Fitch Ratings has affirmed its 'A' rating on approximately $1.12 billion in outstanding airport revenue bonds issued by the City of Philadelphia, PA on behalf of Philadelphia International Airport (PHL or the airport). The Rating Outlook is Stable. KEY RATING DRIVERS The rating reflects Philadelphia International Airport's (PHL, or the airport) role as the main air service provider to a large and stable market of nearly 16 million enplanements, which is offset by American Airline's (rated 'BB-'/Outlook Stable) elevated degree of carrier concentration and connecting traffic exposure. The rating also reflects PHL's strong residual airline agreement which provides for full recovery of operating expenses and debt service costs, albeit the agreement also lends to narrow coverage and liquidity levels. PHL's leverage levels are expected to remain elevated over the medium term as additional capital-related borrowing comes on line, though Fitch views the airport's levered position as sufficiently mitigated by its franchise strength. Moreover, while airline costs are expected to continue to rise, signatory carriers have approved the airport's capital plan, signalling their ongoing commitment to the airport. Revenue Risk - Volume: Midrange Sizable, Stable American Airlines Hub: PHL serves as one of American Airlines' top connecting hubs, which lends to sizable carrier concentration of roughly 70% and moderate connecting traffic exposure of about 40%. Service reduction risk is partially mitigated by American Airline's long-standing presence at the airport which Fitch expects to persist. Fitch also views PHL's low historical traffic volatility positively; the airport experienced a minimal -5% peak-to-trough through the last recession despite large amounts of connecting traffic, representative of stable American Airlines operations and the sound Philadelphia MSA. Revenue Risk - Price: Stronger (revised from Midrange) Strong Cost-Recovery Framework: The airport benefits from a five-year residual use and lease agreement (AUL) through fiscal (ended June 30.) 2020, which effectively provides for 100% recovery of operating expenses and debt service costs. The current agreement has a longer tenor than PHL's past AULs, which provides the airport with additional protection. PHL's rising cost per enplaned passenger (CPE) level, which Fitch expects to rise to $20 by fiscal year (FY) 2021, is viewed as mitigated by the airport's franchise strength coupled with the majority in interest provision, allowing airlines to signal their willingness to fund additional capital costs. Infrastructure Development and Renewal: Midrange Largely Debt Funded Capital Plan: The airport's eight year capital plan is large at $1.6 billion, with main projects including the expansion of Terminal F, modernization of Terminals B&C, and construction of a ground transportation center. The plan is expected to be roughly 54% financed with future debt and commercial paper, with the remainder in customer facility charges (19.8%), existing bonds (13.4%), and passenger facility charges or grants (13%). Debt Structure: Stronger Sound Debt Structure: PHL benefits from all senior, fully amortizing debt with no material exposure to variable interest rates as all debt is either fixed or synthetically fixed. The debt's structural features are considered adequate, including a partially cash-funded debt service reserve and low unrestricted cash reserves albeit low liquidity is common for airports with residual AULs. The airport's leverage position is expected to remain relatively stable at roughly 11x over the next five years as PHL issues additional debt. Adequate Financial Margins: The airport has historically managed to debt service coverage levels (excluding fund balances) of around 1x and liquidity levels of roughly 100 days cash on hand (DCOH; including operating expenses and interdepartmental charges), which are considered narrow yet typical for airports with residual AULs. Fitch is also views the airport's franchise strength as a mitigant against elevated leverage levels of roughly 11x. Financial metrics are expected to remain in a similar range over the near term. Peers: Philadelphia's similarly sized hub airport peers include Miami (rated 'A'; Stable Outlook) and Minneapolis-St. Paul (rated 'AA-'/'A+'; Stable Outlook), resulting in comparable exposure to carrier concentration and connecting traffic. PHL's rating is similar to Miami's though weaker than Minneapolis's as a result of leverage metrics, with fiscal 2015 total leverage of 10.75x, 12.00x, and 4.76x, respectively. RATING SENSITIVITIES Negative: A material reduction in, or elimination of, American's hubbing activity which reduces financial flexibility could result in negative rating action. Negative: Inability to maintain a minimum of 1x net revenue debt service coverage and inability to maintain leverage levels at or below 10x-11x on a sustained basis could pressure the rating. Positive: Given the single carrier concentration and planned additional borrowing for PHL's large capital plan, upward rating movement is unlikely at this time. TRANSACTION SUMMARY The bonds are secured by the net revenues generated through the operations of the airport. In addition, the airport may pledge certain passenger facility charge (PFC) revenues for eligible projects. Performance Update Enplanements exceeded Fitch's base case expectations in FY2016, growing a modest 2.4% as a result of low cost carriers such as Spirit and Frontier adding O&D flights which more than offset declines in connecting flights from American Airlines; specifically, O&D