U.S. Airports: Trends Indicate Another Difficult Year Ahead

Moody’s outlook for the US airport sector remains negative due to the uncertainty surrounding three key growth drivers: economic conditions, airline capacity expansion, and federal funding


Moody’s Global Risk Perspectives’ most recent report indicates that “a sluggish recovery remains the most likely global macro-economic scenario” and financial market turbulence, fiscal consolidation efforts and banking sector deleveraging will continue to constrain growth into 2012.” Other economists, including Moody’s Economy.com1Moody’s notes that unsuccessful handling of the European debt crisis could result in severe dislocation within the euro area and contagion risk to the US economy. Euro area financial market turbulence is already affecting consumer and business confidence, which will negatively affect consumption and investment activity. Transatlantic contagion has the potential to drive the US economy into recession, and perhaps for a more prolonged period than the recent recession. This would sharply reduce the demand for both domestic and international air travel and continue to exert downward pressure on enplanement numbers. The degree to which activity loss is contained, thus preventing a spiral of worsening government fiscal positions and bank sector profitability, will determine the likelihood of US contagion. Recent economic indicators have demonstrated US resilience to weakening conditions in the euro area so far. expect slow but positive growth for the US economy. We believe this solid, positive growth will provide a foundation for stable demand in both business and leisure travel.

 

Moody’s Global Macro-Risk Scenarios 2012Moody’s Global Risk Perspectives (available at www.moodys.com/gra) indicates that a sluggish recovery is the most likely global macro-economic scenario for the period 2011 and 2012. Moody’s expects the global economy to return to trend growth rates with persistent unemployment and budget deficits in developed markets.Recovery for advanced economies, such as the US, is expected to be fragile because financial market volatility has reduced consumer and business confidence. In addition, the combination of deleveraging efforts of the public and private sector is likely to have an important impact on credit. Moody’s view is based on our analysis that most governments will continue to pursue fiscal austerity measures in advanced economies. Growth will not be homogenous across the globe as developing nations, specifically those in Asia and Latin America, will see above average growth. Still downside risks to the global economy remain and Moody’s is focusing on four: financial market turbulence in the euro area; credit contraction due to policy-induced banking system deleveraging; a potential for a hard landing in China; and an oil price supply-shock.

 

Airline Consolidation Pressures Seat CapacityEnplanement growth will be restrained in 2012, in part by stagnant economic growth, but also by the continuing threat of airline capacity reductions. Airline mergers mean that the new United, Delta, and Southwest airlines now account for 60% of total US enplanements (2011 through September), having accounted for only 45% in 2007.

Delta made several route reductions in 2011 and we expect all three major airlines to continue to trim capacity as they complete full integration. Seat capacity is already forecast to decrease by 1.2% in the first quarter and 0.7% in the second quarter, according to the Official Airline Guide.Moody’s expects enplanements to grow by between +1% and -4% in 2012. Our opinion is that seat capacity is likely to fall further as the year progresses due to route restructuring by most major airlines. The consolidation that has occurred in the airline industry over the past three years has given airlines considerably more market power to raise and maintain higher fares on top of the ancillary fees that have become so commonplace. These higher prices will combine with high unemployment and low household wealth levels to limit enplanement growth from a sizeable rebound in 2012. If US and European economic conditions remain stable, we believe demand may be strong enough to limit seat contraction and result in slightly positive enplanement growth.

 

The recent decision by American Airlines to enter Chapter 11 bankruptcy also brings a potential for that airline to trim its capacity.

Moody’s expects the airline will cut between 5% and 10% of its system-wide capacity as part of the restructuring process. While we expect the greatest relative credit impact to occur at smaller market airports, reduced service at the airline’s domestic hub airports is also likely to occur.

We believe the severe “de-hub” risk, the airline’s decision to stop using the airport as a connecting hub, is low at these airport, but other risks are more likely to occur.

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