Airport Bonds Should Return To those "Blue Skies"

We maintain wide-ranging appreciation for the airport sector while recognizing some rather front-line headwinds that are likely to challenge ratings preservation and security valuations throughout the foreseeable future. Although we assign a negative outlook to the airport sector, we acknowledge the operational, strategic and liquidity strength as well as the economic contributions exhibited by the sector prior to the COVID-19 crisis, and the overall security quality and diversification appeal for both retail and institutional portfolios. We are prepared for building credit pressure with the potential for multiple notch downgrades on some airports.

We like General Aviation Revenue Bonds (GARBs) for their essential economic asset, revenue diversification, historically stable credit quality framed by solid legal provisions and fully funded debt service reserve funds, role as monopoly service provider in a number of strong economic metropolitan areas, sizeable cash positions for the overall sector with access to external sources of liquidity, incremental cost recovery borne by the airlines, and minimum guaranteed revenue arrangements with concessionaires and rental car agencies. Bulge bracket gateway airports, critical hub facilities, and airports with heavy O&D enplanement activity have historically been at the top of the quality pyramid, but such profiles may find it difficult to respond to extensive travel restrictions, particularly foreign, and to the unprecedented drop in demand. Generally, we do expect the airport sector to demonstrate resiliency as the sector entered the economic suspension from a position of strength and most facilities have the financial wherewithal to confront sustained operational challenges, yet a prolonged displacement in volume trends and overall consumer sentiment could have adverse credit consequences for a wider-than-expected range of airports.

We anticipate the potential need for a number of airports to invoke sharp expenditure controls and to scale back pre-crisis capital improvement programs in response to outsized revenue disruption. While many airports represent the economic hub for their host service areas, we are mindful that leisure and business travel may take on new dynamics and we reserve skepticism that enplanement activity will return to pre-crisis levels anytime soon as the aviation recovery may not exhibit the level of performance that typically follows a cyclical downturn in the economy. Historically, gateway airports and many tourist-centric airports benefitted from solid and more diversified demand metrics, yet the uncertain outlook for both foreign travel and cruise/theme park/destination resort activity alters the risk assessment calculus.

Stress testing and revisions in enplanement assumptions are now part of the near to intermediate-term surveillance protocol. Ratings preservation will certainly be determined by the level of risk surrounding refunding/remarketing capabilities. The airport business model is being challenged and admittedly, we find it difficult to predict when a dramatic turnaround in air travel will occur. We posit that sector recovery will not be uniform, with some airports underperforming enplanement advances. There is no playbook for this type of recession/recovery cycle and until there are proven therapeutics and a safe and efficacious vaccine, airport demand patterns may not show sufficient recovery. While many GARBs may prove to be well-positioned to outperform a widening out in sector credit spreads, those airports that have more limited financial flexibility and resources, a less secure competitive position with a reliance upon a smaller, less diversified mix of airlines having a more narrow geographic reach and limited capacity to re-configure flight paths, a meaningful lack of offsetting cargo traffic, and those that are likely to display a greater difficulty adapting to what may become a new business model, are likely to see their bonds underperform.

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