DALLAS — Continuing improvements in airline profits are credit positive for airport revenue bonds and may lead to increased capital investments at aviation facilities, Well Fargo Securities said in a new outlook report.
Investors in airport bonds generally benefit from a strong airline industry, said Randy Gerardes, a senior analyst and vice president for infrastructure in Wells Fargo's municipal securities research unit.
"Although security offered to general airport revenue bond investors typically provides protection against poor individual airline operational performance, profitable airlines are more likely to support capital investment at a given airport," Gerardes said.
"Likewise, the risk profile for airport special facility bonds that rely on airline credit quality should benefit from improved airline profitability," he said.
North American airlines are expected to post total profits of $8.6 billion in 2014, an increase of $300 million from earlier estimates, the International Air Transport Association said in March.
"The anticipated $8.6 billion profit is more than double the $4.2 billion profit posted in 2010, the previous peak, and represents a third consecutive year of improving profitability," IATA said. The aviation trade association said the main drivers behind the solid profitability of U.S. industry are efficiencies gained through airline consolidation and the contribution of ancillary passenger revenues, including baggage fees and other charges.
The growth in airline profits and higher passenger demand may lead airports to consider additional debt to fund capital expansions and updates to their facilities, Gerardes said.
Airport issuers were been slow to come to market in the first quarter of 2014, Gerardes said, but three large sales in May drew heavy investor interest.
During the short week after Memorial Day, there were two airport bond sales totaling $1.3 billion, he said, citing Chicago Midway Airport's pricing of $784 million of second lien revenue and refunding bonds, and a $542 million sale of system revenue and refunding bonds by the Metropolitan Washington Airports Authority.
Dallas-Fort Worth International Airport sold $222 million of joint revenue improvement bonds earlier in the month after raising the size of the issue from $190.2 million due to strong demand for higher-yielding debt.
"Even though technical factors such as low primary market supply continue to drive credit spreads tighter, airports, particularly international gateway airports or those in vibrant, larger metropolitan areas, may offer interesting, creditworthy opportunities," Gerardes said. "Despite the compression of spreads, tax-exempt airport yields still remain attractive compared to corporate benchmarks on an after-tax basis."
Additional airport facilities are needed because passenger loads are going up, said Kevin Burke, president of Airports Council International-North America.
U.S. and Canadian airports will need $71.3 billion of infrastructure improvements by 2017 to accommodate growing demand for passenger and cargo capacity, and to update aging terminals, he said.
"In order to ensure that our airports and commercial aviation sector continue to lead the world, we need to get serious about investing in our future," Burke said.
The Federal Aviation Administration expects total number of passengers on U.S. airlines to reach 1.15 billion in 2034, up from about 750 million in 2014.
