Flat passenger counts not seen as threat to paying debt on midfield terminal

The big debt payments on the $1.1 billion midfield terminal at Indianapolis International Airport start coming due in January–just
as a recession hits and the battered airline industry cuts capacity.

Despite the likely prospect of fewer passengers than projected in the next year or two, airport
managers say they don’t anticipate problems shouldering the roughly $40 million a year in debt burden
over the next 30 years for the new facility.

They say they’re not flying into a financial storm largely because of the new Col. H. Weir Cook Terminal’s more powerful revenue-generating
engines. It offers the possibility of millions of extra dollars from parking, restaurants, retail shops and other so-called
non-airline revenue.

challenge going forward is to manage the new facility in a way to produce growth of non-airline revenue," said John J.
Kish, executive director of the Indianapolis Airport Authority and manager of the midfield project. "The airport’s financial
system has survived the ups and downs of the economy of the last decade," including 9/11, Kish added.

Indeed it did, and not only the 2001 disaster
but also the demise in recent years of what once was the busiest carrier at Indianapolis International,
ATA Airlines.

Still, bond
rating agencies who gave high marks to the airport debt earlier this year are watching. The airport authority
first started floating bonds for midfield in 2003.

Earlier this year came the airport’s final midfield bond issue–which raised another $350 million.
In June, before the stock market dived and the economy worsened, Fitch Ratings assigned that debt an
"A+" rating, one of its highest. Still, Fitch noted the airport’s rising costs through 2011
as debt service for the terminal is included in what airlines pay to operate here. It also noted industry
turmoil and the "potential for significant system-wide capacity reductions in the last quarter of 2008."

Should those reductions "affect Indianapolis,
projected gains in non-airline revenues expected from its new state-of-the-art terminal building …
could be less than anticipated."

Similarly, Moody’s Investors Service affirmed a good "A1" rating on the $350 million in 2008 airport bonds for midfield
that will, alone, increase the airport’s annual debt service $18 million in 2009 and $22 million starting
in 2011.

"The airline
industry may be facing a difficult period given rising fuel costs and a softening economy, highlighting the importance
of the [Indianapolis Airport] Authority’s ability to meet its [passenger targets]."

Those targets through 2012 figure an annual passenger growth rate of 3.3 percent, "which
is consistent with the long-term annual growth rate but may be somewhat aggressive given rising fuel
and airline ticket prices and a slowing economy," Moody’s said.

Fewer passengers

Indianapolis International traffic last year grew 2.4 percent, to 8.3 million passengers, thanks
largely to growth of Air-Tran Airways and Frontier Airlines.

In 2008, however, Indianapolis is likely to see just fewer than 8 million passengers, according
to Evergreen, Colo.-based Boyd Group International. And through 2014, "we see it growing very slowly,"
said CEO Michael Boyd.

Nationwide, "the industry is going to be pulling back on capacity significantly," Boyd said.

Officially, the Indianapolis Airport Authority
has projected the number of passengers will be flat next year, though Kish concedes "that may be
a little optimistic."

Kish said original projections for passenger growth are sound, that a roughly 3-percent annual growth rate is the average
over the last 20 years. "Those are long-haul numbers we are comfortable with."

Passenger numbers are key because they underlie financial assumptions on which the airport bases
landing fees and rents paid by airlines. Those airline payments are primary contributors to the airport’s
operating revenue. Operating revenue funds about 61 percent of the airport’s $1.2 billion in total bond
and airport debt.

rest comes from a $4.50 "passenger facility charge" tacked on to the cost of each ticket, and a $3 "customer
facility charge" per day on car rentals.

Revenue machine

Even if passenger numbers remain flat next year, the new terminal should start producing more
cash that will go toward paying down debt.

For one, base minimum rent alone from the 51 shops and restaurants in the new terminal should
bring $7.6 million versus $4.8 million this year from 44 vendors at the existing terminal.

The authority estimates higher sales in part
because more of the restaurants and shops are in the gate areas, beyond security checkpoints. Airports
have found that in an era of tighter security, many prefer to wait until after they get through checkpoints
to eat and shop.

are also counting on a new parking garage to spin off more revenue. The new garage has 5,900 spaces versus 1,776
at the old one. Prices in the new garage are lower–the daily maximum rate is $16 vs. $22. Airport managers predict more spaces
at a lower price will generate an extra $10 million in parking revenue.

With the terminal and garage combined, the authority estimates a $26.6 million, or 24 percent,
jump in operating revenue over 2008.

Airlines have been on board the terminal expansion since 2001, when they signed an operating agreement
with the airport that spelled out higher terminal rents to fund the new terminal, starting next year.
That agreement runs through 2010.

The authority got their support largely by assuring them Indianapolis would remain a relatively affordable place to do business.
Key to that has been the authority’s ability to grow its non-airline revenue, said Fitch Ratings.

"The airport’s ability to generate substantial
non-airline revenue, which has historically represented 60 percent of total operating revenue, sustains
the airport’s reasonable cost per enplaned passenger," Fitch said in June.

The diversity of airlines in Indianapolis and FedEx’s second-largest global sorting hub here also
helped distribute expenses across a wider base, said Fitch analyst Andrew Abramczyk.

Fitch has maintained its outlook on the airport
debt since its June report. So has Moody’s, which deemed debt service coverage as strong, with the authority
collecting 80 percent more in operating revenue than it needs to cover its bond payments.

The airport plows a portion of the remaining money into expenditures such as runway resurfacing.

Even with financial clouds on the horizon for
the airline industry, massive projects such as a new terminal still need to be viewed in the context
of long-term endeavors, Boyd said. "If you knew what you know now, you still should have built it."

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