. Fitch also notes that the weakening credit quality of Denver's anchor carrier, UAL's , and the recent bankruptcy developments of Frontier do introduce some near-term risks to the ability of the airport to maintain its overall positive air service trends. Additionally, despite successful restructurings of certain variable-rate debt and interest rate swaps since 2008, DIA still retains nearly $1.2 billion of variable-rate obligations or debt in term mode, which exposes the airport to volatility amongst the swap counterparties and liquidity providers, as well as stabilization of debt interest costs.

The airport serves not only as the primary commercial airport for the Denver metropolitan area, but for the entire eastern Rocky Mountain area in general, providing natural regional connecting traffic to complement the national hubbing operation of United. Overall, the scheduled carriers provide non-stop service to a relatively large 130 domestic and international destinations. The airport served a record 25.6 million enplaned passengers in 2008 but subsequently faced a modest 2% decline in enplaned passengers in 2009. Originating passengers accounted for approximately 54% of total enplanements, representing an adequate local component of overall traffic for a major connecting hub facility.

United remains the airport's largest carrier, although its aggregate share of enplaned passengers declined to 46.2% for the current year versus 59% in 2004. While United's dominance continues to diminish, the airline still represents the largest contributor to airline-based operating revenues, thus its scheduling decisions could significantly influence the overall financial operations of the airport. To date, United's service reductions at DIA (approximately 7% as compared to 2008 levels) have not been as severe as UAL's overall system cutback in operations.

Denver-based Frontier has steadily increased its share of passengers at DIA to over 25% in 2008, up from 16.7% in 2004 and serves to offset the dominance of United. Frontier had previously filed for bankruptcy protection in April 2008 but emerged from bankruptcy in October 2009 as a subsidiary of Republic Holdings, Inc. While Frontier is expected to retain its large presence at Denver, the level of service and business strategy may be subject to changes following the closing of the Republic acquisition. Year-to-date figures through July indicate that Frontier has reduced DIA's seating capacity and passenger traffic by nearly 9% from last year.

The airport's third-largest carrier, Southwest Airlines, also continues to aggressively grow its market share at the airport. After resuming service at the airport in January 2006 following a 20-year hiatus, Southwest provided 14.4% of total enplanements in 2009, up from just 5.3% in 2007. Fitch expects Southwest to at least maintain its current service level at DIA although capacity reductions are a possibility given the current challenges in the aviation sector.

The airport system's use and lease agreements utilize a strong compensatory methodology for setting fees and charges in the terminals and residual methodology at the airfield facilities, which together have resulted in sound financial operations during years of traffic expansion. The rate setting structure has allowed the airport to build sound debt service coverage levels on all debt in excess of 1.60 times while similarly providing annual credits to the signatory carrier charges of up to $40 million per year. However, Fitch notes that approximately 50% of total operating revenues are derived from airline payments, a level generally above average for a large-hub airport. Concession revenues (including parking) also contribute approximately 30% of airport revenues while annual passenger facility charge (PFCs) collections in excess of $95 million are applied to offset debt service payments, and in future years, will also be deposited into the airport's revenue fund. Airport cash reserves have remained notably strong with nearly $420 million of unrestricted fund balances in fiscal 2008.

Taking into account the large growth trends in passengers since the early part of the decade, the cost per enplanement (CPE) has trended downward. The fiscal 2008 CPE is estimated at $10.95 as compared to over $15 in 2002. Fitch notes the updated $583.5 million capital improvement plan (CIP) through 2012 will be largely debt financed and could pressure CPEs at the current enplanement level. The consultant's forecast, based on both low traffic growth rate assumptions and issuance of nearly $400 million of additional debt obligations indicate the CPE level rising to over $15 by 2015. Any unanticipated declines in traffic given the current market conditions could either exacerbate the increases in CPE or lead to tighter financial flexibility. Fitch believes that management has adequate resources to cushion airline charges and maintain sound coverage levels in the event a downturn in traffic occurs.

Following the issuance of the series 2010A bonds, the airport's capital structure will include $1.2 billion in variable-rate exposure or bonds with term modes, which together translates to approximately 25% of more than $4.1 billion in total revenue debt. Much of the variable-rate bonds have associated interest rate swaps for purposes of hedging interest costs. Fitch notes that the debt restructuring actions taken by the airport since 2008 to address weakening counterparty credit have provided greater stability with regard to interest rate resets for the outstanding debt. Still, the large balance of variable-rate exposure and swaps agreements could lead to future rate volatility and ongoing risks to counterparty performance. Thus, management of the debt portfolio will remain an important consideration to the airport's credit.

(c) Centre for Asia Pacific Aviation. Date posted: 12-Feb-10