enplanements grew 11% while connecting enplanements declined roughly 9% in FY2016. Fitch considers future O&D growth largely uncertain given the tendency of low-cost carrier operations to be somewhat volatile in general. Total enplanements have declined 7% for the two months of FY2017 YTD, which could be reflective of continued declines in American Airline specific traffic. Fitch does not believe these declines are indicative of American Airline's intentions to significantly withdraw air service at PHL, as declines appear to solely be attributed to strategic changes in American's fleet at PHL and the airline continues to publicly express its commitment to the airport as an important part of American's network. Fitch has assumed the airport will experience a 2% traffic decline in FY2017, slightly worse than if enplanements were to exhibit flat growth for the remainder of the fiscal year. Fiscal 2016 financial performance was roughly in line with expectations, with higher than expected growth leading to a slightly lower than expected CPE of $14.58 versus $15.06. While operating expense growth was 5% lower than expected, non-airline revenue growth was 2% lower than expected as a result of lower rental car performance, which required higher amounts of airline revenue growth to meet operating and debt expense obligations. Cash balances experienced growth as a result of the airlines contributing additional monies to the airport's operating and bond redemption and improvement accounts to recoup past draw downs, bringing leverage down to 9.7x, below expectations of 10.5x. In October 2016, the state of Pennsylvania's House of Representatives and Senate approved State Bill 984, which will replace rideshare services Uber and Lyft's experimental licenses, originally set to expire in winter 2017, with permanent licenses to operate legally state wide. Though it is possible future Uber and Lyft operations could hamper PHL's rental car and parking revenues, the rideshare companies remit fees to the airport for every pick-up and drop-off, which should serve to partially mitigate declines in rental car or parking transactions. Management opined that it has not yet observed any material negative impact on the aforementioned business lines as a result of Uber and Lyft's operations, albeit it plans to monitor operations and respond with protective measures as necessary. In Fitch's view, declines in non-airline revenue streams should be mitigated by the airport's residual AUL, though increases in airline revenues to compensate for declines in non-airline revenues puts additional pressure on airline costs. Negative rating action as a result of Uber and Lyft's operations at the airport is currently considered unlikely, though the agency plans to monitor developments as they relate to credit quality going forward. The airport plans to issue approximately $911.2 million in debt over the next four years to support its capital plan, with $542.3 million in fiscal 2017 and $368.9 million in fiscal 2020. Both series have been assumed to be senior, fixed-rate with flat debt service payments and 30-year maturities. Fitch does not expect these future issuances to be detrimental to credit quality so long as traffic performance remains stable and total operating expense growth (including interdepartmental charges) remains in line with expectations. However, the potential for debt-related costs associated with the airport people mover coming online poses mild credit concern, as solely planning and design costs have been incorporated into the airport's current financial plans. Should the capital plan experience a large increase in debt-funded costs as a result of the people mover coming on line, sustained leverage metrics with additional debt beyond fiscal 2020 factored in could become inconsistent with the current rating level. Fitch Cases Fitch's base case assumes a 2% enplanement decline in fiscal 2017 with flat growth thereafter while operating expenses increase at above inflationary rates of roughly 3.5%. In this case, DSCR (including interdepartmental charges and excluding fund balances) remains at an average of 1.03x, in line with historical performance, while leverage ranges from 9x-13x and CPE grows to $20.03 by FY2021. Fitch's rating case incorporates a 7.5% enplanement drop mid forecast and higher costs. In this case, CPE is slightly higher at $20.25 by FY2021, while coverage and leverage remains in a similar range as the base case due to the airport's robust cost recovery framework. PHL's coverage and liquidity levels are lower in comparison to Fitch's airport criteria's indicative guidance for an indicative 'A' large hub airport, though this is not considered a material credit concern as lower coverage and liquidity levels are standard for airports with residual AULs given the structure of the contract which affords robust downside protection, making additional financial upside less imperative. Leverage levels are also slightly higher than guidance thresholds, though Fitch is comfortable with these levels given the airport's franchise strength. Fitch also does not view rising CPE levels as adverse to credit quality given the airport's franchise strength and MII provision which allows the airlines to signal their willingness to fund additional capital projects. Overall, so long as airlines continue to demonstrate their commitment to the airport, 1x coverage (including interdepartmental charges and excluding fund balances) is maintained, and leverage levels remain reasonable, Fitch believes the airport's credit should remain commensurate with an 'A' rating.