How the Airport Sector Held Steady Through the Pandemic | Lord Abbett
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Fixed-Income Insights

Despite a sharp drop in passenger volumes, airports’ revenue structure, robust liquidity positions, and capital spending flexibility helped them maintain a strong financial footing.

Read time: 2 minutes

[This article is from the forthcoming edition of the Lord Abbett Muni Quarterly.]

The airport sector has shown tremendous resilience during the past year despite strong headwinds from the coronavirus pandemic. Travel ground to a halt during the onset of the global outbreak, with April 2020 enplanements (a measure of passenger boarding) down 95% versus the same month in the prior year, due to a combination of shelter-in-place orders and travel restrictions (from the Transportation Security Administration). Despite what would seem like a near-total shutdown of the sector, most airports did not experience material financial stress over the past year.

Why? The first reason is that airport revenues are not directly linked to enplanements. Instead, they are mainly derived from the use agreements that these facilities establish with airlines and concessionaires; the most common form of these agreements provides for cost-sharing mechanisms. This means that when enplanements fall, and there are accordingly fewer flights scheduled to land, and thus fewer customers for airport-linked businesses like car-rental agencies, the airport does not have to shoulder the full burden of these revenue declines but gets to pass on the cost in the form of higher terminal fees to airlines. It also means that aid to airlines under various government programs related to COVID-19 relief, which has amounted to nearly $54 billion since March 2020, indirectly benefits airports because it lessens the chance that the airlines will be unable to pay their required fees.

A second reason why airports have remained resilient is that they entered the pandemic with historically strong liquidity positions, and, like their airline tenants, received significant federal aid over the past year. The average amount of cash and investments held by airports we cover amounted to 575 days cash on hand as of the end of fiscal 2019, and has not materially declined, based on 2020 audits that have been released. Airports’ persistently strong liquidity reflects (1) their revenue structure; (2) the $10 billion in federal aid distributed to operators in the CARES act; and (3) the fact that the airports were able to quickly cut expenditures as traffic began to crumble. Many airports temporarily closed terminals and cut contracted services, and due to the expansionary nature of their capital plans, were able to significantly reduce capital expenditures and push back plans for additional debt.

The final big factor that will continue to benefit airports is essentiality. Airports have no significant competition for long-distance domestic and international travel except each another, and when travel returns to pre-pandemic levels, airline passengers will be reaching their destinations through the same airports they always have. Airports are not only essential to travelers, but to airlines as well. Prior to the pandemic we had considered diversity in airline mix as a credit strength for airports, as it reduced reliance on one or two large payers. However, during the pandemic we saw that concentration in one specific airline—for example DFW acting as a hub for American Airlines—was also a good indicator of how essential the airport was as a node in the airline’s transportation network.

Summing Up

 We continue to believe that airports will remain strong credits as the recovery continues. Enplanement recovery has started to accelerate since March 2021, as vaccines have become widely available in much of the United States. After stalling out at 60% below 2019 levels for the entirety of November 2020 through February 2021, year-over-year enplanements were down just 47% in March and 40% in April; thus far in May, the decline has fallen to around 36%. Airports that have a higher percentage of domestic travel have recovered more rapidly, but as other countries are able to vaccinate their populations, we expect international travel to recover as well.

 

Figure 1. After Pandemic Plunge, U.S. Passenger Counts Gain Altitude
Throughput (TSA data) percent change versus pre-COVID 19 pandemic levels

Source U.S. Transportation Security Administration. Data as of May 31, 2020. Throughput refers to the average quantity of passengers that can pass through an airport on a daily basis from arrival at the terminal to boarding on the plane, or from disembarkation to the exit (clearance) from the airport. For illustrative purposes only.

 

IMPORTANT INFORMATION

This commentary may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

This material is provided for general and educational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or any Lord Abbett product or strategy. References to specific asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations or investment advice.

References to specific securities and issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in portfolios managed by Lord Abbett and, if such securities are held, no representation is being made that such securities will continue to be held. This is not a representation of any securities Lord Abbett purchased or would have purchased or that an investment in any securities of such issuers would be profitable.

A Note about Risk: The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The municipal bond market may be impacted by unfavorable legislative or political developments and adverse changes in the financial conditions of state and municipal issuers or the federal government in case it provides financial support to the municipality. Income from the municipal bonds held could be declared taxable because of changes in tax laws. Certain sectors of the municipal bond market have special risks that can affect them more significantly than the market as a whole. Because many municipal instruments are issued to finance similar projects, conditions in these industries can significantly affect an investment. Income from municipal bonds may be subject to the alternative minimum tax. Federal, state and local taxes may apply. Investments in Puerto Rico and other U.S. territories, commonwealths, and possessions may be affected by local, state, and regional factors. These may include, for example, economic or political developments, erosion of the tax base, and the possibility of credit problems.

The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, is a $2.2 trillion economic stimulus bill enacted in March 2020 in response to the impact on the U.S. economy of the COVID-19 pandemic.

The credit quality of the securities in a portfolio is assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor’s, Moody’s, or Fitch, as an indication of an issuer’s creditworthiness.  Ratings range from ‘AAA’ (highest) to ‘D’ (lowest).  Bonds rated ‘BBB’ or above are considered investment grade. Credit ratings ‘BB’ and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer’s ability to pay interest and principal on these securities.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett’s products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action, as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product, or service may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

FIXED-INCOME INSIGHTS

 

    Muni Quarterly

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