Historically, the airport sector has provided reliable cash flow for municipal bond investors, while demonstrating unique credit resiliency, even during periods of crisis such as after 9/11 and during the COVID-19 pandemic. Despite sector outlook changes to negative as well as negative creditwatch placements and limited multi-notch downgrades on certain structured credits tied closely to specific terminal projects, stability emerged during the pandemic.
The airport sector outlook returned to stable and higher credit ratings on those affected general aviation revenue bonds (GARBs) were reinstated. I would add that the CARES Act funding, as part of overall federal relief legislation, was passed swiftly and prevented wholesale downgrade activity on airport bonds.
Why is this relevant? With the end of the first quarter of 2026 nearing, escalating geopolitical tensions are backdropping the quarter with market volatility and challenging both inflation and growth expectations. These events can extend beyond Q1, especially with a protracted military campaign in the absence of any viable off-ramp for either side, coupled with ongoing trade rebalancing efforts pursued by the Trump administration.
We continue to examine the impact of ongoing trade uncertainty, particularly since the adverse U.S. Supreme Court ruling striking down President Donald Trump's authority to impose global "reciprocal" tariffs under the International Emergency Economic Powers Act of 1977. We are also assessing the implications of the Iranian crisis against an indeterminable time horizon and erratic shifts in energy prices. Given this full geopolitical plate, we are reminded that associated volatility often breeds investment opportunity as muni yields become elevated.
The airport sector merits investment consideration given the quality-oriented nature of the credit structure having strong legal provisions, asset essentiality, the ability to add portfolio diversification, available secondary market liquidity, a defensive bias in down cycles, and suitability for SMA portfolios. Income opportunities can be found as these types of bonds can offer higher yields than available on many general obligation bonds. Quality-focused SMAs can find comfort with gateway and large- to medium-sized hub enterprises.
Tax-exempt investors can buy GARBs with incremental spread and the above-mentioned attributes. GARB sector spread volatility is not as high relative to other "yield" sectors. Wider spreads can be found on bonds exposed to the alternative minimum tax (AMT), yet spreads between AMT and tax-exempts have compressed. Pricing variances can also be attributable to bond structure (e.g., a short par call), the aggressiveness of an airport's capital plan and the extent of airline commitment. Taxable GARBs benefit from active trading, sufficient market liquidity, diversification and wider spreads versus similarly rated corporates, given a smaller investor base, relatively thinner liquidity and a more complex security structure.
I assign a stable, yet guarded, outlook to the airport sector. Certain airports will perform better than others, particularly during these uncertain times. How management responds to geopolitical unrest, rising fuel prices, enplanement variability, capacity reductions, rising cyber threats, and a potential recession will determine individual airport credit standing. Enplanement activity varies by airport type. Large hubs and international gateways are likely to outperform secondary hubs and regionals in competitive markets. The industry displays uneven leverage metrics and this will be an important measure of future credit stability.
Muni research analysts often self-identify as generalists. Nevertheless, many of us do have our favorite credit sectors that we find to be intriguing and exciting to analyze and surveil. When I think about the conversations I have with colleagues and the conferences I attend in either a moderator/speaker capacity or as an audience member, invariably, there is a discussion of muni credit quality and sector preferences.
In many of these instances, the airport sector rises to the top of the conversation in terms of portfolio attribution and a source of credit ballast, and I eagerly join the dialogue. As highlighted in my 2026 Municipal Market Outlook, active sector and security selection is a critical determinant of performance.
Given the early-in-the-year event-driven volatility, perhaps it makes sense to fine tune the airport security selection calculus for the most conservative-centric investors. Key variants include liquidity strength, airline commitment, competitive footing and route dominance, rate recovery methodology, and operational structure (hub, origination and destination, gateway).
