The U.S. Aviation Industry And Airport Credit Quality Continue To Recover

Following the most turbulent period in modern aviation history, U.S. air travel demand has recovered for most airport operators--and for some, performance has even exceeded pre-pandemic levels--allowing management to return their focus to the future. Despite the risk of an economic slowdown in 2024, airport operators will restart or have already restarted expansion and modernization plans deferred during the pandemic. S&P Global Ratings believes any potential drag on air travel demand caused by inflation and economic weakness will be relatively benign and short-lived. With most airport issuer ratings now equal to or, in some instances, higher than pre-pandemic levels, our view of the U.S. airport sector remains stable. This reflects our view of industry conditions and substantially recovered air travel demand, resulting in significantly improved activity-based revenues, a return to business-as-usual rate-setting for airport operators, and overall rating stability. Our analysis of U.S. airport sector fiscal 2022 financial metrics--including debt service coverage, debt to EBIDA, and liquidity--for U.S. not-for-profit airport issuers that we rate shows a financial recovery, which we expect will support stable ratings in the near term. However, these metrics could weaken with inflationary-driven expense growth and capital improvement spending ramping up if a weaker economy in 2024 reduces air travel demand. For additional details, refer to our article, "U.S. Not-For-Profit Transportation Infrastructure 2022 Medians: Demand Recovery And Management Actions Powered A Financial Rebound," published Oct. 18, 2023, on RatingsDirect.

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Air Travel Demand Has Largely Recovered, And "Revenge Travel" Is Waning

After declining in 2020 and 2021, travel bookings surged in 2022 as COVID-19 restrictions loosened and travelers took trips they delayed during the pandemic. Median enplanement growth was 66% in 2022 which continued into 2023 resulting in an almost complete rebound in demand (see chart 2). Airports with high levels of pre-pandemic passenger growth or serving warm-weather and leisure domestic destinations generally experienced stronger recoveries than those serving international markets (particularly trans-Pacific travel) or metro areas more heavily affected by the decline in regional business travel. Now, even as so-called revenge travel begins to wane, enplanements have largely fully recovered to pre-pandemic levels in fiscal 2023.

Chart 2

Federal Aviation Administration (FAA) forecasts have been relatively accurate over a 10-year period, if not slightly conservative, often projecting lower near-term growth coming off years of high traffic growth. As depicted in chart 3 below, with the pandemic largely in the rearview mirror in terms of air travel impact, the 2023 updated FAA forecast is largely back in line with the 2009 forecast in the out years with an assumed average annual growth rate of 2.7% in both cases. The 2019 passenger forecast assumed a lower rate of 1.8% due to economic uncertainties, and subsequent impact on demand for air travel, at the time related to Brexit and other geopolitical tensions leading to reduced global trade.

Chart 3

We lowered 89% of our airport ratings beginning in June 2020 with passenger volumes stalled, mobility restricted, and the efficacy of COVID-19 vaccines unproven. And while all transportation infrastructure credit outlooks were negative, we didn't lower 11% of airport ratings in 2020 due to factors such as more diversified financial profiles. Currently, 80% of airport ratings have returned to pre-pandemic rating levels and 16% are now above that rating level, with only 4% remaining below that level.

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After air travel demand surged in the post-pandemic economic recovery and airfare prices spiked globally, domestic U.S. demand has shown signs of easing from strong 2022 levels, with average annual airfare prices moderating in 2023 compared to 2022 (see chart 5). In addition, according to a recent report by the U.S. Federal Reserve, while "revenge spending" triggered economic strength during summer 2023, leisure spending began to level off toward the end of August. This spending pattern has applied to air travel as well. However, leisure spending levels vary by region, income levels, and even airline. The more budget-conscious traveler is spending less, according to low-cost carriers such as Frontier Airlines. But traditional legacy carriers such as Delta Air Lines Inc. continue to see strong growth in passenger travel, particularly those passengers booking premium seating tickets to overseas destinations. The trend of air travel demand will be a key credit factor for our rated airports as continued growth will support the multitude of rising costs whereas, conversely, a weakening or stagnating demand will challenge management teams to maintain financial margins commensurate with credit quality. For additional information on U.S. airlines, see "U.S. Airlines Can Manage Higher Jet Fuel Prices For Now," published Sept. 15, 2023.

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Large Capital Programs Are Back

Capital spending to maintain assets or improve long-term capacity has resumed after a short pause. In particular, airport operators have accelerated terminal projects at the behest of airlines scrambling to regain market share. The U.S. airport industry has approximately $140 billion in outstanding debt as of year-end 2022 (up 9% from 2021 and 17% from 2020) with many large-hub airports continuing to issue new-money debt so far in 2023. Year to date, 20 airports across all hub sizes have issued a total of $10.7 billion of debt with an average principal amount of $544 million.

