Fitch Rates Metro Washington Airports Authority, D.C.'s $400MM Bonds 'AA-'; Outlook Stable

Business Wire, Oct 31, 2006

NEW YORK -- Fitch assigns a 'AA-' rating to Metropolitan Washington Airport Authority (the authority), D.C's $400 million of airport system revenue bonds, series 2006B (alternative minimum tax [AMT]). The bonds are expected to price on or about Nov. 13, 2006 through negotiation led by Lehman Brothers and carry 'AAA' bond insurance. Net revenues generated by Dulles International Airport (Dulles) and Washington Reagan National Airport (National) secure airport system revenue bonds, of which approximately $3.1 billion are currently outstanding and affirmed at 'AA-'. The Rating Outlook is Stable.

The authority's 'AA-' rating reflects the strong competitive position and complementary service offerings of both Dulles and National, historically sound financial performance and debt service coverage, conservative forecasting practices, and an experienced management team. Primary credit concerns include the modest airline concentration risk at both authority airports, increased issuance of debt to support of the capital construction program (CCP) and subsequent rising airline costs, and the modest recovery to date in passenger traffic at Dulles in the wake of Independence Air's liquidation. Proceeds of the series 2006B bonds will finance certain CCP costs, including a portion of costs relating to planning and design of a new concourse and federal inspection facility at Dulles and various airfield projects at National. Bond proceeds will also fund a deposit to the debt service reserve fund, and pay bond issuance costs.

Independence Air, which accounted for Dulles' second largest passenger share during 2005 (20.1%), announced a voluntary suspension of service effective Jan. 5, 2006 and later liquidated. As the authority took a conservative approach to Independence Air's business plan and did not significantly alter the CCP to accommodate their service, the financial implications of the shutdown proved to be minimal. Nonetheless, the nearly 19% drop in enplanements reported by the authority for the first 8 months of 2006 is considerably larger than what Fitch anticipated as replacement service has materialized at a slower than expected rate. Importantly, Fitch notes that the these figures do not incorporate Southwest Airlines' (Issuer Default Rating of 'A' by Fitch) recent commencement of service at Dulles, nor United Airlines' (Issuer Default Rating of 'B-' by Fitch) decision to grow it's international hub at the airport and expand related domestic feeder services. While Fitch expects Southwest to maintain a more limited schedule at Dulles given its sizeable presence at nearby Baltimore/Washington Thurgood Marshall International Airport, and recognizes that there is some risk to United's expansion, both operations, which are seemingly based upon sound economic reasoning, appear well positioned to facilitate sustained traffic growth at the airport. However, the pace of this expected growth is likely to be more gradual that what was experienced by the authority during the build-up of Independence Air's hubbing operation in late 2004 and early 2005.

The authority consistently generates healthy financial results. Supported by the strong growth in passenger traffic at both Dulles (18.3%) and National (12.0%) during 2005, the authority recorded an operating ratio of 41%, which is consistent with prior years, and debt service coverage of approximately 1.7 (x), providing a cushion for bondholders well in excess of the 1.25 times (x) rate covenant. Despite the expected decline in traffic at Dulles, and more moderate growth at National (5.0%), financial performance for 2006 is expected to approximate the 2005 level, with coverage of debt service falling just slightly to approximately 1.6 (x).

The authority's recent decision to extend the CCP from 2011 to 2016, and add approximately $1.1 billion of new projects, will increase authority financial leverage and create higher, though still fairly manageable, rates and charges for the airlines. Through 2014, the authority expects to issue approximately $3.6 billion of additional debt, providing approximately $2.8 billion in CCP funding. Reflecting this issuance, signatory airline costs per enplaned passenger (CPE) are expected to reach a maximum of $23 at Dulles and $19 at National, metrics which are average for similarly sized facilities. Under a number of stress scenarios reviewed by Fitch, however, projected CPEs could be significantly higher. Importantly, Fitch recognizes the generally conservative assumptions underpinning these scenarios and notes that the modular nature of the CCP allows for cancellation or deferral of projects if needed.

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