Okaloosa County BOCC — August 6, 2013 — Resolution for Airport Revenue Refunding Bonds, Series 2013 — reading text

unemployment and reduced discretionary income contributed to reduced airline travel demand at the Airport in those years. With the globalization of business and the increased importance of international trade and tourism, growth in the U.S. economy has become more closely tied to worldwide economic, political, and social conditions. As a result, international economic conditions, trade balances, currency exchange rates, political relationships, and hostilities are important influences on passenger traffic at U.S. airports, including the Airport. Sustained future increases in passenger traffic at the Airport will depend in part on stable international conditions as well as national and global economic growth. Financial Condition of the Airlines; Industry Consolidation. The recent global recession, sluggish recovery from the 2008-2009 recession and high fuel prices, among other things, resulted in airlines raising fares, adding new fees and surcharges while reducing capacity and the size of their fleets, as well as personnel. In addition, several airlines merged or consolidated, while others either reorganized under applicable bankruptcy laws or ceased operations. The County is not able to predict whether any future airline mergers, consolidations, reorganizations or liquidations will occur or the impact that any such events may have on the operations of the Airport. Cost, Availability and Price Volatility of Aviation Fuel. The level of prices, the availability and the price volatility of aviation fuel are some of the most significant and uncertain factors impacting the airline industry. In 2008, according to the Air Transport Association, fuel overtook labor as the industry’s largest operating expense. During the first quarter of 2011, fuel prices increased as a result of rising global demand and political instability in oil producing countries in the Middle East and North Africa. In recent years, some airlines have attempted to pass the higher fuel costs to consumers by imposing fuel surcharges, increasing the price of airfares and associated services, or reducing capacity, fleet and personnel. Despite these types of efforts, aviation fuel costs had, and are likely to continue to have, an adverse impact on the air transportation industry by increasing airline operating costs, hampering airline financial recovery plans and reducing airline profitability. The County is not able to predict how continued uncertainty with respect to the cost, availability and volatility of prices of aviation fuel will impact the Airport or the airlines operating at the Airport. Air Travel Security, Public Health and Natural Disasters Concerns. Concerns about the safety of airline travel and the effectiveness of security precautions, particularly in the context of international hostilities (such as those that have occurred and are currently occurring 40 in the Middle East and North Africa) and terrorist attacks, as well as public health and natural disaster concerns, may influence passenger travel behavior and air travel demand. Travel behavior may be affected by anxieties about the safety of flying, the inconveniences and delays associated with more stringent security screening procedures, the potential exposure to severe illnesses and natural disasters (such as volcano eruptions, earthquakes and tsunamis), all of which could lead to the avoidance of airline travel or the use of alternate modes of transportation. Regulations and Restrictions Affecting the Airport. The operations of the Airport are affected by a variety of contractual, statutory and regulatory restrictions and limitations, including, without limitation, the provisions of the Airline Agreements, the federal acts authorizing the imposition, collection and use of PFCs, and extensive federal legislation and regulations applicable to all domestic airports. It is not possible to predict whether future restrictions or limitations on Airport operations will be imposed, whether future legislation or regulations will affect anticipated federal funding or PFC collections for capital projects for the Airport, whether additional requirements will be funded by the federal government or require funding by the County or whether such restrictions or legislation or regulations would adversely affect Gross Revenues. Impact of Federal Sequestration. Federal funding received by the Airport could be adversely affected by implementation of certain provisions of the Budget Control Act of 2011 (Pub. L. 112-25) (the "Budget Control Act"), which was signed into law by President Obama on August 2, 2011. As a result of the failure of the Joint Select Committee on Deficit Reduction to reach an agreement on the deficit reduction actions as required by the Budget Control Act, sequestration has been triggered. On January 2, 2013, President Obama signed into law H.R. 8, the American Taxpayer Relief Act of 2012, which delayed the initiation of the sequestration process from January 2, 2013 to March 1, 2013. Sequestration could adversely affect FAA operations and the availability of certain federal grant funds typically received annually by the Airport. These federal spending cuts would likely be spread over a number of years. In addition to adversely affecting the United States economy, commercial aviation operations throughout the United States could also be adversely affected, due to layoffs or furloughs of federal employees responsible for certain critical federal airport functions; however, on May 1, 2013, President Obama signed into law the Reducing Flight Delays Act of 2013 (H.R. 1765), which ended FAA air traffic controller furloughs that had caused air traffic delays across the nation, but which reduced the amount of available AIP funds in the federal fiscal year of 2013 by $253 million to pay for such controller costs. The full impact of such sequestration measures on the Airport, however, is unknown at this time. Low-cost Carriers and Low-fare Divisions of Legacy Carriers. In recent years, low-cost carriers have accounted for an increasing share of the domestic U.S. passenger market at the expense of the legacy carriers. Nationally, low-cost carrier service accounted for approximately 10% of passenger traffic in the early 1990s and increased to approximately 25% by early 2004. Increased competition from low-cost carriers has placed additional pressure on the legacy catriers to institute further cost-cutting measures, reduce their fares to remain competitive and introduce their own low-fare divisions. 