Fitch Affirms County of Sacramento Airport System Revs At 'A+'; Stable Outlook.

SAN FRANCISCO -- Fitch Ratings affirms the 'A+' rating on the outstanding $222.2 million County of Sacramento senior lien airport system revenue bonds (the system). Fitch also affirms the 'A+' rating on $49.6 million County of Sacramento airport system passenger facility charge and subordinated

The system consists of four airports, including Sacramento International Airport (SIA), providing the only scheduled commercial air service and Mather Airport, with extensive cargo and general aviation activity; whereas, Executive Airport and Franklin Field are exclusively general aviation airports.

The 'A+' reflects the system's historically strong enplanement growth, high origination and destination (O&D) level, and strong service area. Historical passenger enplanements grew at an average annual rate of 6.6% from 1990-2003. SIA recovered relatively quickly from the events of Sept. 11, 2001. Fiscal year 2002 enplanements dipped to 4 million, before rebounding 7% to 4.3 million in fiscal year 2003, exceeding historic levels. Moreover, preliminary fiscal 2004 results show passenger enplanement levels increased a healthy 6% to 4.6 million. SIA, located in Sacramento County, the seat of state government, serves a primary service area that includes Placer, Yolo, El Dorado, Sutter and Yuba counties. The healthy 95% O&D level reflects this strong primary service area population that grew 2.5% in fiscal 2003, and steady employment that has expanded at an annual rate of 2.9% over the past decade, as well as a diverse set of top employers: California State University Sacramento, Raleys, Inc., Sutter Health Central, Kaiser Permanente and Intel Corporation.

Additional credit strengths include SIA's solid financial performance with high cash balances, moderate to low cost per enplaned passenger (CPE), a high percentage of non-airline operating revenues and solid debt service coverage. As of fiscal 2003, the system's unrestricted cash and cash equivalents amounted to $113 million providing financial flexibility. SIA's CPE was a low $4.20 in fiscal 2003, down from $4.81 in fiscal 2002. SIA's CPE has historically remained low due to high non-airline revenue generation that was 75% of the airport's operating revenue in fiscal 2003. Debt service coverage on the senior and passenger facility charge and subordinated revenue bonds were a healthy 1.72 times (x) and 7.21x in fiscal 2003.

Key credit concerns are growing operating and maintenance (O&M) expenses, and future capital needs that include increased debt levels. O&M expenses net of depreciation have increased at an average annual rate of 14% to $62.3 million in fiscal 2003 from $47.6 million in fiscal 2001 due to higher costs associated with security, salaries and benefits and insurance. Meanwhile, operating revenue growth has not kept pace resulting in a fiscal 2003 operating margin of 18% down from 35% in fiscal 2001. The system has identified anticipated capital improvement program (CIP) needs of at least $586 million for fiscal years 2003-2007. The CIP program focuses on building a new terminal to meet future passenger enplanement growth and would be financed with a combination of federal grants, system funds, third party financing, PFC revenues, and proceeds from the sale of senior bonds. Given the declining operating margin, increasing SIA's debt burden would put pressure on the airport's finances in the near term. Fitch will continue to monitor future capital development and its impact on the airport system's cost structure.

An additional credit concern includes airline market share concentration. SIA's airline market share is concentrated towards Southwest Airlines (rated 'A' by Fitch with a Stable Outlook) at 52% of total passenger enplanements in fiscal 2003 followed by United Airlines, American West Airlines, American Airlines and Delta Airlines at 10%, 6%, 6%, and 6%, respectively. Somewhat mitigating this credit risk is Southwest's strong operational and financial position as an 'A' rated credit and SIA's high O&D level.