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COMMENTS

U.S. Transportation Infrastructure Sector Update And Medians: U.S. Large-Hub Airports


U.S. Transportation Infrastructure Sector Update And Medians: U.S. Large-Hub Airports

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).

Chart 1

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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-'.

Chart 2

image

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).

Chart 3

image

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

Table 1

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).

Table 2

Select Large-Hub Airport Medians Computed By Rating Category*
Large hubs (n=26) AA category (n=15) A category (n=11)
FY18 FY17 FY16 FY18 FY17 FY16 FY18 FY17 FY16
EPAX (000's)** 22,648 21,770 22,105 23,382 22,516 22,380 17,656 17,281 17,131
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
Coverage (x) 1.44 1.55 1.39 1.66 1.74 1.76 1.17 1.16 1.18
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%).

Related Research

  • 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;
joseph.pezzimenti@spglobal.com
Secondary Contacts:Todd R Spence, Farmers Branch (1) 214-871-1424;
todd.spence@spglobal.com
Kurt E Forsgren, Boston (1) 617-530-8308;
kurt.forsgren@spglobal.com

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