- The rapid spread of the new coronavirus across the globe has caused an unprecedented plunge in air traffic demand in recent weeks.
- Controlling the coronavirus, as well as reestablishing passenger confidence, may be more challenging than similar efforts for previous viruses, and recovery is likely to take longer, given the lockdown measures many states recommend (in contrast with other virus events).
- Hence, our current base case for global air passengers in 2020 assumes a decline of 20%-30% from 2019, with full recovery achieved only in 2022-2023. We recognize, however, that the situation is highly uncertain and fast-moving.
- Over the coming weeks, we will conduct reviews of our airport ratings to reflect our updated views, with airport ratings likely to come under pressure.
S&P Global Ratings believes the coronavirus pandemic is likely to have an unprecedented impact on global air travel compared with previous pandemic or epidemic events, such as 2009's H1N1 virus, also known as swine flu, or SARS in 2003. Our base case for global air passengers in 2020 assumes a decline of 20%-30% from 2019, with full recovery achieved only in 2022-2023. This view takes into account the coronavirus's rapid spread to over 125 countries and the severity of lockdown measures to contain the coronavirus, given the risk of contagion. Various European countries have now taken extreme measures to restrict travel, while the U.S. has restricted anyone who has been in 28 European states in the prior 14-day period from entering the U.S.
In addition, economic growth is heading sharply lower against a backdrop of volatile markets and growing credit stress, leading S&P Global economists to now forecast a global recession this year, with 2020 GDP rising just 1.0%-1.5%, consisting of roughly 3% growth in China but contraction of -0.5% to -1% for the eurozone and 0% to -0.5% for the U.S. (see "COVID-19 Macroeconomic Update: The Global Recession Is Here And Now," March 17, 2020).
The impact on each airport rating will depend on several factors, including the speed, scale, geography, and duration of the crisis; measures taken by each airport to mitigate passenger declines and administrate fixed costs; potential government extraordinary support; and the financial flexibility of each airport prior to the virus outbreak, as well as their liquidity cushions. We expect the traffic impact to extend to domestic flights as local social isolation and travel restrictions come into place.
For example, in India, where airports are over capacity and traffic is concentrated in domestic flights, we don't expect a big scaling back of large capital expenditure plans, given the degree of advance of ongoing investments. As a result, already weakening credit metrics will come under further pressure.
Airport Ratings Are Likely To Come Under Pressure
Even though airports' credit quality tends to be significantly more resilient than airlines', we do foresee rating pressure. This is because of the extreme drop in passenger numbers--assumed to be at least 20% in 2020 (from 2019) but potentially averaging 70% over a three-month peak period and recovering less steeply than seen in past events, given the difficulty of containing this virus. While airports have diverse revenue streams, the plunge in passengers will undoubtedly affect non-aeronautical commercial revenue or may lead to some negotiated support of retailers from the airport operators.
While many airports' contracts with their tenants have minimum revenue guarantees that normally would provide some protections, in the current situation, airports are likely to take into consideration the difficulties endured by their customers affected by the outbreak and adapt the payment conditions applicable to them, and to cooperate with airlines and retail partners by relieving them of some of their contractual obligations to help them survive. For example, Aeroports de Paris is suspending parking fees for aircrafts immobilized on its platforms because of the crisis. The rental and leasing expenses for premises located in the closed terminals will not be due for the closure period of these terminals.
There are additional downside risks related to the uncertainty of when the pandemic will peak. The impact on the economy and air travel could certainly persist well beyond second-quarter 2020. According to the International Air Transport Assn. (IATA), previous disease outbreaks have peaked after one to three months and recovered to pre-outbreak levels in six to seven months. Because the new coronavirus is more difficult to contain, given the slower development of symptoms and the risk of contagion, we expect a longer path to recovery, as shown below.
|Revised Base-Case Assumptions For Air Passengers*|
|2020||Negative 20%-30% (from 2019)|
|*In the regions with higher spread of the coronavirus.|
In the past, we have seen airports resort to a number of mitigating measures to partly offset declining cash flow. Noncommitted capital expenditure was deferred and dividends scaled down in periods of stress. Additional flexibility is possible in staff costs and maintenance expenditure, which may not be required due to falling capacity. Although investor-owned airports typically bear the full extent of traffic risk, some relief could come under upcoming regulatory reviews or under commercial contracts with minimum traffic guarantees or traffic incentives.
