Airport Credits and the Airlines Linked For Better or for Worse, Moody's Says
DALLAS -- Airport credits may only be as good as the airlines that use the facilities now that industry-wide uncertainty brought on by deregulation has thrown the carriers' status into question, Moody's Investors Service said in a new report.
But the rating agency also says the importance of a carrier can be affected by the controls an airport has over its gates and the flexibility of the airport's revenue structure.
"Every airport is unique," said Al Medioli, vice president and assistant director at Moody's, which yesterday released the special report, "Moody's on Airports: A New Look at Airport Debt in a Changing Environment."
In the first of two special reports on the subject, the agency assesses how deregulation has affected airports, the concerns over the capacity of the nation's air travel system, and whether plans to spend billions of dollars to expand or modernize airports in the coming years is prudent as the airline industry retrenches.
The report cites the turmoil over the $2.6 billion Denver International Airport project, the first new airport construction since 1974. The project is rated a conditional Baal by Moody's, which noted, "The critics in Denver fear the new airport. . .is being built on. . .flimsy assumptions about future air travel. Moody's disagrees."
Mr. Medioli added, "In the long term there is a great need for capacity. We don't particularly think anybody is overbuilding."
Because deregulation created monopolies for carriers at many airports, analysts say it is critical to study whether an airport and its finances depend on a strong local market or on connecting passengers who only change planes there, a less certain source of business.
"The hub [or connecting] facility could live or die with the air carriers themselves, because these private companies -- not the local economy -- are the primary generators of passenger traffic," the report says. "If a dominant air carrier at a hub airport falters, another carrier might not be available or interested in replacing" it.
The agency recognizes that the difference between the two types of airport traffic is not new, but adds, "It was not a matter of deep practical credit concern because of the continual and substantial growth in [passenger boardings] across the country throughout the 1980s."
Even as airline traffic was growing, so was competition and the pressure on carriers to expand, take on debt, and be competitive. The result has been an unprecedented consolidation of major and regional carriers. Analysts concede that only three airlines -- American, Delta, and United -- can be considered strong. They list two others as troubled, and note five airlines are already under bankruptcy court protection. A sixth has missed debt service payments on its corporate debt, and is planning to file for Chapter 11 next year. Meanwhile, Eastern was liquidated after declaring itself bankrupt.
That is a long way from the 30 airlines competing in 1978 when the federal government decided it would stop assigning routes and let competition decide which destinations were best.
"Has deregulation failed?," Moody's asked in its report. "The question poses a variety of public policy issues that are beyond the scope of this review, but one thing is inescapably clear: The competitive landscape in the domestic air carrier industry has been transformed completely."
Later, the report adds, "Today, the remaining carriers are much freer to serve markets on their own terms."
As an example, Moody's cited the still-vacant Eastern concourse at Hartsfield Airport in Atlanta. Noting that Delta's dominance of Atlanta has been a deterrent to possible users of those gates, the agency called the situation "an occurrence that would have been almost unthinkable in a more competitive environment."
Beyond the linkage between airports and their carriers, analysts say critical issues affecting the credit quality of airport bonds include gate control and the kind of revenue structure used to secure municipal debt.
Because of the shakeout in the airline industry, Moody's said the degree to which an airport controls its own facilities will be a key credit factor. In simpler terms, whoever controls gate assignments also controls traffic and revenue.
"Lack of control means that a bankruptcy court, and not the airport administration, has the right to determine airport utilization," the report says. "A weak carrier that dominates utilization and control of gates at a given airport represents a potentially alarming credit situation in that an entire airport could effectively be shut down by a bankruptcy court acting in the interest of creditors for whom those gates are important assets."
Again because of the consolidation in the airline industry, Moody's said another key issue for airports is the type of revenue structure securing its debt. Many airports use a combination of residual or compensatory arrangements.
Analysts generally consider residual agreements more flexible because airports are guaranteed to break even regardless of how well individual carriers do. On the other hand, a compensatory agreement can create a credit weakness at hub airports or others dominated by a single carrier.
"This weakness would reflect the fact that, in the event of that dominant carrier's failure, the loss of operations and revenue typically cannot be passed on to the remaining carriers," the agency said.
There are exceptions. At Phoenix-Sky Harbor International, the airport has a mix of strong gate control, and 68% of its traffic comes from the local market as well as a compensatory revenue structure.
Besides that, the airport is base for America West Airlines, one of five carriers under bankruptcy law protection. Despite that, Moody's has affirmed the A-rating on the airport debt.
"A hub with a weak carrier is a concern," said Mr. Medioli. "But another question is whether somebody else will want to serve that market."