- We expect U.S. large-hub airports, in general, to maintain or possibly improve their credit standing due to their very strong or extremely strong market positions, skilled management teams, and cost-recovery financial structures, despite taking on more debt to fund sizable capital needs.
- Downward rating pressure could result for some if management is unable to maintain steady financial performance and debt capacity, especially if demand declines or leverage increases.
- Upward rating movement is possible longer term for those airports that continue to exhibit steady financial results from generally favorable or higher-than-forecast activity level trends and effective financial management of higher debt loads.
- Our forward-looking ratings are based on an expectation of where demand and financial metrics are headed. As a result of large hubs taking on more debt to fund investments in their facilities to accommodate existing or future activity levels, we anticipate debt service coverage (S&P Global Ratings-calculated) may trend lower than recent levels. Despite this, we believe the financial performance of large-hub airports rated in the 'AA' and 'A' categories will remain strong and adequate, respectively.
Role And Importance Of The Nation's Biggest Airports
Large-hub airports, as classified by the Federal Aviation Administration (FAA), serve the majority of commercial air travel passengers in the U.S. In fact, during calendar 2018, the 30 large-hub airports handled over 70% of the almost 900 million system wide enplaned passengers reported by the FAA. The large hubs' significance is multifaceted, serving as gateways to the country's largest metropolitan areas, key catalysts of economic development within the regions they serve, and strategically important nodes within the nation's largest airlines' route networks. Given their favorable roles and importance, these airports have experienced generally positive demand trends, with most achieving new historical peaks in air travel demand--handling passenger levels almost 23% higher, on average, than those experienced prior to the Great Recession (see chart 1).
With activity levels reaching new highs, airport operators continue making significant capital investments to accommodate current and future demand. We expect operators will fund these investments predominantly with general airport revenue debt, as has been the case in the past. Although large-hub airports' debt levels will increase because of these investments, we expect management teams will adjust revenues, expenses, and capital spending to preserve financial margins and debt capacity to maintain their credit standing--even if they were to experience modest declines in air travel demand. While demonstrating cyclicality in the past, the aviation industry has been resilient through various real-life shocks such as economic recessions, airline bankruptcies and consolidations, health scares, severe weather events, spikes in fuel costs, and security concerns. (See "When The Cycle Turns: U.S. Airport Balance Sheets--And Exposures--Increase With Traffic," published July 9, 2019, on RatingsDirect.)
Steady Financial Results Supported By Favorable Market Positions Drive Credit Quality
As a result of maintaining generally steady financial results through different industry and economic conditions due to solid business positions and generally favorable demand characteristics, the majority of large-hub airports rated by S&P Global Ratings are highly rated, with 56% falling in the 'AA' category, and the remaining 44% falling in the 'A' category (see chart 2), resulting in a median senior-lien rating of 'AA-'.
The airport sector is evaluated under our "U.S. And Canadian Not-For-Profit Transportation Infrastructure Enterprises" (TIE) criteria, published March 12, 2018, whereby we assess the operator's enterprise risk profile (including industry risk, economic fundamentals, market position, and management and governance) and financial risk profile (including financial performance, debt and liabilities, and liquidity and financial flexibility) on a '1' (extremely strong) to '6' (highly vulnerable) scale. We determine an airport's creditworthiness by combining our views of its enterprise risk and financial risk profiles. We view the enterprise risk profile as very strong or extremely strong for all large-hub airports, while viewing the financial risk profile as strong or very strong for most (see chart 3).
We believe the airport industry, like other transportation infrastructure enterprise (TIE) asset classes, represents low risk compared with other industries and sectors, equating to very strong or '2' on our six-point scale under our TIE criteria. This industry risk assessment is consistent with the principles outlined in "Methodology: Industry Risk", published Nov. 19, 2013, and "Key Credit Factors For The Transportation Infrastructure Industry", published Nov. 19, 2013.
The industry risk assessment represents 20% of our overall enterprise risk profile and is determined by combining our views of the industry's cyclicality, competitive risk, and growth environment. The market position assessment represents 60% of our overall enterprise risk profile and is used to identify the extent to which an issuer's particular attributes entail higher or lower overall risk than is suggested by our general industry risk determination.
