OREANDA-NEWS. Fitch Ratings has affirmed the Susquehanna Area Regional Airport Authority's approximately $148 million senior airport revenue bonds at 'BB+' and the authority's approximately $4.2 million subordinate airport revenue bonds at 'BB+'. The Rating Outlook on all bonds is Stable.

RATING RATIONALE

The 'BB+' ratings reflects the authority's (SARAA) small enplanement base with elevated exposures to air service competition, a high debt load lending to above average airline costs, and narrow overall coverage levels from airport cashflows. A modest sized capital program without additional borrowing requirements coupled with a new airline agreement with backstop protections for full cost recovery are positive considerations. The two liens are rated equally given the debt service payment structure which, in Fitch's view, provides little differentiation to both operation and cashflow risks.

KEY RATING DRIVERS

REVENUE RISK - VOLUME: WEAKER

SMALL ENPLANEMENT BASE WITH COMPETITION: Harrisburg International Airport (MDT) serves primarily as an origination/destination (O&D) airport of slightly below 600,000 enplanements serving the state's capital region. MDT's location draws passengers from a regional air trade service area, anchored by economic support from state government, corporations, and universities. However, the traffic base is still constrained by significant regional competition, particularly from Baltimore-Washington International Airport, Philadelphia International Airport, and Dulles International Airport.

REVENUE RISK - PRICE: WEAKER

HIGH COST STRUCTURE: The recently implemented airline use agreement, which runs through 2019, allows for the authority to raise airline rates and charges as necessary to meet all costs. However, given a high fixed cost profile, the current airline cost per enplanement (CPE) is notably elevated for its airport size, at over $15 per enplanement. While overall airport costs are expected to remain stable in the near term, airline charges could still be exposed to even higher average levels under a scenario of any future passenger contraction.

INFRASTRUCTURE DEVELOPMENT AND RENEWAL: STRONGER

MODERN FACILITY WITH LIMITED CAPITAL NEEDS: Updated facilities allow the Authority to maintain an internally funded five-year capital plan that totals approximately $62 million. Funding is expected to be sourced primarily from federal and state grants, and no near-term debt is likely. Some use of airport cash funds to support the capital program could limit the authority's ability to retain or expand its overall level of funds and reserves.

DEBT STRUCTURE: STRONGER (SR), MIDRANGE (SUB)

CONSERVATIVE DEBT STRUCTURE: All senior and subordinate lien bonds are fixed rate, and aggregate annual debt service is flat through 2033. The subordinate bonds reach final maturity in 2017 and debt service on senior lien bonds subsequently rises in 2018 from $7.6 million to $12.4 million to maintain a stable but not declining level of total debt service.

THIN COVERAGE AND HIGH LEVERAGE:

SARAA's overall coverage ratio, exclusive of the coverage account and treating PFCs as revenues, was narrow in fiscal 2015 at 1.08x. Traffic declines from the prior year, with its impacts to revenues and costs, have led to lower coverage from fiscal 2014 (1.16x). Still, SARAA's indenture approach coverage, at 1.24x for all debt, met the rate covenant requirements (1.25x senior debt service, 1.10x subordinate). The authority has a high debt burden and debt per enplanement ($264) driven by prior capital spending and is also currently highly leveraged at 10.9x total net debt to cashflow available for debt service. Unrestricted cash and operating reserves provide only 60 days cash on hand but SARAA has additional capital designated reserves as well as a bond coverage account for additional liquidity support.

PEER ANALYSIS: Amongst its closest rating-level peers in the 'BBB' category, such as Burlington ('BBB-'), Fresno ('BBB') and Pensacola ('BBB-'), the airport demonstrates higher leverage airline costs, with narrower debt service coverage and liquidity.