Our outlook for the US airport sector is negative. This outlook is based on our view that a struggling economic recovery will limit enplanement growth, which will pressure financial flexibility; that continued airline consolidation will result in reduced seat capacity; and that federal funding reauthorization is unlikely to be resolved in an election year.»
Declining enplanements.
Enplanement trends turned negative in the second half of 2011 and airline industry and economic conditions will likely cause them to continue downward in 2012. Moody’s expects enplanement growth to be in the +1% to -4% range.» Economic conditions do not favor growth. US and global economic conditions remain sluggish and contain substantial risks particularly concerns about how Europe will manage its fiscal crisis. Successful management of the European financial crisis or stronger than expected growth in the US economy would push the outlook toward stable.»
Airport financials have weakened.
Airport financial health remains resilient, but the difficult conditions of 2008 through 2011 have reduced financial flexibility. We see financial metrics declining in 2012, or remaining flat at best.» Federal funding support remains uncertain. Congress has yet to pass a long term FAA reauthorization bill making long-term capital planning difficult for US airports that all rely on some kind of federal funding for capital improvements.
Moody’s expects the credit impacts of these factors to depend on the trajectory of the US and global economies and does not expect the sector to stabilize until consistent positive enplanement growth is achieved. The sector outlook has been negative since August 2008 and we expect it to remain negative until enplanement growth reaches a sustained growth rate of +3% or higher.
Note: Industry outlooks are not explicit signals of the likely direction of ratings in an industry. They are a view of the business conditions that factor into our ratings.
INFRASTRUCTURE2 JANUARY 24, 2012INDUSTRY OUTLOOK: US AIRPORTS: TRENDS INDICATE ANOTHER DIFFICULT YEAR AHEAD
Key IndicatorsMoody’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. While the stabilized US economy led to limited enplanement growth across the sector during 2010 and early 2011, growth in 2012 is likely to be hampered by reduced airline capacity and uncertain economic conditions. Most rated US airports lost some financial resiliency during the recent economic downtown, and therefore have a reduced capacity to manage further enplanement declines. In addition, the ongoing fiscal difficulties for all levels of US government are likely to reduce the availability of grant funds for capital projects.
US AIRPORTS: TRENDS INDICATE ANOTHER DIFFICULT YEAR AHEAD
Economic Conditions Hamper Demand Recovery
The US economy remains in a fragile state with high unemployment, high public, corporate and personal debt, and uncertain growth prospects.
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.
While Moody’s believes the majority of rated US airports maintain enough flexibility to manage the many uncertainties facing the industry, we note that almost all rated airports have lost some financial flexibility since 2008. Each airport managed the impacts of the downturn in their own way, but whether they reduced operating expenses with staff cuts, used financial reserves, maintained airline rates by allowing debt service coverage to slip or a combination of those, some measure of flexibility has been lost.
The changes in FY 2009 and FY 2010 medians for the sector show the general decline in financial strength through the substantial reduction in debt service coverage.Our outlook remains negative as we believe that the reduced financial strength of most rated airports leaves them in a weaker position to manage the many industry uncertainties.
Please see our special comment “AMR Bankruptcy Filing Adds to US Airport Credit Stress” published December 2011.
Federal funding support remains uncertainCongress has passed 23 extensions to the authorization act that currently funds the Federal Aviation Administration, and it appears unclear if a longer term solution will be reached prior to the current January 31, 2011 expiration. The House of Representatives passed the Federal Aviation Administration Reauthorization and Reform Act of 2011 (H.R.658) on April 1, 2011. The bill includes an authorization level of $3.1 billion for the Airport Improvement Program for FY 2011 and $3.0 billion for each year from FY 2012 to FY 2014. These authorization levels are lower than the recent extensions, which held annual funding at $3.5 billion. This bill does not include an increase in the Passenger Facility Charge (PFC) cap of $4.50, but does allow for a pilot program for up to 5 airports that expands PFC use for airport access projects.The Senate passed the FAA Air Transportation Modernization and Safety Improvement Act (S. 223) on February 17, 2011. The bill includes AIP authorization of $4.1 billion for FY 2011 and also does not increase the PFC cap above $4.50. The Senate version includes a pilot program for up to 6 airports that allows an unlimited PFC, but requires the airport to self-collect the charge.Because the bills differ on a number of points, to move forward each chamber would have to either pass new identical legislation or appoint conferees to deliver an amended bill to the President for signature. The Senate has appointed conferees, but at the time of writing, the House has not. A provision that overturns a recent National Mediation Board rule making it easier for labor unions to organize airline workers appears to be the largest impediment to a final bill, though there remain some questions about other issues.The short-term extensions that have kept the FAA funded over the past five years make it difficult for airports to conduct long-term capital planning as there remains uncertainty about the amount of Federal support that can be provided to projects. This was particularly evident when the FAA experienced a 14 day shutdown in August when a short-term extension was not passed in time. Inflation and increases in construction costs have eroded the buying power of the PFC at the $4.50 level. While Moody’s has not considered a potential increase in any debt rated to date, as costs increase the cap on the PFC will continue to limit the value of the program to a greater degree.
