The nation's airport sector outlook remains stable, but with a slowing national economy, airports face significant uncertainties and should consider less debt issuance and more monitoring of debt service coverage ratios, Moody's Investors Service said in a report released yesterday.
"One of the things we highlight is maintaining healthy cash reserves, as well as to avoid having to issue debt to fund needed projects," said Moody's analyst Maria Matesanz, one of the editors of the report.
Matesanz said Moody's rates about 120 of the nation's commercial airlines and most of those airports are "very capital-intensive enterprises" that "rely on debt issuance to fund their capital needs."
"As the economy slows, there is the potential for a slowing of travel demand, a slowing of airport travel activity," she said. "And so that would speak in the opposite direction of airports not needing to expand their facilities as much to accommodate new growth. However, some airports take advantage when things slow down to actually undertake capital projects that they wouldn't otherwise be able to squeeze in."
The report said that U.S. airports will face "significant uncertainty in the amount of service their air carriers provide in the coming months," and that a number of airlines have already announced service cuts "in light of high oil prices, slim financial margins, and concerns about reduced demand in a slowing economy."
Revenue volatility is always a concern in the tumultuous air travel industry, the report said.
Moody's said it takes a favorable view of management teams that acknowledge the challenges and risks an airport faces and develop plans to mitigate them in advance.
"In our credit analysis, we assess the airport management's expected use of operating and capital cost controls, increases in rates and charges, debt management, facility control, and other tools to navigate through potential market disruptions," the report said. "Those airports that are prepared to absorb market disruptions or service reductions - by maintaining strong reserves, revenue diversity, or the budgetary flexibility to cut discretionary expenses - will be better positioned to maintain their credit quality."
"With more cash on hand, airports can weather the declines in traffic and the revenues that decline along with that traffic, and continue to maintain healthy operations and ultimately debt service coverage of their existing obligations," Matesanz said.
