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Fixed-Income Insights

Strong passenger growth is expected to continue.

By Yeida Reyes, Research Analyst

[Note: This article is from the forthcoming issue of The Muni Quarterly.]

We continue to maintain a favorable view of the U.S. airport sector—which represents a roughly $100 billion segment of the $3.8 trillion municipal-bond market—as credit fundamentals remain strong. Enplaned passenger growth is accelerating due to continued U.S. economic expansion, airlines are profitable (with the help of low oil prices), and financial metrics for airports are favorable.1

Although large-scale capital programs have pushed leverage higher in the sector, the impact to the airlines that serve the airports will not be significant, as the rate increases required to service the additional debt are expected to remain manageable.  

We expect continued U.S. gross domestic product (GDP) growth and robust seat capacity from the airlines to contribute to overall traffic gains of 4% in 2018. Low-cost carriers likely will continue to show the strongest growth in the sector, but legacy carriers are starting to increase capacity after several years of restraint. United Airlines, for example, has announced aggressive plans to increase capacity by connecting more flights to smaller, higher-yielding destinations via its hubs in Chicago, Denver, and Houston. Meanwhile, other legacy carriers are starting to respond in kind with expanded capacity.

Smaller Airports Take Off
While large hubs continue to dominate the market and account for more than 70% of passenger enplanements in the United States, smaller airports have begun to show stronger growth. In 2016, traffic at small airports was up just 1.7%, versus growth of 5.5% and 6.5%, respectively, for large and medium-sized airports.2 In contrast, small airports experienced traffic growth of 5.3% in 2017, versus 2.6% and 5.2% increases, respectively, at large and medium-sized facilities. 

Airports with the largest increases in traffic, bolstered by new service from low-cost and ultra-low-cost carriers, included Long Beach (CA), Colorado Springs (CO), and Savannah (GA). Small and medium airports should continue to see strong growth in 2018. This could create some upside for these credits in the sector, in particular for those airports that can accommodate larger planes that carriers favor for operational efficiency.

Moreover, we expect connecting traffic at large airports to expand or remain stable, now that airline industry consolidation is in the rearview mirror. With traffic gains poised to exceed budgeted expectations (most airports incorporated the Federal Aviation Administration’s annual growth projection of 1.9%), the sector likely will see revenue growth and strengthened financials that should contribute to upside.  

Possible Headwinds
There are, however, potential challenges for the airport sector, including leverage increases due to large-scale capital projects across the nation that will require more than $10 billion of debt issuance in 2018. Most projects are focused on improving or expanding terminal space and concession schemes rather than enhancements to runways and other airfield infrastructure. It is possible that construction plans could accelerate should the Trump administration’s infrastructure funding plan come to fruition this year.  Even if the plan were enacted, much of the financial burden of capital projects likely will fall on the shoulders of the airports rather than the federal government. Nevertheless, we generally do not see a risk of overbuilding and the creation of uncompetitive financial positions.

Parking revenue is also under pressure, as passengers shift to transportation network companies (TNCs) like Uber and Lyft. While rate increases and access fees charged to TNCs have helped to offset some of the pain in recent years, pressure on this revenue stream continues to build. Based on our analysis, terminal concessions typically account for more than 45% of total airport operating revenues, so this remains a key item to watch.

Security Selection Remains Key
In light of the factors listed above, we expect the overall U.S. airport sector to perform well, though there are some important distinctions to keep in mind. From a credit perspective, we maintain a positive stance on those airports that demonstrate a trend of strong enplanement growth, serve a robust and diverse metropolitan region, have manageable airline costs, and a stable carrier base. We believe those airports that are located in less dynamic service areas and those that have less capacity to accommodate a capital program will present less attractive investment opportunities going forward. As always, a disciplined security selection process, informed by rigorous credit research, will remain a key factor in capturing value in the airport sector.

 

1Based, respectively, on enplanement data from the Federal Aviation Administration, earnings data from Bloomberg, and financial filings from issuing airport entities.

2Source: Moody’s Investors Service. Per Federal Aviation Administration guidelines, small airports are defined as those with at least 0.05%, but less than 0.25% of annual U.S. passenger boardings. Medium airports account for 0.25%, but less than 1%, while large hubs represent those with more than 1%.

 

 

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