A solid recovery in the airport sector is still up in the air--at least over the next 12 months. Recurring waves of COVID cases remain a threat to the rebound for Australian and New Zealand (ANZ) airports and has also delayed the much-awaited trans-Tasman travel. The risk remains unless a COVID vaccine becomes widely available and is proved effective. Moreover, lucrative international traffic could be minimal over the next 6-12 months as international borders remain largely closed and governments remain cautious.

Still, domestic travel in ANZ could support airports' cash flows. S&P Global Ratings continues to expect fiscal 2021 to be a weak year for ANZ airports and that a meaningful rebound isn't likely before fiscal 2022. The recent setbacks have shown that recovery remains fragile and volatile until consumer confidence in air travel is restored. The outlook on the airport sector remains negative and the ratings on the eight Australian and New Zealand airports remain unchanged for now because we see prospects for a modest and progressive recovery from fiscal 2022.

Unlike those in New Zealand, airports in Australia have been hamstrung by volatile state border policies. The latter will benefit from the restart of domestic traffic with COVID-19 under control across Australia and recent opening of various state borders with no quarantine requirements. New Zealand airports have steadily ramped up domestic traffic since mid-May 2020 to 60%-70% of pre-COVID levels. This bodes well for Australian airports, which could also see domestic travel of at least 40%-50% of pre-COVID levels in 2021, if state borders remain open.

Airports' recovery could lift if recent news of potential COVID-19 vaccines restores confidence in air travel and spurs a quick rebound in international travel. We expect all rated ANZ airports to maintain tight restraint on all costs until traffic numbers stabilize. However, if the recovery remains volatile or weak, then cost control alone may not be enough to maintain airports' credit quality without balance sheet support.

Rebound Still Unlikely Until Fiscal 2022

Global travel recovery suffered a setback with a new round of lockdowns and travel restrictions following a fresh wave of COVID-19 cases globally (see table 1). We have therefore updated our recovery expectations for global passenger air traffic. These are based on recent air traffic trends, which are weaker than we previously expected, as well as forward-looking guidance from airlines, aircraft lessors, and airports. We also incorporate information and analysis provided by other sources such as industry trade groups International Air Transport Association (IATA) and Airports Council International (ACI).

Table 1

For Australian and New Zealand airports, we had forecast a 40%-60% decline in traffic for fiscal 2021 (mostly June ending) and a slow recovery thereafter during our mid-June 2020 update. The planned restart of trans-Tasman and Pacific travel has been pushed back due to delays in the containment of COVID-19 in Australia. Likewise, domestic borders between some Australian states just recently reopened, later than our earlier expectations and have pushed out the restart of domestic travel. As such, fiscal 2021 could be weaker for some airports compared with our previous expectations.

Wellington International Airport Ltd. and Christchurch International Airport Ltd., however, may perform better than our prior expectations in fiscal 2021 given that they have benefited from a ramp-up in domestic travel to date. Indeed, New Zealand's domestic travel has jumped to more than 60% of 2019 levels, albeit it suffered slightly following a second brief lockdown in Auckland in late August 2020.

We still don't expect a meaningful rebound until fiscal 2022, when international travel could pick up and domestic traffic ramps up further. For example, governments previously discussed travel within trans-Tasman and to some north Asian countries (Taiwan, Japan, and Korea) based on these countries' control of COVID-19. Still, confidence remains fragile due to volatility caused by fresh waves of COVID-19 infections and government policy measures. A protracted recovery in traffic remains a key risk in our view.

Property Revenues Performed Better Than Our Expectations

Commercial property revenues at airports have outshone amid a plunge in revenue and cash flows in other segments. Commercial property income remained at close to historical patterns with only a few abatements. For July-September 2020, this segment's income has largely sustained airports' positive EBITDA or breakeven levels despite very low passenger numbers. The proportion of property income varies across airports with smaller airports generating a greater proportion of income from this segment (see chart 1).

Chart 1

We expect the trend to continue over the next 12 months at least. Smaller airports with lower absolute debt are in a slightly better position to cover their interest expense, aided by benefits from swaps restructuring. Larger airports like Sydney Airport (rated entity Southern Cross Airports Corp. Holdings Ltd.) and Melbourne Airport (rated entity Australia Pacific Airports Corp. Ltd.) that rely more on passenger-related revenues and have a larger debt book will likely have to fund a portion of their interest expense from existing liquidity sources at least over the next 12 months.

