Congressional stimulus boosts airport liquidity

The $10 billion in assistance for airports provided in the $2 trillion stimulus package recently agreed to by Congress, and signed into law by President Trump is unprecedented for the sector and will help to stabilize airport budgets, Fitch Ratings says. The funds, which are provided in response to the coronavirus pandemic and can be applied broadly by airports for any lawful airport purpose, are intended to provide near term bridge funding for lost revenues until enplanements can meaningfully return to pre-crisis levels. Fitch expects airports to take varying courses of action with this assistance, ranging from rate relief to air carriers and concession tenants to directly offsetting operating costs and upcoming debt payments.

Large hub airports will likely receive a substantial share of the assistance funds based on the set aside formulas for distribution. The formula takes into account an airport’s relative enplanement, debt service and cash reserves. A number of the largest US airports are potentially in position to receive more than $100 million. Smaller commercial airports represent the largest class of air facilities and will be entitled to receive a nominal minimum amount, regardless of actual operational or financial metrics. It remains to be seen if the funding formula under the bill will be effective in bringing money to where it is most needed.

The overall adequacy of the aid to airports as well as aid to airlines under a separate nearly $60 billion allocation intended to help stabilize the industry remains unclear. The air travel industry is in dire need of assistance as current and projected demand is falling at steeper levels than what was seen during prior global crises, such as the Severe Acute Respiratory Syndrome (SARS) outbreak and the September 11 terrorist attacks. Further, the start of the recovery period is difficult to assess as the virus continues to spread.

As a condition to the aid, small, medium and large hub airports cannot lay off more than 10% percent of their workforce through YE 2020, but airports can receive waivers for economic hardship or reductions in aviation safety or security staff. Fitch’s review of rated US airports indicated these enterprises have unrestricted cash reserves that are sufficient to meet debt service due through the end of the current calendar year and most have a fully funded debt service reserve to cover 50%-100% of one-year’s principal and interest obligations.

Severe declines in enplaned passenger traffic will affect operating revenues across all airports, with the greatest effects to starting in March and lasting through second-quarter 2020 and potentially beyond. The sector had a decade-long stretch of traffic expansion and financial stability, which helped to shore up robust liquidity across most airports, in the form of cash funded bond reserves and additional accounts with unencumbered funds.

Airport revenue and cost profiles are expected to be negatively affected as the economic recession deepens. Fitch will monitor developments in the sector and incorporate revised base and rating case qualitative and quantitative inputs based on expectations for future performance and assessment of key risks.

Still, in Fitch’s opinion, airport revenues derived from the air carriers will be buffered in the near term at varying levels through the cost recovery mechanisms in contracted airline use and lease agreements (AULs). However, cash flows are exposed and will take a hit from a decline in certain revenue sources such as passenger facility charges, terminal concessions, parking, and rental cars that are directly linked to passenger traffic volumes. Normally, the loss in revenues could be mitigated by either meaningful cost containment actions or timely resets to airline charges as allowed under AULs.

However, with the spread of the virus and the resulting fallout across the aviation sector, airports are faced with increased costs related to coronavirus suppression efforts and airlines that are less able to pay under the AULs. While airports can respond by terminating AULs for delinquent or defaulting payments, the global financial effects means implementation of this remedy may be impractical. As seen during the Great Recession a decade ago, either deferral of payments or use of airport cash funds to subsidize airline payments have been utilized to cover bond debt service. With the stimulus package, government aid will help offset declines in airline and passenger related revenue.