Favorable Market Positions Bolster Credit Quality
|Ratings List (Sorted By Enplanements)|
|Senior rating (1)||Enterprise risk profile||Financial risk profile||Adjustment (2)||Market position assessment||MSA population (000's) (3)||GDP per capita (3)||EPAX (000's) (4)||Top airline (EPAX market share)|
|Port Authority of NY & NJ (JFK, LGA, EWR)||AA-||Extremely strong||Strong||None||Extremely strong||20,055||$ 92,687||69,237||United (24%)|
|Hartsfield Jackson Atlanta International Airport||AA-||Extremely strong||Strong||None||Extremely strong||5,964||$ 68,545||52,562||Delta (80%)|
|Los Angeles International Airport||AA||Extremely strong||Strong||1 notch up||Extremely strong||13,298||$ 76,241||44,000||American (19%)|
|O'Hare International Airport||A||Extremely strong||Adequate||None||Extremely strong||9,497||$ 75,420||41,563||United (45%)|
|Dallas-Fort Worth International Airport||A+||Extremely strong||Adequate||1 notch up||Extremely strong||7,540||$ 73,187||34,512||American (84%)|
|Denver International Airport||A+||Extremely strong||Strong||1 notch down||Extremely strong||3,263||$ 76,492||32,259||United (44%)|
|San Francisco International Airport||A+||Extremely strong||Adequate||1 notch up||Extremely strong||8,443||$109,828||28,814||United (45%)|
|Houston Airport System (IAH, HOU)||A+||Extremely strong||Strong||None||Extremely strong||7,019||$ 72,687||27,713||United (45%)|
|Port of Seattle, WA (SEA)||AA-||Extremely strong||Strong||None||Extremely strong||3,945||$100,688||24,894||Alaska (49%)|
|Las Vegas-McCarran International Airport||AA-||Very strong||Strong||1 notch up||Very strong||2,148||$ 50,543||24,633||Southwest (37%)|
|Metropolitan Washington Airport Authority (IAD, DCA)||AA-||Extremely strong||Strong||None||Extremely strong||6,152||$ 84,336||23,751||United (36%)|
|Orlando International Airport||AA-||Very strong||Strong||1 notch up||Very strong||2,568||$ 55,492||23,382||Southwest (24%)|
|Charlotte/Douglas International Airport||AA-||Very strong||Very strong||None||Very strong||2,532||$ 68,661||23,075||American (91%)|
|Miami International Airport||A||Very strong||Adequate||1 notch up||Very strong||6,105||$ 54,634||22,220||American (67%)|
|Phoenix Sky Harbor International Airport||AA-||Very strong||Very strong||None||Very strong||4,869||$ 54,395||22,219||American (47%)|
|Massachusetts Port Authority (BOS)||AA||Very strong||Very strong||None||Very strong||4,877||$ 97,815||19,636||Jet Blue (28%)|
|Hawaii Airport System (HNL)||AA-||Extremely strong||Strong||None||Extremely strong||1,420||$ 64,341||18,806||Hawaiian (51%)|
|Minneapolis-St. Paul International Airport||AA-||Very strong||Strong||1 notch up||Very strong||3,637||$ 74,268||18,382||Delta (71%)|
|Fort Lauderdale-Hollywood International Airport||A+||Very strong||Strong||None||Very strong||6,224||$ 59,320||17,656||Jet Blue (24%)|
|Detroit Metro Wayne County Airport||A||Very strong||Adequate||1 notch up||Very strong||5,249||$ 60,833||17,559||Delta (72%)|
|Philadelphia International Airport||A||Very strong||Adequate||1 notch up||Very strong||6,060||$ 71,303||15,245||American (70%)|
|Baltimore/Washington International Airport||A+||Very strong||Strong||None||Very strong||8,944||$ 79,095||13,534||Southwest (65%)|
|Salt Lake City International Airport||A+||Very strong||Strong||None||Very strong||2,549||$ 53,582||12,420||Delta (70%)|
|San Diego County Regional Airport Authority||A+||Very strong||Strong||None||Very strong||3,351||$ 67,312||11,729||Southwest (38%)|
|Midway International Airport||A||Very strong||Adequate||1 notch up||Very strong||9,497||$ 75,420||11,022||Southwest (93%)|
|Tampa International Airport||AA-||Very strong||Strong||1 notch up||Very strong||3,149||$ 49,744||10,519||Southwest (34%)|
|Port of Portland, OR (PDX)||AA-||Very strong||Strong||1 notch up||Very strong||2,429||$ 64,892||9,733||Alaska (42%)|
|(1) All ratings have a stable outlook. The rating for Bush Intercontinental and Hobby Airport refers to the airport system's subordinate debt since the system has no senior debt outstanding. The rating for Baltimore/Washington International Airport (BWI) refers to the airport's stand-alone PFC debt. S&P Global Ratings does not have a general airport revenue bond rating for BWI. (2) Adjustment indicates whether a holistic analysis or exceptional additional situation notching adjustment was used in determining the final rating. (3) Refers to S&P Global Ratings identified primary service areas for airport. (4) Refers to corresponding airport's most recent available fiscal year ending EPAX (enplaned passenger) data. Some credits operate more than one major airport, like the PANYNJ that operates JFK, EWR, and LGA.|
As seen in table 1:
- Large-hub airports that have a market position we consider extremely strong also typically have the highest enplanement levels because they access very large service areas that are economically vibrant, deep, diverse, and heavily populated, or function as a major national connecting hub or provide an essential air service.