With very little passenger traffic at the airports, aeronautical (aero) revenues continue to suffer. This, in turn, has dragged down non-aero revenues such as retail and car parking. Airports have waived minimum guarantee rents on retail contracts (including duty free) and are likely to continue on this basis over at least the next 6-12 months until some baseline traffic is reached.

We believe most of the airports have reached their base level of operating costs, making further cost cuts difficult. In response to the COVID-19 situation, airports have slashed their operating costs through downsizing of operations, managing terminal operations, and undertaking organizational restructuring (including personnel redundancies).

Airports have either obtained covenant waivers or don't expect to be in breach of the covenants. Brisbane Airport Corp. Pty Ltd. and Melbourne Airport have obtained covenant waivers until June 2021 and the three New Zealand airports have waivers until December 2021. The next few months will dictate if the airports need to assess their covenant position for further periods until there is stability in the traffic outlook.

Uncertain And Volatile Traffic Recovery For Some Time

Periodic waves of COVID infections and various governments' responses to such outbreaks make forecasting difficult. For example, the recurrence of infections in Auckland in early August led to a short period of lockdown. In Australia, sporadic cases of COVID-19 have delayed border openings or even the reimposition of restrictions at short notice, as seen for South Australia recently.

We continue to believe that domestic leisure travel will likely lead the industry's recovery, with business and international travel lagging. Passenger recovery trends and the financial metrics will be driven by domestic, regional, market, and airport-specific factors.

International traffic

• Borders remain largely closed with few repatriation flights. International traffic is still down by about 98% for the first three months of fiscal 2021 (July-September 2020).
• International traffic might not return until the last quarter of fiscal 2021 (i.e. April-June 2021), or perhaps even toward the end of fiscal 2021 (i.e. from June or July 2021).
• While several countries are considering opening select international travel within Asia, several setbacks have occurred. For example, trans-Tasman travel is on hold or very limited. Also, the first quarantine-free travel between Hong Kong and Singapore slated for late November has been pushed back due to a COVID resurgence in Hong Kong.
• Quarantine policies may vary across countries and that can affect which sectors open first.

Domestic traffic

• New Zealand airports have shown that the recovery in domestic passengers can be quick (see chart 2). In the three months of July-September 2020, domestic travel at Auckland International Airport Ltd., Christchurch, and Wellington Airports has ramped up to about 60%-70% of the 2019 levels (pre-COVID).
• Perth Airport Pty Ltd. has seen intrastate mining-related travel return close to pre-COVID levels. This segment constitutes about 30% of total traffic at Perth. Brisbane Airport has also seen some intrastate travel with overall domestic at about 25% of pre-COVID levels in the first quarter of fiscal 2021. While small, they still provide some cash flows and signal the potential speed of recovery.
• Domestic borders in Australia could open before Christmas with no quarantine requirements. This could bring some respite to all airports.

Chart 2

International Passengers Will Bring Back Stability

International passengers form a significant proportion of traffic for gateway airports such as Sydney and Auckland (see chart 3). For other major capital city airports as well, international passengers form about 25%-30% of their total passenger base (based on fiscal 2019 data).

Also, international passengers are more valuable since they drive greater non-aero revenues such as duty free and retail. For example, international passengers at Sydney Airport provide three times the revenue of domestic passengers as well as a significant portion of aero revenues. As such, we believe that recovery in international passengers is a crucial factor for the return of financial stability for the airports.

Regional and fly-in-fly-out (FIFO) traffic at Perth Airport, Brisbane Airport, and to some extent Adelaide Airport Ltd., have continued to remain strong, providing some cash flows. However, in our view this traffic alone will not be adequate to restore the financial metrics back to pre-COVID levels.

Chart 3

Risks Remain High

Development, availability, acceptance, and effectiveness of a vaccine could be the panacea for the sector. Yet, consumer's propensity to travel, social distancing and health concerns, and quarantine policies will influence the recovery path. Upon a meaningful recovery, consumer discretionary spending will dictate the confidence in retail and car parking income.

Given the current delay in passenger recovery, we believe airports could face strain over the next 6-12 months. We will need to take into consideration the level of traffic that could ramp up during fiscal 2021, particularly domestic traffic, as well as the airport management's or sponsor's response to the delayed recovery prospects.

