Fitch Affirms Chicago Midway Int'l Airport Ratings; Outlook Stable

Business Wire, Feb 27, 2007

CHICAGO -- Fitch Ratings affirms its underlying 'A ' rating for the City of Chicago, Illinois' (the city) $835.8 million of outstanding first lien airport revenue bonds for Chicago Midway International Airport (Midway) and its underlying 'A' rating for the city's $422.7 million second lien airport revenue bonds for Midway. The Rating Outlook is stable.

The ratings for Midway reflect the airport's established niche in the Chicago market for providing low cost, point-to-point air service; high proportion of originating passengers; competitive cost structure; modern and efficient terminal; and modified residual use and lease agreement that allows the airport to maintain a favorable liquidity position. Credit concerns include the airport's reliance on Southwest Airlines (Southwest, IDR by Fitch of 'A') and the resultant vulnerability to reductions in the airline's operations; the price sensitivity of the core passenger market; significant barriers to further airfield expansion as the airport nears its physical capacity limitations; and the long-term potential for development of a third major airport in the metropolitan area. The Stable Outlook is based on the local region's sustained demand for air transportation and the airport's limited capital needs.

Located nine miles southwest of downtown Chicago, Midway recorded a 4.4% average annual increase in enplanements between 2001 and 2006, when the airport served 9.1 million enplaned passengers. This growth demonstrates the airport's resilience in the face of the economic downturn in 2001, a series of unprecedented international events that disrupted air travel in general from 2001-2003, and the retrenchment of American Trans Air (ATA), which was the airport's largest carrier in 2004 before entering bankruptcy protection in October 2004. However, due to the transition of several of ATA's gates to Southwest in early 2005 under a transaction in ATA's bankruptcy proceedings and ATA's subsequent retrenchment in the market, passenger activity at the airport declined by nearly 10% in 2005 and has not yet recovered to the peak of 2004 when the airport served 9.6 million enplanements. As a result, enplanement activity is below the airport's 2004 base case forecast, but ahead of the stress scenario presented that factored in the loss of ATA. Fitch acknowledges the airport's past ability to recover from a transition in carriers serving the market place and expects Midway's passenger activity to return to its historical growth trend over the next few years.

Southwest is now the largest carrier at Midway and operates at 25 of the airport's 43 gates following the transaction with ATA. For 2006, Southwest represented 73.3% of enplanements at the airport, followed by ATA at 8.6%. However, as Southwest and ATA have entered into a code sharing agreement, Southwest's share of the market may actually be somewhat higher. Midway is now Southwest's second largest station, with the potential to become the carrier's largest over time. However, the significant presence of Southwest does pose some concern due to the airport's exposure to reductions in the carrier's routing and scheduling decisions.

The airport's residual use and lease agreement provides the basis for its consistently sound financial results. Reflecting the completion of the new terminal facilities and the consistent growth in enplanements, operating revenues at the airport increased at a 6.4% average annual rate from 2000-2005 (years ended Dec. 31). The airport's operating margin equaled a slim 4.3% in 2005, reflecting the airport's use of non-operating revenues, including passenger facility charge (PFC) receipts, to cover debt service. When such revenues are included, the airport's margin improves to a respectable 40.7%. Net revenues and non-pledged sources, which include PFC and Federal Aviation Administration (FAA) Airport Improvement Program grants under a letter of intent, provided a sound 1.7 times(x) coverage of aggregate debt service in 2005. Furthermore, the airport's cost per enplaned passenger (CPE) equaled a low $3.91 in 2005. Fitch expects that 2006 results will be in line with previous experience.

The city has applied to privatize Midway under the FAA's pilot program. Currently the city is in negotiations with the FAA and the airlines regarding the parameters of such a transaction, which it expects to pursue over the course of the current year. Should the city successfully complete such a transaction, Fitch believes it will require that outstanding revenue debt of the airport either be called or defeased.

Reflecting the completion of the terminal development program and the potential privatization of the airport, the current capital program is modest with minimal borrowing expected in the short term. Current projects include construction of an in-line baggage security system and arrester beds at the end of the runways for safety purposes. The projects total approximately $80 million that will be paid from resources on hand. Midway's outstanding debt of approximately $139 per passenger is moderately high, while leverage (in 2005) at 8.4x currently generated revenues (including PFCs) is moderate.