Travel rebound that rewarded airport bondholders to lift sales

Travelers returned to US airports in droves last year, contributing to a pick-up in plans to renovate and build new facilities.

The rebound in passenger traffic to levels not seen since before the pandemic has airports moving ahead with capital improvement projects and turning to the municipal bond market for funds. It also has delivered substantial returns to airport bondholders.

“Though there are still some future challenges to navigate, the sector’s days of playing defense are effectively over,” said Seth Lehman, a senior director at Fitch Ratings Inc. Airports are “now focusing more squarely on increased capital spending to meet current and future demand, both of which are trending much more positively.”

Airport bond issuance is expected to rise to $21 billion this year from $15.7 billion last year, according to a report by investment bank Ramirez & Co. New capital needs, deferred plans from 2023 and an increase in bonds that are eligible to be refinanced in 2024 through first quarter 2025 will bolster issuance this year, the firm said.

“There is a backlog of capital investment needs,” Guy Nagahama, managing director and head of the airport finance team at Ramirez, said in an interview. “Better demand for airport bonds will support airport issuance.”

Chicago expects to sell debt this year for its O’Hare International Airport. “The amount of both issues may change based on actual expenditures and market conditions,” Jill Jaworski, the city’s chief financial officer, said in an emailed statement.

At the beginning of Covid-19, uncertainty over how soon passenger traffic would recover had marred sentiment. Investors weren’t sure whether a rebound would be quick like it was after Sept. 11, or if it would resemble the drawn-out recovery following the financial crisis, said Nagahama.

Last year, roughly 942 million travelers boarded airplanes, 2% more than the record high set in 2019 before the pandemic brought air travel to a screeching halt, according to estimates by CreditSights Inc. 

“Clearly demand has rebounded in a very big way,” said Chip Hughey, managing director of fixed income at Truist Advisory Services, Inc.

After a slew of credit rating cuts during the pandemic and the subsquent upgrades, actions are now expected to be “a lot more muted,” Nagahama said. In fact, last year Fitch upgraded Miami International Airport and New York’s John F. Kennedy International Airport special facility bonds to A+ and BBB+, respectively. 

For investors, the upbeat credit outlook and better-than-expected economic data pointing to a soft landing are welcome.

Last year, investors saw returns of 7.4% on airport bonds, according to the ICE BofA US Airport Municipal Securities Index. It was the most since 2019 and more than a percentage point above the broader market index. But the window of opportunity may be coming to an end.

Spreads on airport revenue bonds have been tightening. Investors are currently demanding about 40 basis points in extra yield over comparable top-rated muni bonds, down from roughly 69 basis points in February 2023, according to data compiled by Bloomberg.

“Strong demand this year could tighten the spreads further,” wrote Pat Luby, head of municipal strategy for CreditSights, in a Tuesday note.