As the Iranian crisis unfolds, the risk of cyberattacks, along with conventional military attacks, escalates. An assessment of cyberattack preparedness is critical and this spans energy infrastructure, government agencies, financial institutions and transportation and aviation networks. For airports specifically, we are concerned about a complex digital ecosystem, with specific implications for reservation systems, baggage handling, concessions, security and surveillance networks, Wi-Fi connectivity, and general aviation operations.
Many modern airports employ network segmentation as a critical element of their cybersecurity defense infrastructure, designed to minimize the risk of an interconnected attack. The significance is to isolate key systems and controls in an effort to avoid a complete shutdown of airport operations.
Airports showing ability and willingness to raise rates to preserve margins and liquidity and those with a competitive advantage or strategic importance are better insulated from the economic cycle and rating downgrades. Airports with chronic traffic declines, eroding margins and liquidity, heavy debt and limited rate-adjustment capacity are most vulnerable to a downgrade.
Central to my 2026 outlook, I did not factor recession into my base case forecast. While I predicted that above-trend growth with disinflationary conditions are likely for 2026, I also observed that potential disruptors may present themselves, impeding growth and continued movement to the Federal Reserve's inflation target.
Current geopolitical concerns have the potential to upend the Fed's two guiding tenets: price stability and full employment. While more clarity is needed before meaningful prognostications can be made, the differences between a structural rise in inflation and transitory price increases are rather stark. At a minimum, current events may be moving the recession needle.
Although consumer sentiment and engagement have sustained economic growth, signs of retrenchment are present. Consumer discretionary purchases are exhibiting pullback, especially for big-ticket electronics, restaurants and clothing, while spending on essentials remains a priority. While it is too early to determine whether these patterns are moving beyond normal consumer cyclicality, there is ample reason to be concerned.
Business and personal travel could be impacted in a meaningful way, so we have to remain vigilant in our airport credit assessments. This economic reality is due to a confluence of sticky inflation, a softening labor market, thinning consumer savings and still burdensome interest rates. Layered on top of these conditions is a troubling geopolitical climate.
Current events can materially catalyze supply chain disruption, and a prolonged period of $100-plus prices per barrel of oil can pressure goods inflation across the global economies, impacting petroleum-based exposures such as manufacturing, clothing, transportation, energy and agriculture. As of this writing, oil has moved back up to $100/barrel, and volatility could produce further spikes. Hopefully, we will soon have clarity over operational capabilities at the Strait of Hormuz, with Iranian determination and capacity to close or limit maritime traffic flow, the ability of the U.S. to escort safe passage through the strait, and availability of war-risk insurance front and center.
To gauge the strength and resiliency of the U.S. airport system, we draw on the experience from the COVID-19 pandemic. In addition to having access to federal support under the CARES Act, swift collaborative actions were taken by airports and their signatory airlines as the parties substantively renegotiated the terms of airline use agreements and terminal leases given unprecedented declines in passenger volume. Such adjustments provided the parties with greater operational flexibility through reduced rents and other costs and lower capacity. Strong airport cash positions further added significant remedial support.
The pandemic produced very unique consequences that effectively shut down a global economy and froze air travel. While I do not anticipate a similar scenario given today's events, I offer an illustration of the airport sector's resiliency during episodic chaos. U.S. policymakers and central bankers recognize the strategic, economic, national security and essential nature importance of preserving a viable aviation system and recent history reveals the strength and breadth of the government's commitment to the sector.
Public airports are government-owned and operated, yet do not receive tax subsidies from the host government, operate as a monopoly service provider and represent an essential economic asset within its community. While there are several airport bond types, the GARB is the most common, with this structure demonstrating a stronger security profile relative to airline credits.
Other airport bond types include those secured by passenger facility charges (PFC), which are exposed to greater risk potential at connecting airports. PFCs are capped and provide airports with a local funding source for FAA-approved projects, such as noise abatement and safety upgrades. Consolidated rental car facility (CONRAC) bonds are secured by customer facility charges (CFC) to fund centralized car rental facilities. CFCs may exhibit variability in per transaction day fee, show limited nature and collection history and may involve construction risk. PFC-and CFC-backed bonds are not secured by general airport revenues.
