Fitch Rates LAX Airport's $626.3MM Senior Revs 'AA'; $250MM Sub Revs 'AA-'

Business Wire, July 10, 2008

SAN FRANCISCO -- Fitch Ratings has assigned the following ratings to the Department of Airports of the City of Los Angeles, California, Los Angeles International Airport's (LAX) senior and subordinate revenue bonds:

--$618 million senior revenue bonds 2008 series A (AMT) 'AA'

--$8.3 million senior revenue refunding bonds 2008 series B (AMT) 'AA'

--$250 million subordinate revenue bonds 2008 series C (Non-AMT) 'AA-'

--Senior refunding revenue bonds 2008 series D (Non-AMT) 'AA' (subject to market conditions).

The bonds are scheduled for negotiated sale on or about July 23, 2008. The 2008 series A bonds will fund interior improvements at the Tom Bradley International Terminal (TBIT), the 2008 series B bonds will refund the 1995 series D bonds, and the 2008 series C bonds will fund the South Airfield Improvement Program (SAIP). The airport may also simultaneously issue its Senior Revenue Refunding Bonds 2008 series D (Non-AMT) to refund all or portion of the outstanding series 2002 A bonds, contingent on market conditions. Fitch has also affirmed LAX's approximately $115 million outstanding senior revenue bonds at 'AA'. The Rating Outlook is Stable.

Los Angeles World Airports (LAWA) owns and operates LAX, Ontario International Airport (ONT), Van Nuys Municipal Airport (VNY), and Palmdale Regional Airport (PMD). However, the LAX airport revenue bonds are solely secured by revenues derived from LAX's operations.

The 'AA' rating on the senior revenue bonds and the 'AA-' rating on the subordinate revenue bonds are based on LAX's extremely strong market economics reflected in its status as the nation's largest origination and destination (O&D) airport and second largest international gateway. LAX has a strong and well-developed diversity of air carriers and maintains a very healthy liquidity position and strong financial margins. Management has experience executing large complex capital programs and is employing a conservative financing strategy through the projected capital plan ending in 2014. Credit and operating challenges include LAX's significant deferred maintenance needs, the current economic challenges facing the airline industry, management's ability to enhance and improve control measures at various terminals, and the continued coordination with, and support of, the various stakeholders at LAX including the city, the community surrounding the airport, and the airlines.

LAX serves as the region's largest airport, representing about 70% of all passenger traffic in the very large and diverse greater Los Angeles region. The combined statistical area population that includes Los Angeles-Long Beach- Riverside totaled approximately 18 million in 2007, second in the nation to New York-Newark Bridgeport which totaled 22 million that same year. Additionally, wealth levels are exceedingly strong in the combined statistical area with approximately 1.8 million household incomes above $75,000, representing the 2nd highest concentration of wealth outside of the New York-Newark Bridgeport area. In 2007, LAX's sizable service area produced 22.4 million domestic enplanements and 8.4 million international enplanements, and boasted solid average annual rates of growth at 2% and 4%, respectively, over the historical 5-year period between 2003 and 2007. Airport management is currently projecting domestic enplanements to grow at 1.9% on an average annual basis between 2008 and 2014, a slower rate than international enplanements, which are expected to grow at 3.1% over the same time period.

Airport management utilizes a compensatory rate-setting methodology in terminal areas and a residual full cost recovery methodology for the airfield, representing a combined airport economic model that generates excess cash for reserves on an annual basis. This rate-setting methodology affords management the ability to set reasonable rates and fund most airport improvement projects with cash. Terminals two, four, five, six, seven and eight were either built or renovated with third-party financing at little or no cost to LAX, but until the long-term leases expire, airport management has little control over these facilities. The prevalence of third party financing at LAX explains the exceptionally low debt levels of $212 million as of fiscal year end 2007.

Current unrestricted cash balances are excellent at roughly $544 million, representing approximately 379 days cash on hand, as of March 2008. Management's cash policy aims to maintain one year's maintenance and operating expenses in days cash in hand. Financial margins are also bolstered by the high level of non-airline revenues as a percent of operating revenues, which equaled 40% of total revenues in 2007. LAX's cost per enplaned passenger of approximately $7.00 in 2007 was lower than any comparable airport in the U.S. Debt service coverage ratios on a historical basis have been strong with senior lien coverage ranging from a 2.31 times (x) in fiscal 2002 to a high of 5.49x in fiscal 2007. Historical debt service coverage calculated on an all-in basis, including both senior and subordinate liens, produced similarly high results ranging from 2.31x in fiscal 2002 to 4.13x in fiscal 2007. Should management continue to execute the full CIP program, debt service coverage is projected to decline, but to remain solidly in excess of 1.5x through 2014.