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


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.

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