"Fitch Rates $117MM Los Angeles Intl Airport Revs 'AA'"

Wednesday, April 2, 2003

Fitch Rates $117MM Los Angeles Intl Airport Revs 'AA'
Business Wire


NEW YORK--(BUSINESS WIRE)--Fitch Ratings assigns a 'AA' rating to
$117,000,000 Department of Airports of the City of Los Angeles (LAWA),
California, Los Angeles International Airport (LAX) revenue refunding bonds,
2003 series B. The 2003 bonds are scheduled to sell competitively on April
16. Fitch also affirms the 'AA' rating on $244,335,000 in outstanding parity
LAX revenue bonds. The Rating Outlook for the 2003 bonds and parity debt is
Negative, reflecting uncertainty in the airline industry and United
Airlines' future, the likelihood of increased costs regarding the LAX Master
Plan, and principally the commenced war operations in Iraq that has already
depressed air travel in the U.S. Pledged revenues for the 2003 series B
bonds consist solely of moneys derived from LAX's operations. Bond proceeds
will be used to refund portions of LAWA's series 1995A and 1995D LAX revenue
bonds. 

LAWA owns and operates LAX (the airport), Ontario International Airport
(ONT), Van Nuys Municipal (VNY), and Palmdale Regional Airport (PMD). LAX is
the 3rd largest passenger airport in the world and provides 71% of all
domestic commercial passenger service and 99% of all international flights
within the Los Angeles metro area. The airport has a 67% origination and
destination (O&D) ratio. This O&D ratio is a credit strength since the
airport serves the second largest market in the U.S. and accounts for 48% of
California's (or 5.8% of the U.S.) total population. 

The 'AA' rating reflects LAX's extremely strong financial position,
illustrated by low debt levels and healthy cash balances. Airport management
utilizes a compensatory rate-setting methodology (cost-based), which
generates excess cash for reserves on an annual basis. This rate-setting
methodology affords management the ability to set reasonable rates and fund
most airport improvement projects with cash. Terminals two, four, five, six,
seven, and eight were either built or renovated with third-party financing
at little or no cost to LAX, but until the long-term leases expire airport
management has little control over these facilities. The prevalence of 3rd
party financing at LAX explains its exceptionally low debt levels. Debt
service was 5% of total operating revenues during 2002, very low for an
airport this size. Current unrestricted cash balances are roughly $500
million, roughly a very high 2:1 cash to debt position. Management's cash
policy establishes a floor of $200 million of working capital and a reserve
fund set at 25% or higher of annual budgeted operating expenses. Financial
margins are also bolstered by the high level, 59% of total operating
revenues in 2002, of non-airline revenues generated annually. LAX's cost per
enplaned passenger of $5.82 in 2002 was lower than any comparable airport in
the U.S. 

Credit concerns primarily include the commenced war in Iraq and its
subsequent effect on U.S. air travel -- primarily at international gateway
airports -- and the need to expend considerable airport funds to modernize
LAX. Although the Master Plan remains vague and unquantified at this time,
it is likely that LAWA will expend billions of dollars to improve LAX's
airfield and landside facilities in the future which may constrict the
airport's financial flexibility. Additionally, due to the use of 3rd-party
terminal development, airport management lacks terminal and space usage
flexibility, which constricts management's ability to maximize efficiency
and accommodate new entrant carriers. If LAX chooses to redeem any
outstanding special facility bonds used as 3rd party financing, Fitch will
review this credit. 

Since Sept. 11, LAX has also been plagued by a 20% decline in passenger
traffic, due largely to the termination of Shuttle by United, American
Airlines service reductions, and the weakening in trans-Pacific traffic.
Fitch also recognizes the credit risk relating to United Airlines' (UA) 19%
market share at LAX in FY2002 and potential service reductions if the
carrier's parent company (UAL) declares bankruptcy. Despite its passenger
marketshare, UA accounted for 8% of LAX's total revenues in FY2002. Fitch
believes that if UA is to cease operations, it is highly probable another
carrier would take over its LAX routes, and the disruption would be likely
be in short term, but mitigated by LAX's strong cash position.


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