It is likely, however, that the financial difficulties at airlines will lead to contracts not being honored, or that political decisions, such as the European Commission's suspending of the EU's "use-it-or-lose-it" rights to landing slots, will reduce the need to fly empty planes. While airports expect this suspension will be targeted and temporary, it reduces protection of airports. We will integrate such measures in our scenarios on a case-by-case basis, depending on the pace and willingness of management to act.
Our updated base-case assumptions take into account the IATA's "extensive spread" scenario, as per its March 5 report estimating the potential loss of traffic and revenue for airlines in various regions (see "COVID-19: Updated impact assessment of the novel Coronavirus," IATA, March 5, 2020). The extensive spread scenario assumed a 23% drop for China, Japan, Australia, and other Asia-Pacific countries. It also pointed to a 24% decline for most European countries, though this could reach higher than 30% given the worse spread of the virus so far in Italy and Spain, and depending on the length and extent of full lockdown actions across several European countries.
However, the IATA's projections assumed only a 10% drop in 2020 from 2019 for the U.S., which we believe could be higher, at 20%-30%, because the spread of the virus has accelerated in the U.S. since publication of the IATA report, making President Donald Trump announce the 30-day ban on travel to the U.S. from Europe.
We believe a good reference point is the 70% three-month average drop in passenger numbers suffered by Hong Kong International Airport (HKIA) due to SARS in 2003 (even considering Hong Kong was the epicenter). The 2003 SARS outbreak started in Hong Kong, where HKIA, operated by Airport Authority Hong Kong, experienced an approximate 20% drop in the annual number of passengers carried, albeit followed by over 35.6% recovery in the following year. Amid the current outbreak, passenger numbers at HKIA dropped almost 70% in February 2020.
|Hong Kong International Airport--Air Passengers|
|SARS outbreak||No. of passengers carried||Year-on-year % change||COVID-19 pandemic||No. of passengers carried||Year-on-year % change|
|*SARS peak months. Source: Civil Aviation Department - The Government of Hong Kong Special Administration Region.|
Recovery Will Take Longer Than In The Past
For the new coronavirus, we expect a more protracted recovery compared with the quick rebound seen after the 2003 SARS epidemic. This is because SARS' spread was not as acute as the spread of the coronavirus. Considering likely weaker macroeconomic conditions globally and the debilitated competitive positions of airlines emerging from the pandemic, we assume air traffic could remain depressed over a six-month period (albeit with a partial recovery after a three-month peak drop), while full recovery is likely to be gradual in the 24 months following the containment of the virus.
Also, as the world enters the post-coronavirus phase, apprehension around travel may slow down the recovery of traffic through some airports. Amid similar macroeconomic conditions following the 9/11 terrorist attacks in 2001, the number of annual global air passengers recovered by approximately 2.5% in 2002-2003 and 13% in 2003-2004, converging to 4.3% in 2004-2005. Such a trend is supported by our view that commercial air travel should remain the preferred mode of transportation for long-haul trips as the fastest affordable way to move people globally. Therefore, we don't believe there will be secular change in the airport industry unless the situation worsens.
- Economic Research: COVID-19 Macroeconomic Update: The Global Recession Is Here And Now, March 17, 2020
- U.S. Transportation Infrastructure Sector Outlook Update: Now Negative For All Sectors, March 16, 2020
- Coronavirus Impact: Key Takeaways From Our Articles, March 13, 2020
- Coronavirus' Global Spread Poses More Serious Challenges For Airlines, March 12, 2020
- Unrestrained Supply Swamps Oil Outlook: S&P Global Ratings Revises Oil & Gas Assumptions, March 9, 2020
- Coronavirus Is Unlikely To Bring European Airports To A Standstill, Unless It Spreads Further, Feb. 11, 2020
- Australian And New Zealand Airports Brace For More Pain With Coronavirus Outbreak, Feb. 4, 2020
This report does not constitute a rating action.
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