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Fitch, S&P Analyst: Airport Merger Could Hurt Sector Credits

Several major airport credits could be negatively affected by operational shifts in the wake of the US Airways/American Airlines merger, but rating agencies are still waiting before deciding if downgrades might be warranted.

The potential credit pressure stems from a loss of connecting traffic at some of the airports currently used as hubs by the two carriers. Since passenger traffic is a key driver of ratings for airports, a consolidation of routes or diversion of operations away from one of the existing hubs could adversely affect ratings, especially for airports carrying a lot of debt.

"The combined carrier would effectively maintain six hub airports in Dallas-Fort Worth, Miami, Chicago, Philadelphia, Charlotte, and Phoenix," explained a special report on the merger issued by Fitch Ratings. "While geographic location and separation helps support a rationale for hubs, it is still fair to ask whether maintaining as many as six hub airports at the same level of operations will be necessary to maintain an efficient single network."

Although US Airways Chairman and chief executive officer Doug Parker, who is slated to head the massive new airline when the deal becomes legally finalized, sent employees a letter assuring them that the combined operation would continue to operate at all hubs, Fitch's projection assumes huge losses of connecting flights for several major airports.

Fitch estimated "a connecting traffic loss range of 75%?100% at American's Chicago and DFW hub airports," in the report. "As the leading US Airways hub, Philadelphia was assumed to lose 50% of its connecting traffic while Charlotte was assumed to lose all of its hub operations."

Miami might be in better shape despite a projected 50% loss of connecting traffic, Fitch said, because its "unique international gateway operations" would provide protection against a total loss of hub status.

While Charlotte is slated to take a big traffic hit, it is helped by its relatively modest debt portfolio, compared with the other hubs. Charlotte carries about $800 million of debt, while DFW has a debt load of nearly $5 billion and both Chicago O'Hare and Miami International Airport have more than $6 billion of debt each.

"The carrier risk is well mitigated by the extremely low leverage metrics and airline costs," the Fitch report said of Charlotte.

The report also said that a variety of smaller airports could get hurt as redundant routes are eliminated - a point echoed by Standard and Poor's analyst Joseph Pezzimenti.

"Smaller markets are more vulnerable," he said. Pezzimenti stressed that although the merger could have rating implications, he does not anticipate any imminent downgrades.  Moody's Investor's Service said it would issue its analysis next week.

Airports struck an upbeat tone.

"Executives at US Airways have publicly stated that they have no intention of giving up their Phoenix passengers, even if they move some administrative jobs out of their Tempe headquarters building," Phoenix Sky Harbor officials said in a prepared statement.

"We expect to be working closely with the newly merged airline as it sets a course for the future and combines its respective operations over the coming months," said DFW CEO Jeff Fagan.

The merger still needs approval from antitrust regulators and a bankruptcy court.

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