WASHINGTON - Airports are likely to face financial difficulties into next year because, despite their successful efforts to stabilize their debt portfolios, they are expected to have a continued slump in airline passenger traffic, Fitch Ratings said in a recent report.

Since the beginning of this year, Fitch has downgraded the ratings of six airport bond issues and assigned a negative outlook to another seven of them, while the airlines that service them have been assigned low ratings as well, according to the report. At this point, almost half of the major carriers are rated CCC by Fitch.

As a result, the agency is keeping its outlook negative for the airport sector.

"We're expecting a pretty tepid performance, at least on the [passenger] enplanement side," said Michael McDermott, an analyst who worked on the report. The airports are being challenged to "manage their capital and operational costs in an environment where the enplanement outlook is still relatively uncertain," he said.

Lackluster enplanements are expected to be a credit stressor through 2010 and is putting stress as well on airport revenues from concessions, parking fees, and passenger facilities charges, which go hand-in-hand with passenger travel.

Revenues from passenger facility charges, which are often used to back bonds, grew modestly in the past few years, according to Fitch. However, the growth is partly due to airports raising their PFCs. Most airports have hit the $4.50 cap they can legally charge passengers, meaning revenues will now start reflecting the reality of lower traffic, McDermott said.

A bill pending in Congress would raise the PFC cap to $7.00, generating another $2 billion per year of PFC revenues, Fitch said. That would benefit mostly large and medium hub airports, since they have a higher flow of passenger traffic. However, the PFC cap increase is unlikely to be approved until at least January, when the current airport funding law expires.

During the past couple of years, airports have increasingly diversified the revenues that they use to pay off general airport revenue bonds, McDermott said. They have used parking and concession revenues and, as a result, have taken some of the cost burden off airlines.

"What looks like is happening now is that it might be heading in the other direction," and airlines may have to bear more financial responsibility, he said. This could present a danger to airports that rely on a single airline, if the airline files for bankruptcy.

On the bright side, Fitch said it believes "stabilization or perhaps small positive growth [at some point] in calendar year 2010 is a reasonable scenario." But it warned that "cautious forecasting is the sound approach while industry conditions remain unsettled."

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