Fitch Ratings has affirmed the 'A' rating on approximately $173.3 million of outstanding airport revenue bonds issued by the Allegheny County Airport Authority, PA on behalf of the Pittsburgh International Airport (PIT). The Rating Outlook is Stable. KEY RATING DRIVERS Summary: The rating reflects the airport's competitive position within the Pittsburgh metropolitan statistical area (MSA), a primarily origin and destination (O&D) traffic base of approximately 4.4 million passengers, and well-diversified airline market share. The rating further reflects the airport's rapidly declining debt burden under the current amortization profile, allowing for a very low leverage position as well as giving an opportunity to further reduce airline costs from historically high levels. The combination of stabilized traffic and debt coverage levels coupled with healthy reserves and manageable near-term capital needs should allow the authority to maintain a strong financial and cost profile. O&D Airport; Limited Competition (Revenue Risk - Volume - Midrange): The airport serves a primarily O&D passenger base with no competing alternatives within the MSA. Traffic levels have shown some volatility in the past decade, averaging approximately 4.3 million enplanements annually. Well-diversified market share exists with American Airlines and Southwest airlines both accounting for approximately 28% market share. Subsidized CPE (Revenue Risk - Price - Stronger): The airport utilizes a cost center residual use and lease agreement that provides strong cost recovery terms through May 2018. While cost per enplanement (CPE) levels ($12.88 in 2016) remain slightly above average compared to other regional airports, the airport retains a solid coverage level and strong cash balances which could be used to offset airline costs, reducing CPE to a level consistent with Stronger peers. Also, while dependent on the airport's successor airline agreement, airline costs will likely be further reduced as a large portion of the airport's debt matures. Manageable Capital Program (Infrastructure Development & Renewal Risk - Stronger): The airport's capital improvement program (CIP) through 2022 totals $160 million, approximately 48% of which is estimated to be funded from federal and state grants. The CIP is primarily focused on rehabilitation and maintenance of the airfield and terminal facility. No additional debt is anticipated to fund the near-term CIP. The airport's $1.1 billion master plan is expected to rely on additional debt issuance, though the timing and sizing is unknown at this point in time. Rapid Debt Amortization (Debt Structure - Stronger): The debt profile amortizes rapidly, with approximately 85% of revenue bonds amortizing within the next five years. Debt service payments decrease to approximately $15 million in 2019, from the current annual payment of approximately $65 million. All bonds are fixed rate and fully amortizing, with standard covenants and reserve levels. Financial Metrics The airport has low leverage with net debt to CFADS of approximately 1.4x in 2016. Cash on hand is expected to exceed that of debt outstanding by fiscal 2019. Debt service coverage remains adequate at 1.42x, and Fitch expects coverage to remain in the 1.4x range going forward. Fitch expects CPE levels to fall to a competitive $9 range, assuming the airport's current AUL terms remain intact. In 2016, the airport's cash available for operational purposes equaled $95.6 million, equal to 330 days cash on hand (DCOH). Peer Analysis The airport's peers include Cleveland, Ohio (BBB+/Stable), and Cincinnati, Ohio (Kenton County Airport Board; A+/Stable). Each airport was previously a domestic hub and has transitioned to a primarily O&D airport. Traffic levels among the airport remain similar. Pittsburgh International Airport has low leverage levels similar to Cincinnati, despite a slightly elevated CPE. However, CPE is expected to further evolve down by 2019 as a substantial portion of the airport's debt matures. Pittsburgh's liquidity position is below both Cleveland and Cincinnati. However, Cleveland's leverage and CPE remain much higher than both Pittsburgh and Cincinnati. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action: --Additional leverage for future capital projects that has a material impact on current financial metrics and/or exceeds 6x on a sustained basis. --Service reductions from airlines or cost increases leading to a sustained CPE level above $14. Future Developments That May Lead to Positive Rating Action: --Execution of a new AUL coupled with low debt levels that further reduce costs to airlines on a sustained basis. CREDIT UPDATE The airport's enplanements continued to grow behind increased frequency by airlines and stability of the Pittsburgh region. In 2016, traffic increased approximately 2.4% to 4.15 million, following a 1.3% increase in 2015. Traffic has further increased through July 2017, up an additional 2.5%. Management continues to focus its efforts on attracting new carriers to the airport, and increasing the frequency of current offerings. Near-term traffic reductions are partially mitigated as the airport maintains sufficient cash flow to service what will be a much less significant debt obligation, as a substantial portion of the current debt matures in 2018. An increase in non-aviation revenue and management's ability to contain expenses had positive effects on financial performance in 2016. Non-aviation revenue increased 1.5% to $55 million, driven by a 2.2% increase in parking revenue and a 6.2% increase in terminal concession revenue. Other non-operating revenue applied to debt service, such as passenger/customer facility charges, gaming revenue, and gas drilling bonus payments also helped to offset costs charged to airlines. Total airline revenue still increased 2% to $78.9 million, though CPE levels continued to fall to $12.86 from $12.9 in 2015. In 2016, the airport began to receive royalty revenue from gas drilling on the airport's property, in addition to the bonus payments received through 2018. While royalty revenue was used to further offset airline costs, Fitch notes that gas drilling is a volatile revenue source as it is subject to market-based pricing. Management has budgeted for a 3.9% increase in total revenues for fiscal 2017. Expenses increased 3.7% in 2016 driven by growth in salaries/benefits, maintenance, and capital expenditures. Any future cost savings could offset slightly above average airline costs, which coupled with a decline in debt service requirements, would further strengthen the airport's financial position. Expenditures are budgeted to increase by 4.8% in fiscal 2017. Given the changing role of the airport over the past 15 years (and no longer serving as a connecting hub) the airport unveiled plans for a $1.1 billion modernization program in September. The modernization plan is primarily aimed at reducing operating expenses and improving facilities to support growth in O&D traffic. There are no concrete funding plans outlined at this time, though additional airport borrowing is likely, which could impact current financial metrics. Fitch will continue to monitor developments pertaining to the project as they arise. Performance Update Fitch Cases Fitch has applied various revenue and expenditure assumptions in a base and rating case that extends through fiscal 2022. Such projections will be updated and augmented as details of the authority's master plan are outlined. The airport's current airline agreement expires in May 2018, and when formulating its cases, Fitch assumed renewal of the agreement under similar terms. Fitch's base case assumes annual traffic growth of 1% and inflationary expense growth of 3%, consistent with the airport's recent results. Under this scenario, CPE is expected to decline to approximately $9.50 through 2018, as the airport continues to apply a strong portion of non-operating revenue to debt service. The rapid amortization of debt allows CPE to fall to the $6-$8 range in 2019 through 2022. Fitch's rating case assumes a sharp decline in traffic in 2018, followed by modest recovery thereafter. Expenses are stressed to 4% growth per year. In this scenario, the airport's CPE rises to nearly $12. Assuming a similar airline agreement, CPE averages around $9-$10 in the latter years of the pro forma. Fitch did not include any royalty revenue from gas drilling on the airport's property in either of its cases, as such payments are subject to market-based pricing and have limited proven history. Fitch also notes that the airport could use additional CFC, PFC, and gas drilling bonus payment revenue to offset additional costs to airlines in the event of a downturn. As such, the airport's CPE and other financial metrics are consistent with peers at the 'A' rating level.