Fitch Affirms Susquehanna Area Regional Airport Auth’s (PA) Sr Airport Revs at ‘BB+’; Outlook Stable

Fitch Ratings has affirmed the Susquehanna Area Regional Airport Authority's (SARAA) approximately $147.7 million senior airport revenue bonds at 'BB+'. The Rating Outlook is Stable. RATING RATIONALE The rating reflects the authority's small enplanement base with elevated exposure to nearby air service competition, a high debt load resulting in elevated airline cost per enplanement (CPE), and narrow overall coverage levels from airport cash flow. This is balanced by the airport's modest capital program without any need for additional borrowings, coupled with a recently implemented airline agreement containing backstop protections and full cost recovery. Rating case coverage is stable averaging 1.24x through 2021, while leverage is still high averaging 11x and CPE remains elevated at $16. KEY RATING DRIVERS Small Enplanement Base with Competition (Revenue Risk- Volume: Weaker) Harrisburg International Airport (MDT) serves primarily as an origination and destination (O&D) airport of just over 600,000 enplanements in the state's capital region. MDT's location draws passengers from a regional air trade service area, anchored by economic support from state government, corporations, and universities. However, traffic is constrained by significant regional competition from Philadelphia International Airport (PHL; rated A/Stable), Dulles International Airport (IAD; rated AA-/Stable), and Baltimore Washington International Airport (BWI). High Cost Structure (Revenue Risk- Price: Weaker) The recently implemented airline use agreement, which runs through 2019, allows the authority to raise airline rates and charges as necessary to meet all costs. However, given a high fixed-cost profile, the current airline CPE is notably elevated for its airport size. While overall airport costs are expected to remain stable in the near term, airline charges are vulnerable to potential traffic declines.  Modern Facility with Limited Capital Needs (Infrastructure Development & Renewal: Stronger) Updated facilities allow the authority to maintain an internally funded five-year capital plan totalling approximately $62 million. Funding is expected to be sourced primarily from federal and state grants, and no near-term borrowings are anticipated. Limited use of airport funds to support the capital program could limit the authority's ability to retain or expand its overall level of cash and reserves. Conservative Debt Structure (Debt Structure: Stronger) All bonds are senior, fixed rate, with flat annual debt service of approximately $12 million through 2037. The previously outstanding subordinate bonds were repaid upon final maturity in January 2017 and debt service on senior lien bonds will rise in 2018 to maintain the stable level of debt service. Cash-funded 12-month debt service reserve funds are maintained. Financial Metrics: SARAA's five-year indenture coverage is expected to average about 1.24x in Fitch's rating case. Fitch-calculated coverage (treating PFCs as revenues) was slightly less robust at 1.19x. The authority's debt burden is sizeable, with leverage averaging 11x in the rating case, but evolving downward to 10.5x by 2021. CPE remains elevated at $16 per enplaned passenger. Fitch anticipates SARAA'S unrestricted cash levels to remain low, providing just 102 days cash on hand (DCOH). However, SARAA maintains other capital-designated reserves as well as a bond coverage account for additional liquidity support. PEER GROUP Peers include 'BBB' category airports with similar enplanement sizes, such as Burlington (rated BBB-/Stable), Fresno (rated BBB/Positive) and Pensacola (rated BBB-/Stable). Compared to SARAA, each peer demonstrates significantly lower leverage levels below 4x, reasonable CPE below $9, and stronger debt service coverage between 1.6x-2.0x. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: --Sustained declines or uneven trends in passenger traffic levels leading to fluctuating or unsustainable CPE above current levels.  --Debt service coverage falling below 1.3x, on an ongoing basis.  Future Developments That May, Individually or Collectively, Lead to Positive Rating Action: --Sustained improvement in the airport's traffic base which generates higher operating revenue and stronger coverage levels may lead to a higher rating. --Leverage evolving below 4x and coverage levels maintaining at the 1.3x level could support a positive rating action on a sustained basis. Performance Update The authority's previously outstanding subordinate airport revenue bonds were repaid on Jan. 1, 2017, and current outstanding debt is entirely senior in position.  The airport's traffic recovered for the first time in 2016 after three years of consecutive declines. 2016 enplanements grew 2.9% to 607 thousand, as airlines added new routes and increased frequencies. Seven-month year-to-date (YTD) 2017 traffic is up 1.2% compared to the prior year. Allegiant Airlines generated the largest increase in passengers in 2016, adding new nonstop service to Punta Gorda/Ft. Myers and summer seasonal service to Myrtle Beach. New carrier Southern Airway Express began service at MDT in 2016 with weekly nonstop flights to Pittsburgh. 2016 operating revenues increased 4.4% due to new tenants renting out previously vacant facilities, additional rent being charged on certain airport buildings, airline rentals increasing in accordance to the airline agreement, and car rentals growing with increased passenger activity. Publicly available sources show that six-month YTD operating revenues are 1.8% above budget as a result of increased cargo landing fees and gate rentals. 2016 operating expenses (less depreciation) grew 6.6% due to the addition of new staff, the purchase of snow-removal equipment, and other weather-related charges incurred due to record snowfall in January. Public sources show that six-month YTD operating expenses are 6.3% below budget, as new positions were not filled as quickly as anticipated.  The authority's 2017-2022 capital plan indicates total project costs of about $62 million. The authority expects to spend an estimated $28 million on runway rehabilitation, $31 million on cargo area construction, and $2 million on replacing fire and snow removal equipment. The airport is currently in the midst of updating its runway, which began construction in April 2017. The plan will be financed by grants and airport cash flow. No borrowings are expected in the near term to fund the capital plan. 2016 airport metrics were strong with senior indenture coverage growing to 2.4x compared to 2.3x in 2015. All-in coverage subsequently grew to 1.3x, compared to 1.2x in 2015. 2016 leverage continued to devolve, down to 10.6x from 11x in 2015. CPE remained elevated, near an estimated $15, while liquidity grew to 127 DCOH from an increase in unrestricted cash. Fitch Cases Fitch's base case assumes flat enplanement growth and cost increases of 2.5% per year. Airline revenues are assumed to grow based on the annual escalation of rates and charges set by the airline agreement, while non-airline revenues are driven by enplanement levels. This results in stable coverage levels averaging 1.3x through 2021. Leverage remains high at over 10x, with CPE in the $14-$15 range. Fitch's rating case assumes a 6% aggregate stress through 2019, with recovery beginning in 2021. Operating expenses are stressed an additional 0.5% above base case levels. Airline revenues are increased to reflect the need for additional cost recovery. Under this scenario, coverage is still adequate, averaging 1.24x. Leverage is inflated, reaching 11x while CPE exceeds $16.