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S&P Global: Weak Passenger Recovery Challenges Airport Credit

The COVID-19 pandemic and global recession continue to severely depress enplaned passenger levels at U.S. airports, eroding key credit metrics for the foreseeable future, S&P Global Ratings said today in a report titled “This Time Is Different: An Anemic And Uncertain Passenger Recovery Will Challenge U.S. Airports’ Credit Quality.”

S&P predicted that the disruption to aviation caused by the COVID-19 pandemic will “dramatically reshape the U.S. airport sector landscape, adding uncertainty and potential variability to operations, along with comparatively weaker financial performance and competitiveness. It is clear this is unlike previous downturns in severity; likely duration; effect on the rise of virtual meetings and decline of business travel; and, most notably, the tremendous industrywide transformation required to address consumer health and safety issues on a global scale,” the ratings agency said.

“We view this precipitous decline not as a temporary disruption with a relatively rapid recovery, but rather as a backdrop for what we believe will be a period of sluggish air travel demand that could extend for a prolonged period,” said S&P Global Ratings credit analyst Kurt Forsgren.

S&P noted that most current U.S. airport ratings are high investment-grade, and said it expects the sector will have a greater ability to weather adverse credit conditions than largely speculative-grade sectors such as airlines. “However, given the highly uncertain industry conditions and challenges ahead, we see rating downgrades of one or more notches as likely. And while we have taken rating actions in the airport sector and will continue doing so, at this time we generally expect them to be less severe because of the sector’s important infrastructure-provider role, access to the capital markets and financial flexibility. We will likely maintain a negative outlook on affected entities until we have better visibility into the shape of the recovery.”

On Friday, the same day the report was released, S&P placed several U.S. airports on CreditWatch Negative due to severe passenger declines and weakening credit metrics. The ratings move affected 99 ratings on most U.S. airports and airport-related obligations.

“The CreditWatch placements are based on our view that a material change in the performance of airports and related issuers has occurred and the magnitude of the rating impact has not been fully determined,” S&P said. “We believe the ongoing COVID-19 pandemic will result in materially depressed, unpredictable or anemic passenger activity levels for an extended period, which is increasingly weakening the overall credit quality of U.S. airports and airport-related issuers.”

Given the challenges ahead, S&P said it anticipates rating downgrades of one or more notches. “In our view, the airport sector is venturing into uncharted territory with likely slow systemwide passenger traffic growth; a smaller and weakened airline industry; and airport operators exposed to credit risk from a business model untested in the current, severely stressed operating environment. Time horizons, predictions regarding the evolution of the coronavirus pandemic, and related impacts remain highly ambiguous and we believe current airport financial forecasts based on estimates of passenger recovery scenarios are subject to considerable uncertainty.”

Despite the current difficulties, S&P expressed confidence in airports. “We believe defaults are not imminent and the sector as a whole benefits from several factors that have historically supported positive credit trends, including recovery from economic cycles and disruptions,” the agency said.