Fitch Rates LAX Airport (CA) Sr Revs 'AA'; Sub Revs 'AA-'; Outlook Negative

Fitch Ratings has assigned an 'AA' rating to the Department of Airports of the City of Los Angeles (the department), Los Angeles International Airport's (LAX) proposed $898 million senior revenue bonds series 2010A.

Fitch also affirms the department's outstanding $993 million senior revenue bonds at 'AA' and outstanding $619 million subordinate revenue bonds at 'AA-'. The Rating Outlook for all bonds is Negative. The series 2010A bonds are scheduled for negotiated sale during the week of March 22, 2010. Proceeds of the series 2010A will be used to pay capital program costs, with an emphasis on the rehabilitation of the airport's Tom Bradley International Terminal, and to refund $100 million of subordinate commercial paper notes.

The 'AA' rating on the senior revenue bonds and the 'AA-' rating on the subordinate revenue bonds reflect the strength of the airport's passenger base that ranks among the nation's largest for both origination and destination (O&D) traffic and international service. The airlines serving LAX's 83 domestic non-stop and 53 international non-stop markets are among the most diverse for a U.S. international gateway airport. American Airlines (American) had the largest share of enplanements at LAX with approximately 15% of total enplaned passengers followed by United (13.2%) and Southwest (11.7%). Credit concerns include the challenges facing the airport in addressing significant deferred maintenance needs through a $5.6 billion capital improvement plan (CIP), a higher fixed cost profile associated with a rising debt position, and the current economic challenges facing the greater air trade area which could negatively constrain traffic performance.

The Negative Rating Outlook reflects the potential stresses to the airport's cost and financial profile in conjunction with the $5.6 billion 2009-2016 CIP. Under the current financial plan, more than half of this sizable CIP will be debt financed, creating materially higher fixed costs for LAX's operating budget. By 2014, LAX projects to have over $4 billion of combined senior and subordinate debt as compared to just over $1 billion in fiscal 2009. Further, the size and scope of the CIP, which is already more than 35% higher from plans developed in 2008, could be at risk for further upward adjustments during stages of project bids and construction. However, Fitch notes that the capital program is tracking on schedule and current budget levels are holding at or below 2009 estimates. Within the next year, the airport anticipates receiving up to 80% of the total project bids and should provide for a more accurate indication of the total budget of the capital program. In addition, airport management continues to negotiate for the acquisition of several terminal facilities previously owned by the airlines which will allow the airport to recover a higher percentage of its costs, but may generate additional costs for LAX due to the potential deferred maintenance needs of those facilities.

LAX enters its capital program with a very strong financial profile including solid overall debt coverage levels of 5.0 times (x), low debt levels of $34 per enplanement, and substantial unrestricted cash reserves of $655 million that are supplemented by high passenger facility charge (PFC) balance of $574 million (February 2010 figures). At current traffic levels the airport projects to collect PFC receipts in excess of $100 million annually and will represent a key source of funds to offset over 25% of future debt service obligations, mitigating the impact of future leverage to the airlines over the next several years. Still, financial projections indicate that airline cost per enplanement (CPE) levels are expected to be much higher from current levels of $11 to nearly $20 by 2016. In addition, debt service coverage levels on the combined senior and subordinate lien revenue debt are expected to be considerably lower but still healthy at 1.5x to 2.4x. The ability of the airport to maintain these financial metrics as well as to preserve its very strong market position for Los Angeles regional passenger traffic will be key drivers for the rating maintenance. Fitch also notes that the airport is seeking amendments to existing bondholder legal covenants relating to parity debt tests. Specifically, the proposed amendments, upon consent of majority bondholders that may occur by 2012, will revise the additional bonds tests for both the senior and subordinate lien levels to forecast-based calculations based on aggregate annual debt service rather than maximum annual debt service, affording the airport more flexibility to issue additional debt in the future.

Approximately $1.5 billion of the $5.6 billion long-term CIP is allocated to the 2010A projects which include the international terminal building improvement program. This project involves the demolition and replacement of the terminal's existing core central building area and north-south concourses. Completion of this project is essential as it will provide more efficient gate and airfield access for international operations serving LAX. The remaining CIP comprises of other terminal and airfield projects, including $1.0 billion of ongoing and completed projects. Capital expenditures for the entire 2009-2016 program are expected to be nearly half funded with debt (includes $2.0 billion of future senior and subordinate bonds) supplemented by LAX funds, grants, and PFC pay-go receipts.

As is reflective of an international passenger and cargo gateway, the airport is served by a diverse mix of airlines, including 22 scheduled domestic carriers, 43 scheduled foreign flag airlines, and 17 all-cargo carriers. The largest carrier, American, accounted for only 15% of the airport's total enplanements in fiscal 2009, relatively unchanged from 2001. Even with airline alliances, no one alliance comprises more than 30% market share. This level of diversity is unique to LAX and is considered a strength of the credit. While LAX serves as the largest airport in the greater Los Angeles area, comprising roughly 70% of all passenger traffic, the airport's enplanements fell 9% in fiscal 2009 to 28.3 million. LAX's fiscal year extended from July 1, 2008 to June 30, 2009, primarily driving the reduction in traffic, since the worst declines for all U.S. airports occurred in the second half of 2008. However, traffic stabilization in more recent months is evident as enplaned passengers have increased by approximately 1% over the first seven months of fiscal 2010.

Airport management utilizes a commercial compensatory rate-setting methodology in the terminal areas and a residual cost recovery methodology for the airfield, representing a combined airport economic model that generates excess cash for reserves. Historically, the airlines paid for capital costs associated with terminal improvements, meaning airport management had little control over a large portion of LAX's facilities. LAX is pursuing the implementation of a uniform airport-wide capital charge to the airlines and to effectuate this change, LAX is actively engaged in acquiring those facilities previously funded by the airlines and expects to repurchase 30%-40% of its gates and acquire 2 million square feet from a total of 4.4 million.

LAX's financial operations have been largely stable over the past several years with coverage of total debt service exceeding 2.8x since fiscal 2002. Fiscal 2009 coverage on total debt was particularly strong at 5.0x. Based on the enplanement forecast and the financial structure of the airport, the airport consultant projects total coverage levels from net revenues to remain above 1.5x through 2016. Given the substantial airport facilities and traffic levels, LAX historically had a very low debt per enplanement metric. After the series 2010 bond issue, it will increase to a moderate $67 level but will potentially reach over $130 through the full capital program.

The City of Los Angeles owns LAX, the airport is operated and maintained by Los Angeles World Airports (LAWA) who also manages Ontario International Airport (ONT) and Van Nuys Municipal Airport (VNY). In addition, LAWA maintains Palmdale Regional Airport (PMD), although it is not currently certified by the Federal Aviation Administration. The LAX airport revenue bonds are solely secured by revenues derived from LAX's operations.

The application of the following criteria was used to derive the rating of the above referenced bonds:

-- 'Rating Criteria for Infrastructure and Project Finance', dated Sept. 29, 2009;
-- 'Airports Rating Criteria Handbook for General Airport Revenue, PFC and Letter of Intent Bonds' dated March 12, 2007.

All are available on the Fitch web site at 'www.fitchratings.com' under the headers

Global Infrastructure & Project Finance >> Rating Criteria and U.S. Public Finance >> Rating Criteria.

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

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