Fitch Affirms Orange County, CA's John Wayne Airport's $258.8MM Revs at 'AA-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings affirms the 'AA-' rating on approximately $258.8 million in outstanding Orange County, CA airport revenue bonds issued on behalf of John Wayne Airport (JWA).

The Rating Outlook remains Stable.

KEY RATING DRIVERS:

-- Diversified Origin And Destination (O&D) Airport: JWA is the only commercial airport in Orange County and the second largest commercial airport within the Greater Los Angeles Area. Its passenger mix is 95% O&D; it is served by a diverse group of carriers with no one carrier currently representing more than 36% of the market. JWA experienced an enplanement decline of 2.5% in fiscal year (FY) 2011.

-- New Hybrid Use And Lease Agreement In Place Through 2015: JWA operates a hybrid use and lease agreement which is commercial compensatory in the terminal and residual on the airfield. Under the current agreement the cost per enplanement (CPE) was $9.71 in FY 2011.

-- Strong Balance Sheet Provides Financial Flexibility: JWA maintains a strong balance sheet with 662 days cash on hand (DCOH) as of FY 2011. The strong balance sheet provides JWA with a net debt to cash-flow available for debt service (CFADS) ratio of 1.46.

-- Conservative Debt Structure And Solid Coverage: JWA's fixed rate debt remains relatively flat at approximately $22 million through 2018 then declines to approximately $18 million. Historical debt service (D/S) coverage has been > 2 times (x). JWA currently has no new money borrowing plans.

-- Limited Future Capital Needs: JWA is in the midst of a $543 million Airport Improvement Program with Terminal C opening in November 2011 on time and on budget. The program is funded via a combination of debt, grants, and funds on hand. Once the program is complete JWA will have minimal capital needs for the foreseeable future.

WHAT COULD TRIGGER A RATING ACTION

-- Future changes to the maximum annual passenger limit (MAP) that could modify airport traffic potential.

-- Significant deterioration of strong balance sheet.

-- Management's ability to control costs given recent declines in enplanements and limited revenue growth.

SECURITY

The bonds are secured by the net revenues of JWA.

CREDIT UPDATE

Enplanements were down 2.5% in 2011 to 4.28 million as JWA experienced declines in both business and leisure traffic. Between fiscal 2006 and 2011 enplanements at JWA declined at 2.29% on average annually. Management expects 2012 enplanements to be up 1% due mainly to the commencement of international service to Mexico by Southwest/AirTran.

JWA's carrier mix continues to be diversified. Southwest has maintained its position as the largest carrier by market share at JWA, currently representing about 36% of the market. Southwest is followed by American Airlines with 14%, Alaska Airlines, Delta, and United each with approximately 10%, Continental (7%), US Airways (5%) and several other carriers that held below 5% of the market.

JWA's strong balance sheet is a unique strength of the credit as its unrestricted cash and investments and special investments with the treasurer were $128 million in FY 2011, down from $156 million in 2010, representing approximately 662 DCOH in FY 2011. The reduction in available cash is attributed to planned spending on the capital improvement program. The strong balance sheet provides a relatively low net debt to CFADS ratio of 1.42. The sizable cash balances provide JWA with a considerable amount of financial flexibility.

As anticipated during Fitch's last review, JWA has entered into a new use and lease agreement. The new agreement is consistent with the prior agreement and employs a residual rate setting methodology on the airfield and a compensatory methodology in its terminal. The new agreement expires in 2015. This business model has consistently produced solid net operating income results of $35.8 million in 2011, down from $39.7 million in 2010. Operating expenses outpaced revenue growth from 2006 - 2011 with average annual growth rates of 5% ($57.5 million to $70.7 million) and 1% ($101.8 million to $106.5 million) respectively. If operating expenses continue to out pace revenue growth operating income and financial margins will narrow.

Approximately 37% of JWA's revenues are derived from the airlines, while 63% are derived from all non-airline revenues sources that include parking, rental cars, concessions and other. JWA's debt service coverage ratio (DSCR) under the calculation set in the bond documents has been in excess of 2x since 2004 coming in at 9x and 6.36x in FY 2010 and FY 2011 respectively. FY 2010 and FY 2011 coverage calculated using PFC as a revenue instead of an offset coverage drops to 3.41x and 2.88x respectively. FY 2010 and FY 2011 coverage was high due in part to Capitalized Interest being available for annual debt service on the Series 2009 bonds. As expected, the CPE also increased from $9.24 in FY 2010 to $9.71 in FY 2011.

JWA is owned and operated by Orange County, CA under the direct control of the County Board of Supervisor's. JWA operates under a settlement agreement between various groups within the county and the City of Newport Beach, CA. The settlement agreement limits the average daily departures (ADDs) and million annual passengers (MAPs).

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

-- 'Rating Criteria for Infrastructure and Project Finance,' (Aug. 16, 2011);

-- 'Rating Criteria for Airports' (Nov. 29, 2011).

Applicable Criteria and Related Research:

Rating Criteria for Infrastructure and Project Finance
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=648832

Rating Criteria for Airports
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656970

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