WASHINGTON — Airports will continue to remain at risk for credit downgrades until passenger enplanements reach consistent growth of 3%, far above the flat-to-negative trajectory Moody’s Investors Service expects, according to the rating agency’s newest outlook for the sector.
Moody’s has had the sector on negative outlook since 2008, and that’s not likely to change in the next 18 months. The agency expects that enplanement growth over the next year and a half could vary between a 1% increase and a 4% dip. The projections are roughly in line with those provided by the Federal Aviation Administration, which calls for relatively flat growth in the immediate future with long-term growth near 3% over the next two decades.
Airport credit is heavily influenced by the volume of those boarding aircraft, because passenger facility charges levied on each ticketholder produce revenue streams many airports use to back bonds. The growth of those revenue streams are being held down by a confluence of economic and business factors, Moody’s concludes.
“Enplanement growth will be restrained,” the report asserts, “in part by stagnant economic growth, but also by the continuing threat of airline capacity reductions.”
Mergers, such as the one widely viewed as likely between American Airlines and U.S. Airways, mean redundant routes covered by both carriers may be consolidated. The consolidation could limit the number of seats available and weaken enplanement growth, Moody’s predicts. A handful of major carriers now represent a huge part of the commercial passenger airline industry. “United, Delta and Southwest airlines now account for 60% of total U.S. enplanements, having accounted for only 45% in 2007,” Moody’s said.
Another hit to the capacity and enplanement of the industry was the decision of American to file for bankruptcy protection, which Moody’s said may result in a 5%-10% capacity reduction.
Overlying these industry factors is uncertainty about both the global macroeconomic situation and the future of U.S. aviation policy due to the approach of the “fiscal cliff.”
“The U.S. economy remains in a fragile state with high unemployment, high public, corporate and personal debt, and uncertain growth prospects,” the report notes.
Sequestration cuts to the budget, mandated because of the failure of federal lawmakers to reach a debt-ceiling deal during tense negotiations last year, are expected to hit the air industry hard and further hamper growth. The cuts will slash huge chunks from operations and security budgets, which airport industry groups have said could lead to reduced flight service at some airports. The cuts could also have far-reaching effects on negative airport growth, Moody’s warned.
“Large federal budget cuts could also mean widespread layoffs of federal employees and contractors in unrelated areas that could significantly reduce the demand for air travel,” the agency said. “While this particular method of federal spending remains unclear, what is clear is that there is a strong movement to reduce federal spending levels and that has the potential to bring negative pressure to U.S. airport credit strength in a number of ways.”