Fitch Rates San Francisco -City & County- Airport Commission, California, Revs 'A'

Business Wire, Jan 25, 2005

SAN FRANCISCO -- Fitch Ratings rates 'A' $310,035,000 Airport Commission City and County of San Francisco, California, San Francisco International Airport (SFO) revenue refunding bonds; consisting of

--$110,135,000 second series taxable revenue refunding bonds, Issue 31F;

--$199,900,000 second series variable rate revenue refunding bonds, Issue 32.

The Rating Outlook is revised to Stable from Negative, reflecting United Airlines' (UA) assumption of its airport lease agreements, a stabilizing passenger base, and airport management's strategies to control the escalating cost structure.

Fitch also affirms the 'A' rating on approximately $4.1 billion Airport Commission, City and County of San Francisco, CA, San Francisco International Airport second series revenue bonds and the 'BBB ' rating on $125 million City and County of San Francisco, CA, San Francisco International Airport special facility lease revenue bonds, with a Stable Outlook.

Issue 31F is scheduled to sell on Wednesday, Jan. 26 via negotiation led by Lehman Brothers. The taxable issue refunds outstanding revenue bonds sold to construct SFO's consolidated rental car facility. The Issue 32 auction rate bonds will be sold in five series on Tuesday, Feb. 8.

--$69 million Issue 32A (AMT) with JP Morgan serving as underwriter and initial broker-dealer;

--$35.2 million Issue 32B (AMT) with UBS Financial Services Inc. as underwriter and initial broker-dealer;

--$35.2 million Issue 32C (AMT) with Morgan Stanley as underwriter and initial broker-dealer;

--$31.2 million Issue 32D (AMT);

--$29 million Issue 32E with Bear Stearns & Co. Inc as underwriter and initial broker dealer.

In conjunction with Issues 32 and 33 (planned for February 2006), SFO entered into several swaps. Prior to entering into these contractual agreements, a formal swap policy was devised and management considered several different debt structures. The airport's overall debt portfolio will remain primarily long-term fixed-rate, with approximately 10% synthetically fixed-rate and 10% variable. In fiscal 2004, SFO's cash and investments equaled $271 million, and management retains flexibility with a $400 million commercial paper program.

Fitch's 'A' rating reflects SFO's importance as a regional transportation provider for long-range domestic and international air service. Sustaining this demand for service is the San Francisco Bay Area's significant population base, in excess of 7 million, high wealth levels (2004 median household income of $71,239), and a diverse economy. Although United Airlines (UA), currently operating in Chapter 11 bankruptcy, uses SFO as a hub and in 2004 accounted for a high (50%) of all service, about 73% of the airport's passengers were origination and destination (O&D) in nature. This high percentage of O&D passengers somewhat mitigates the risks associated with UA and is indicative of a large mature marketplace. Additionally, after three consecutive fiscal years of passenger declines, fiscal 2004's enplanements increased 5.3%. Enplaned passenger levels continued to rise, 9% overall, during the first five months of fiscal 2005. Fitch views the airport's last 17 months of operational growth as proof of the resilience of the marketplace.

Fitch recognizes the credit risks relating to UA's high market share and the potential difficulties should UAL (UA's parent corporation) restructure its operations or liquidate. However, UA's assumption of its use and lease agreements with SFO raises the airport's status to administrative, from unsecured, in the event of an eventual Chapter 7 liquidation of the airline. Therefore, Fitch believes UA will continue to serve the airport and remain legally obligated to pay all outstanding, current, and future obligations to the airport.

Credit concerns also include SFO's high cost structure, with a 2004 cost per enplaned passenger of $17.99 and debt per enplanement of $262. To date, management continues taking proactive steps to reduce costs and increase enplanements, which includes reducing 2004 operating expenses and curtailing all non-essential capital projects. Furthermore, in an effort to reduce airline rates and charges, management is applying passenger facility charge (PFC) collections to offset debt service for the international terminal complex. Finally, the airport operates in a moderately competitive airport environment, as the Norman Y. Mineta San Jose International Airport and Oakland International Airport provide viable, low-cost air service alternatives in the South and East Bay.