2010-08-20 20:49:03 -

Fitch Ratings has downgraded to 'A-' from 'A' the rating on the Wayne County Airport Authority, Michigan's (WCAA or the Authority) approximately $2 billion senior lien airport general revenue bonds (GARBs) issued for Detroit Metropolitan Airport (the Airport) and has affirmed the 'A-' rating on the approximately $180 million subordinate lien GARBs. The 'A-' rating on both the senior and junior debt reflects the little financial coverage distinction between the two lien levels based on existing debt secured by airport net revenues. The Rating Outlook for all WCAA bonds is revised to Stable from Negative.

RATING RATIONALE.

The rating downgrade reflects the heightened credit concerns that WCAA's long-term financial flexibility and airline cost competitiveness may be subject to increased levels of stress

given the existing high airport debt burden, the potential for sustained economic weakness in the airport air trade service area that supports the O&D traffic, and the elevated dependence on Delta Airline's market share concentration and connecting traffic operations. The rating is consistent with similar sized connecting hubs that have comparable connecting traffic and financial attributes. The Stable Outlook reflects Fitch's expectation that post-merger Delta service levels and traffic at Detroit will remain largely stable as has been the case since the merger completion in late 2008. Fitch also considers the possibility for a more favorable traffic environment and growth of the Detroit hub resulting from Delta's shift of service from Cincinnati, the addition of international service to new destinations, and management's materialized effort in reducing expenses and manage its future cost structure following the completion of the North Terminal development. Fiscal 2009 enplanements were in-line with budgeted expectations declining by 10.6% due to capacity reductions and soft passenger demand. Management expects fiscal 2010 to see a modest drop of 1.5% in enplanements and a move to positive territory by fiscal 2011. YTD June enplanements are 3% lower compared to fiscal 2009 and for the month of June, enplanements grew by 5.2% over the prior year.

Credit strengths reflect the large underlying market and traffic base in the service area complemented by its central geographic position that can support a major connecting hub, minimal airport competition within the metropolitan area, the modern airport facilities - completion of the North Terminal in 2008 - and substantial airfield and terminal processing capability absent major capital spending going forward, and stable coverage levels supported by a long-term full airport residual lease agreements with its signatory carriers. Fitch views Delta's ongoing commitment to the Detroit regional market, complemented by its substantial connecting and international service, as an important positive credit consideration which is reflected in the lease agreement that expires in September 2032. Any downsizing or elimination of service by Delta would not reduce the financial obligations covered under the agreement. Minimal debt is expected to be issued in the next two to three years considering that a large share of the airport's capital plan has been fulfilled given the recent completion of the North Terminal and other airfield projects.

Credit concerns center on the weakness of the regional economy; the heavy concentration of Delta at the airport accounting for 79.1% of total traffic for fiscal 2009 and rising to 80.9% in fiscal 2010 as the carrier adds service; the high share of connecting traffic amounting to 53% in fiscal 2009; and the expected increase in fixed costs resulting from the North Terminal completion. Pressure on airline costs will be higher in future years as the Authority completes its expected drawdown of the Passenger Facility Charge (PFC) fund balance by fiscal 2011 that has previously subsidized a portion of the debt service costs. Cost per enplanement (CPE) stood at a competitive $8.28 as of fiscal 2009 and is anticipated to increase to $9.88 by fiscal 2011. This new CPE base is not expected to adversely affect airport competitiveness vis-a-vis other comparable large hubs. Fitch also recognizes that an increase in costs associated with the recently completed terminal facility is passed through to carriers' rates and charges. To date, management has limited this cost pressure by having built up its PFC fund balance over the past few years for use on the eligible PFC portion of debt service. However, limited liquidity from unrestricted reserves does not give the airport much additional flexibility for adverse traffic activity or market conditions. Fiscal 2009 unrestricted cash balances totalled $97 million or 168 days cash on hand. A similar liquidity position of about $111 million is projected for fiscal 2010.

KEY RATING DRIVERS.

Future rating actions are likely to be influenced by shifting trends in enplanement activity associated with locally based traffic demand, a material reduction in or elimination of connecting traffic, a higher than expected airport cost structure, and a change in the region's (Detroit and surrounding area) economic condition.

SECURITY.

The senior debt has a first lien pledge on net airport revenue while the junior debt has a second lien pledge of net airport revenues.

CREDIT SUMMARY.

Historical financial margins and metrics remain stable and consistent with a residual airline rate setting methodology. Net operating revenues for fiscal 2009 provided 1.27 times (x) coverage on the senior lien bonds and 1.23x combined coverage (senior and junior lien bonds), as compared to fiscal 2008 results of 1.49x coverage, and 1.21x combined coverage. The overall coverage changes are a reflection of retirement of outstanding debt that was previously issued to refinance the costs of various capital projects. Fiscal 2010 expected coverage is 1.39x and 1.34x on the senior lien and combined debt, respectively. CPE has shifted to the $8 range in fiscal 2009 due to the lower traffic experienced at the airport and is expected to move to the $10 range in the next four years as the airport aims to increase fees and charges to subsidize the PFC eligible portion of debt service and the costs related to the North Terminal development. Fitch forecast scenarios for large connecting hubs contemplate a partial and full loss of connecting traffic. While Fitch acknowledges the strength of the Delta use and lease agreement supporting the credit, under a stress scenario, there is a potential for CPE to rise into the $20 range should Delta pull out most or all its connecting based service. The airport's capital improvement program does not call on any major capital spending in the next two to three years. The remaining airfield projects are expected to be partially funded through federal grants and some additional debt issuance not exceeding $100 million.

Additional information is available at www.fitchratings.com : .

Related Research.

'Rating Criteria for Infrastructure and Project Finance' (Aug. 13, 2010).

Related Research.

Rating Criteria for Infrastructure and Project Finance

www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id= .. :

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS : .
IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.FITCHRATINGS.COM : .
PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.



Fitch RatingsPrimary AnalystMichael M. Murad, +1-212-908-0757Associate
Director33 Whitehall StreetNew York, NY 10004orSecondary

AnalystVanessa Roy, +1-212-908-0508Associate DirectororCommittee
ChairpersonSeth Lehman, +1-212-908-0755Senior DirectororMedia
Relations, New YorkCindy Stoller, +1-212-908-0526 cindy.stoller@fitchratings.com : mailto:cindy.stoller@fitchratings.com