- Airports with a market position we consider very strong typically exhibit some of the characteristics of those we view as extremely strong, tempered by some reliance on discretionary travelers or regional economies that depend on tourism.
- Most of the large-hub airports in the 'A' rating category have higher air carrier concentration or serve smaller markets.
Solid Coverage And Manageable Debt Capacity Are Common Attributes Of Highly Rated Large Hubs
We analyze three primary factors to determine our financial profile risk assessment: financial performance (55%), debt and liabilities (35%), and liquidity and financial flexibility (10%). For the financial profiles of highly rated 'AA' rating category large-hub airports, we anticipate debt service coverage (DSC) (i.e., financial performance) and debt capacity (i.e., debt and liabilities) to be maintained at levels we consider strong and very strong, respectively. We attribute this, in part, to most of them employing a compensatory or hybrid approach to adjusting rates and charges. A little more than half of the lower-rated large-hub airports (i.e., those in the 'A' rating category) employ a residual approach to adjusting rates and charges, while the remainder adjust rates and charges on a hybrid basis. For these large-hub airports, we anticipate DSC and debt capacity will be maintained at levels we consider adequate and strong, respectively (see table 2).
|Select Large-Hub Airport Medians Computed By Rating Category*|
|Large hubs (n=26)||AA category (n=15)||A category (n=11)|
|EPAX origin-destination percentage||70.0||68.8||67.4||79.0||79.0||77.1||65.0||66.3||63.6|
|Top airline EPAX market share (%)||44.8||45.1||45.7||42.0||41.5||42.4||66.8||65.9||66.2|
|Cost per EPAX ($)||10.50||10.45||10.10||9.85||10.08||10.05||11.10||11.47||10.99|
|Debt to net revenues (x)||9.3||9.2||9.5||8.2||7.6||8.1||11.9||12.3||11.7|
|Debt per EPAX ($)||116.22||106.98||109.62||84.95||83.93||87.45||165.04||129.48||149.54|
|Unrestricted days' cash on hand||486||521||521||557||605||592||286||291||338|
|Unrestricted reserves to debt (%)||16.6||18.7||16.7||21.7||23.7||21.3||9.5||8.3||8.5|
|*Does not include senior stand-alone passenger facility charge debt ratings like BWI. **EPAX=Enplaned passenger.|
As seen in table 2:
- Large-hub airports in the 'AA' rating category typically demonstrate DSC we consider strong (1.25x-3x), debt-to-net revenues we consider very strong (5x-10x), days' cash on hand we consider very strong (400-800 days), and unrestricted cash reserves-to-debt we consider strong (20%-50%).
- Large-hub airports in the 'A' rating category typically demonstrate DSC we consider adequate (1.1x-1.25x), debt-to-net revenues we consider strong (10x-15x), days' cash on hand we consider strong (250-400 days), and unrestricted cash-reserves-to debt we consider adequate (7.5%-20%).
Our forward-looking ratings are based on an expectation of where demand and financial metrics are headed. As a result of large hubs taking on more debt to fund investments in their facilities to accommodate existing or future activity levels, we anticipate DSC may trend lower than that shown for fiscal 2018 in table 1. Nevertheless, we are expecting DSC to remain at levels we consider strong (1.25x-3x) and adequate (1.1x-1.25x) for large-hub airports rated in the 'AA' and 'A' categories, respectively. Although the debt capacity metric debt-to-net revenues may trend closer to weaker assessment categories, we expect them to remain at levels we consider very strong (5x-10x) and strong (10x-15x) for large-hub airports rated in the 'AA' and 'A' categories, respectively. Similarly, although the days' cash on hand liquidity metric may weaken somewhat for large-hub airports rated in the 'AA' category, we still expect days' cash on hand to remain at levels we consider very strong (400-800 days). We expect days' cash on hand for large-hub airports in the 'A' category to stay within historical ranges, which is a level we consider strong (250-400 days). Finally, the median liquidity metric unrestricted reserves-to-debt for large-hub airports rated in the 'AA' category may drop to below 20%, a level we consider adequate, while also trending lower for 'A' category large-hub airports, but remain at a level we consider adequate (7.5%-20%).
- Fewer Signs Of Scrooge-ing Up U.S. Growth In The New Year, Dec. 4, 2019
- When The Cycle Turns: U.S. Airport Balance Sheets--And Exposures--Increase With Traffic, July 9, 2019
- U.S. And Canada Airport Ratings And Outlooks: Current List, July 9, 2019
- U.S. And Canadian Not-For-Profit Transportation Infrastructure Enterprises: Methodologies And Assumptions, March 12, 2018
This report does not constitute a rating action.
|Primary Credit Analyst:||Joseph J Pezzimenti, New York (1) 212-438-2038;|
|Secondary Contacts:||Todd R Spence, Farmers Branch (1) 214-871-1424;|
|Kurt E Forsgren, Boston (1) 617-530-8308;|
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