4] Travel Substitutes. Teleconference, video-conference and web-based meetings have improved in quality and price and are often considered satisfactory alternatives to face-to-face business meetings. In addition, leisure and business travelers may choose alternative modes of transportation, such as cars. The September 11 events have accelerated this trend. Although the impact cannot be accurately quantified, it is possible that business travel to and from Okaloosa County may be negatively affected by this trend. Structural Changes in the Travel Market. Many factors have combined to alter consumer travel patterns. The threat of terrorism against the United States remains high. As a result, the federal government has mandated various security measures that have resulted in new security taxes and fees and longer passenger processing and wait times at airports. Both add to the costs of air travel and make air travel less attractive to consumers relative to ground transportation, especially to short-haul destinations. The Air Transport Association observes a disproportionate decline in short-haul air travel and a consistent rise in automobile travel. More people are choosing to drive where in the past they would have flown. In addition, consumers have become more price-sensitive. Efforts of airlines to stimulate traffic by discounting fares heavily have changed consumer expectations regarding airfares. Consumers have now come to expect low fares. In addition, the availability of fully transparent price information on the Internet now allows quick and easy comparison shopping, and this has changed consumer purchasing habits. Consumers have shifted from purchasing paper tickets from travel agencies or airline ticketing offices to purchasing electronic tickets over the Internet. This has made pricing and marketing even more competitive in the U.S. airline industry. Finally, smaller corporate travel budgets, combined with the higher time costs of travel, have made business customers more amenable to communications substitutes such as tele- and video-conferencing. Capacity of National Air Traffic Control and Airport Systems. Demands on the national air traffic control system continue to cause aircraft delays and restrictions, both on the number of aircraft movements in certain air traffic routes and on the number of landings and takeoffs at certain airports. These restrictions affect airline schedules and passenger traffic nationwide. The FAA is gradually automating and enhancing the computer, radar, and communications equipment of the air traffic control system and assisting in the development of additional airfield capacity through the construction of new runways and the more effective use of existing runways. However, increasing demands on the national air traffic control and airport systems could cause increased delays and restrictions in the future. Airport Use and Lease Agreements. A substantial portion of Gross Revenues available for payment of debt service on the Series 2013 Bonds is derived from rentals, fees and charges imposed upon the signatory airlines under the Airline Agreements. Pursuant to the Airline Agreements, each signatory airline has agreed to pay the rates and charges for its use of the Airport. The Delta, American and US Airways Airline Agreements expire in 2016, while the United Airline Agreement expires in 2013 (although a 3-year extension is expected). Any of such Airline Agreements may be terminated by the County or by a signatory airline, including Delta, under certain circumstances. No representations are made herein regarding whether additional Airline Agreements will be executed or with respect to extensions or terminations thereof or that challenges will not be made by airlines to the rates and charges established by the County or its method of allocating particular costs. 42 Risk of Airline Bankruptcies. Since 2001, several airlines with operations at the Airport, including, among others, Delta, US Airways and United, have filed for bankruptcy protection. However, with limited exceptions, these airlines have successfully reorganized and emerged from bankruptcy protection. American Airlines and certain of its affiliates filed for bankruptcy protection in November 2011 and are continuing operations. American has accepted its Airline Agreement at the Airport and has settled its pre-petition debt with the Airport as part of its plan of reorganization; however, no assurances can be given with regard to American’s future level of activity at the Airport. Furthermore, additional bankruptcies, liquidations or major restructurings of airlines with operations at the Airport could occur in the future. The County cannot predict the extent to which any such events would impact the ability of Airport Revenues to pay the outstanding Series 2013 Bonds and Series 2007 Bonds. Effect of Airline Bankruptcy In the event of bankruptcy proceedings involving one or more of the airlines operating at the Airport, the debtor or its bankruptcy trustee must determine within a time period determined by the court whether to assume or reject the applicable Airline Agreement or other lease agreements or operating agreements. In the event of assumption, the debtor would be required to cure any prior defaults and to provide adequate assurance of future performances under the relevant agreements. Rejection of a lease or an executory contract