Airports Eying GDP, Jobless Figures to Gauge Performance

With the transportation sector highly correlated with the broader economy, airports are looking to gross domestic product and unemployment estimates to determine their own levels of performance.

Depending on where the economy heads in the next few months, passenger traffic — a key component in how airports are rated by rating agencies — is expected to follow closely, according to a new report by Fitch Ratings.

Passenger traffic is an important driver of airport revenues and has generally followed the same basic trajectory, such as GDP growth and consumer confidence, over the past 20 years.

“Airport passenger traffic appears to be more highly correlated to the change in GDP and unemployment than several other macro variables tested,” analyst Mike McDermott wrote in the report.

Different types of airports are affected by the general economy in separate ways. Origination and destination airports — such as those in metropolitan areas and around state capitals that have limited competition and exposure to connecting traffic — have the highest correlation to the business cycle. Airports categorized as leisure, secondary or international facilities are much more sensitive to the economy and react more strongly.

“Airports vary in terms of volatility by type, with O&D airports more closely linked with GDP and the leisure and secondary airports much more volatile,” McDermott said. “If GDP goes down 2%, the origination and destination airports more closely follow that. The secondary and leisure airports have a bigger change.”

With the analysis between passenger traffic and business cycles, Fitch is looking ahead to the end of the year and 2012 to determine ratings. Fitch will use the model and analysis to “develop a band of likely traffic volumes for the sector as a means to provide guidance on development of the base-case and stress-case scenarios considered in the ratings process,” McDermott said. The agency will also use the model as a general guide for assessing credit exposure to macro trends and to evaluate the consistency of airport ratings.

For now, the Fitch sovereign team assumes a 1.5% GDP growth rate for 2011, which will put the change in airport traffic between flat to the low single digits. If there is a mild double-dip recession scenario where GDP growth diminishes further at the end of the year and turns negative in 2012, passenger traffic could be flat for 2011 and negative in the mid-single digits in 2012.

“The tool is being incorporated into our ratings process and verifies the approach we were using before and supports the differential in the types of airports,” McDermott said. “It also enhances our ability to respond to change in the future and to more closely evaluate third-party forecasts with our Fitch macro expectations.”

McDermott said that in 2008 and 2009, secondary hub and leisure airports were much more volatile, leading to downgrades of Cincinnati/Northern Kentucky International Airport, Lambert-St Louis International Airport and Las Vegas’ McCarran International Airport being downgraded that year. “Those airports have seen more rating volatility,” McDermott said.

Between 2000 and 2010, major O&D locations had a 0.84% correlation to real GDP, compared to leisure and secondary hub correlations, which came in at 0.79% and 0.73%, respectively. Similarly, O&D airports had a 0.86% correlation to employment, compared to a 0.76% and a 0.63% correlation to leisure and secondary airports.

For reprint and licensing requests for this article, click here.
Transportation industry
MORE FROM BOND BUYER