Moreover, airports' steps and measures to reduce their cash burn and limit debt increase will also be an important factor for resilience. As listed entities, Sydney and Auckland Airports have raised sizable amounts of new equity since the COVID outbreak, providing some balance sheet protection. Others, such as Perth Airport, and to some extent Adelaide Airport and Brisbane Airport, have found flexibility in their balance sheet by monetizing existing swaps to reduce interest expenses for the next few years and preserve cash. However, these types of transactions are limited. Some airports, subsequently, could be at a higher risk of a downgrade in the absence of active capital management.

Airservices Australia (AsA), the air traffic controller, has been supported by its shareholder amid the traffic slump. AsA is wholly owned by the Commonwealth of Australia and the ratings are equalized with the ratings on Australia. AsA's balance sheet is stretched and we expect continued government support until there is some level of traffic stability.

Still Early Days To Assess Long-Term Risks

We expect that some business travel could permanently disappear because virtual meetings and working remotely are becoming viable alternatives. Yet, the remote location of Australia and New Zealand and need for global connectivity mean an extended isolation is not practical. Although the shift will dampen recovery over the next 12 months, we don't expect large structural change over the long term.

Our rated pool of ANZ airports are gateway airports that secure their strong market positions. The great distances between the capital city airports and the lack of viable alternative modes of transport continue to underpin our favorable view of the industry and the rated ANZ airports. This position has helped these airports to enjoy continued access to debt and equity markets, helping them to shore up liquidity and refinance maturing debt.

It remains to be seen if the pandemic will lead owners to re-think the balance sheet structure of their assets. There are potentially significant changes in respect of airports' operating models that will affect these decisions. Uncertainties remain around how retail outlets and contracts will evolve, whether there will be changes to airline charges and contracts, and a likely re-examination of investment growth—these factors, should they crystalize, may have an impact on credit ratings.

Over the medium to long term, there are uncertainties associated with climate science, including those related to the frequency and severity of climate and extreme weather risks--like water stress, wildfire, and rising sea levels. While some risks may not be credit factors now, their potential consequences--if unmitigated--could increase over time, leading to increased uncertainty for revenues, higher operating costs, and more volatile earnings. Indeed, these factors could weigh on our assessment of airports' long-term fundamental business and competitive positions.

Table 2

A Note On Coronavirus

S&P Global Ratings believes there remains a high degree of uncertainty about the evolution of the coronavirus pandemic. Reports that at least one experimental vaccine is highly effective and might gain initial approval by the end of the year are promising, but this is merely the first step toward a return to social and economic normality; equally critical is the widespread availability of effective immunization, which could come by the middle of next year. We use this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

Related Research

• As COVID-19 Cases Increase, Global Air Traffic Recovery Slows, Nov. 12, 2020
• Christchurch International Airport Ltd., Nov. 11, 2020
• Scenario Analysis Shines A Light On Climate Exposure: Focus On Major Airports, Nov. 5, 2020
• Wellington International Airport Ltd., Oct. 5, 2020
• Brisbane Airport Has Solid Liquidity Buffer Amid Travel Slump; 'BBB' Rating Affirmed With Negative Outlook, Aug. 17, 2020
• A Second COVID-19 Wave Will Hurt Australian And New Zealand Airports' Recovery, July 29, 2020
• Melbourne Airport Rating Lowered To 'BBB+' On Prolonged Traffic Recovery Due To COVID-19; Outlook Negative, June 16, 2020
• Sydney Airport Rating Affirmed At 'BBB+'; Outlook Negative Due to Uncertain Timing Of Traffic Recovery, June 16, 2020
• Adelaide Airport Ratings Affirmed At 'BBB'; Outlook Negative Due To Uncertain Timing Of Traffic Recovery, June 16, 2020
• Perth Airport Rating Affirmed At 'BBB'; Outlook Negative Due To Uncertain Timing Of Traffic Recovery, June 16, 2020
• Auckland Airport 'A-' Rating Affirmed, Off Watch Negative; Outlook Stable Supported By Proactive Capital Management, June 16, 2020
• Christchurch International Airport Downgraded To 'BBB+' On Prolonged Traffic Recovery Amid COVID-19; Outlook Stable, June 16, 2020
• Wellington Airport Rating Lowered To 'BBB' As COVID-19 Severely Cuts Travel Demand; Outlook Negative, June 16, 2020
• Airservices Australia Outlook Revised To Negative On Sovereign Action; 'AAA/A-1+' Ratings Affirmed; SACP To 'bbb+', April 8, 2020