Most domestic airports carry strong investment-grade ratings, with relatively favorable credit metrics, underscored by high levels of cash on hand. Overall airport default/impairment experience is extremely limited and I am challenged to identify a default across the GARB subset.
Default/impairment activity is noted for certain special facility revenue bonds which are typically backed by an airline and finance a specific facility, such as a maintenance hangar. In these structures, there is usually a conduit issuer and the airline security represents a contractual lease with operating lease payments pledged to bondholders as unsecured debt in the corporate waterfall.
In the event of bankruptcy, the airline chooses to either assume or reject the lease, with an assumption of the lease — often determined by the value of the gates — prioritizing lease payments over other unsecured creditors. A rejection of the lease places bondholders in general unsecured status, with liquidation and recovery offering the only remedy. One could easily see that an airline bankruptcy could generate heavy trading volatility and price discovery for special facility revenue bonds.
GARBs enjoy a sound credit structure, highlighted by a closed flow of funds with no revenue transfers to the host government and a regulatory environment that restricts the use of airport revenues to airport purposes. Further attributes include a general security framed by use agreements between airport and airlines that establish rate-setting methodology and recovery of operating and capital costs, various barriers to airport privatization and traditional revenue bond covenants, such as a debt service coverage requirement, additional bonds test and a debt service reserve fund. Federal oversight and program grants add further bondholder protection.
Airports typically receive funding from bond proceeds, PFCs, grants and internally generated cash. Concession income comprises 20-35% of airport operating income, depending upon facility size and enplanement activity. Significant investment is being made to build and/or renovate airport terminals, with upscale food, signature brands, wine bars and expanding sources of entertainment occupying valuable real estate. Airlines provide primary funding for the airline clubs, with indirect support derived from passengers and membership programs.
Airline contributions also support the airport funding mix. Landing fees and other airport charges to the airlines — such as terminal rents and gate leases — that are paid to the airport generally represent less than 10% of total airline operating costs. Landing fees alone account for less than 5% of total airline operating expenses. In comparison, labor and fuel approximate 60% of airline costs. A uniquely diversified mix of revenue provides airport management with a degree of operating flexibility and offers GARB bondholder comfort by offsetting the risk of rising fuel prices and the potential for shifting enplanement activity.
Key to GARB credit analysis is understanding the cost recovery mechanism. Rate setting is structured through a compensatory, residual, or hybrid methodology. Under the compensatory approach, airlines pay rates and charges equal to proportionate costs for use of airport facilities. Airlines are under no obligation to pay landing fees to cover shortfalls in concession income.
The airport assumes financial risk that operating income from concessions will be sufficient to meet operating and maintenance expenses and produce required debt service coverage. Compensatory airports are typically stronger, but display more volatile financial ratios. So the next time you order a $12 hotdog, remember that debt service must be paid!
Residual rate setting places a greater financial burden on the airlines by requiring them to pay all costs not satisfied by concession income. The airlines would pay the difference, or "residual cost" necessary to support airport operations. Residual structures can be weaker, but exhibit more stable ratios.
Today, many airports employ a hybrid cost recovery structure, with the trend affecting more facilities. The compensatory structure has become more narrow, with application, for example, on terminals with revenue sharing targets or profit-sharing arrangements that lower airline rates. Residual mechanisms are now typically attached to certain cost centers, such as airfields.
According to LSEG data, airport issuance rose 15% from 2024 to 2025. Continued growth within the airport sector can be expected, given the enormous capital requirements of these enterprise units for modernization to meet capacity and demand needs, technological advancements, security requirements and sustainability and resilience to address climate-related upgrade expenses. Airports Council International-North America estimates that U.S. airports require at least $173 billion from 2025-2029 to meet renovation and expansion needs.
