"St. Louis Airport Downgraded as American Announces Cutbacks"

Monday, July 21, 2003

St. Louis Airport Downgraded as American Announces Cutbacks
Bond Buyer - The American Banker


CHICAGO, After two days digesting American Airlines' announcement that it
would dramatically scale back operations at Lambert St. Louis International
Airport, the rating agencies acted on Friday, with one of them knocking the
city's airport debt down into the triple B-category and the others warning
that they may soon follow suit.

The action of Standard & Poor's analysts was the most severe. The agency
downgraded the airport's nearly $1 billion of outstanding general airport
revenue bonds to BBB-plus from A-minus and placed the credit on its watch
list for further negative action. The airport has $533 million of GARBs and
another $430 million of debt secured by both general airport revenues and
passenger facility charges.

In a signal of just how devastating an impact American's news could
eventually have on the credit, Standard & Poor's wrote, "A CreditWatch
negative listing indicates that the rating could be lowered within 90 days.
While a listing does not mean a change is inevitable, it could mean that
only the magnitude of the rating change has yet to be determined."

Fitch Ratings moved the airport's A-minus credit on to it rating watch
negative list. Moody's Investors Service placed the A3 credit on its watch
list. All three had previously maintained a negative outlook on the credit
because of concerns over how Lambert would fit into the struggling American
airline's future.

American, which inherited the St. Louis hub with its 2001 acquisition of
Trans World Airlines, answered those questions last Wednesday when it
announced that it would cut its flight schedule at Lambert in half effective
Nov. 1, shifting its connecting flights to its other hubs in Dallas-Fort
Worth and Chicago. The airline now carries about 75% of passengers that move
through the airport. The airline will also close its reservation center in
St. Louis.

City officials on Wednesday attempted to accentuate the positive -- the
airline will still maintain a presence at the airport. That fact may have
spared the city more dramatic rating actions on its airport debt, at least
temporarily. But as they noted in their reports, analysts have reservations
about the loog- term health of the airport and the status of a $1.1 billion
runway expansion plan. Voters this past spring approved another $2 billion
of revenue bond issuance over the next 15 years for other improvements.

"The operational changes are likely to result in diminished financial
flexibility at the airport resulting from lower landing fee collections as
the fleet changes from mainline jets to lighter regional aircraft and
reduced concession receipts as passenger volume declines," said Fitch
analyst Peter Stettler.

The city and airport could find themselves scrambling to come up with
funding for the $1.1 billion airport development project. "It could result
in costs that exceed the airport's low case in the sensitivity analysis,
which assumed a hypothetical 20% drop in American departures from St. Louis
in fiscal year 2003, instead of the 50% as announced," Moody's analyst Anne
Van Praagh said. "A decline in enplanements would also directly affect
collections of passenger facility charges and federal entitlement grants."

The situation raises the likelihood that the airport will have to raise fees
paid by the other airlines there to offset the drop in federal and PFC
funds, and that strain could prompt some airlines to rethink their long-term
use of the airport. Southwest Airlines -- which at 12% of passengers has the
second-largest presence at Lambert -- could bear the bulk of the burden.

All three agencies said subsequent rating actions would depend on plans
presented over the next several months by the airport. An airport official
said he understood the concerns of the rating agencies, but he expressed
guarded optimism that other airlines would step up.

"For years there has been one dominant carrier at the airport. That's not
the case anymore," the official said. "There's an opportunity that now
exists for other airlines that hadn't been available before."

Airlines pay a total of $35 million in use fees, with about 60% coming from
American. The airline also pays, on top of its regular fees, a
$650,000-a-month surcharge to St. Louis in connection with the city's
purchase of 57 TWA gates and equipment about nine years ago in a bailout of
TWA. The surcharge is used to retire debt the city issued as part of the
bailout. The airport official said American is legally bound to continue
making surcharge payments.

The city could seek control of some American gates and find new tenants. Van
Praagh said that what the airport needs in order to fully withstand the blow
is for another carrier to step in and establish a hub operation, but that
prospect is unlikely, given the financial struggles of most airlines.


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