This capital spending arrives as more than $1.5 trillion in federal investment from the Inflation Reduction Act, the Infrastructure Investment and Jobs Act (IIJA) (also known as the Bipartisan Infrastructure Law [BIL]), and some portions of the American Rescue Plan passed into law since 2020 is targeted over the next four years. In particular, the IIJA/BIL provided more than $25 billion for airports to include $15 billion in grants for airport infrastructure projects that increase safety and expand capacity, $5 billion in competitive grants for airport terminal replacements, and $5 billion to improve Federal Aviation Administration (FAA) air traffic control facilities, according to Congressional Research Service. Furthermore, in tandem with its expectation of enplanement growth over the next 10 years, Airports Council International-North America estimates U.S. airports have $151 billion of capital needs over the five years (a 31% increase from the 2021-2025 period), most of which consist of terminal projects. S&P Global Ratings-rated airport issuers report to us that these terminal upgrades or enhancements are critical for them in staying competitive both globally and domestically, accommodating more airlines and passengers, and continuing the industry-stated goal of decarbonization by 2050.

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Numerous economic headwinds add uncertainty

Known or still-developing exogeneous risks to the global economy could negatively affect the airport sector, and the potential for unforeseen shocks is always present. These risks include weakening economic conditions, lingering inflationary pressures, and geopolitical risks such as the ongoing Russia-Ukraine war and emerging conflict in the Middle East. Domestically, S&P Global Economics believes that after stronger-than-expected growth so far in 2023, the U.S. economy is poised to slow for the rest of 2023 and come in below trend for the next two years. We forecast baseline U.S. GDP growth at 2.3% for 2023, 1.3% for 2024, and 1.4% for 2025 (see "Economic Outlook U.S. Q4 2023: Slowdown Delayed, Not Averted," published Sept. 25, 2023). Weaker economic conditions below our baseline could negatively affect air travel demand and lead to reduced financial margins for airport operators.

The highest construction cost inflation seen in decades, along with higher labor costs, has weighed and will continue to weigh on project budgets and timelines and could result in higher debt levels across the sector. Although weakening economic conditions could cool inflationary impacts, the massive federal investment in infrastructure could keep input and labor prices elevated in many markets over the medium term. Furthermore, the IIJA requires that all infrastructure projects funded by related federal grants include manufactured end products that are manufactured in the U.S. and the component costs must be greater than 55% of the total costs, which would further increase total airport project costs.

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Risk Management Strategies Remain Crucial To Future Performance

Business strategies that prioritize health and safety of employees and customers, minimize exposure to physical and cyber security risks, and prepare for the aviation industry's efforts to decarbonize are becoming increasingly important to airport management teams as they endeavor to preserve parts of the playbook developed on the fly during the pandemic. Below, we highlight key trends and considerations in our criteria for evaluating airports that could affect credit quality when considered material in our analysis.

Social and human capital.  Airports are exposed to community opposition resulting from noise, pollution, or expansion efforts. Balancing customer experience and employee relations with providing reliable and safe infrastructure is a primary public-purpose mission of airport operators. While these factors can sometimes conflict, managing the multitude of stakeholders presents both risk and opportunities for our airport operators.

Physical risk.  Given the capital-intensive nature of airports, physical climate risks--like hurricanes, extreme heat, intense precipitation, or strong wind events--can disrupt operations and potentially lead to demographic changes in the service area that dampen demand, depending on the severity of an acute event or as chronic risks intensify. Proactive management teams are including resiliency and hardening of system assets in their capital programs to prevent or minimize damage or disruption from sea-level rise (seawall resiliency projects), storm surges, or severe weather events that result in flooding. Thirteen of the 47 largest U.S. airports have at least one runway with an elevation within 12 feet of sea level (see chart 9).

Chart 9

Cybersecurity.  Furthermore, cyber security and the sophistication of bad actors present ongoing challenges for the entire aviation system. We believe management teams that have implemented robust cyber hygiene policies and procedures, regularly test and practice their response to an event, are able to acquire cyber insurance, or set aside reserves to have liquidity available to respond to an event are likely more prepared to mitigate cyber risks, as we reflect in our management and governance assessment. For our view on U.S. transportation issuers management of cyber risk, see "Cyber Risk In A New Era: U.S. Transportation Infrastructure Providers Remain Vigilant On The Road To Cyber Preparedness," published Oct. 26, 2022.

Decarbonization.  The emerging conversation and action related to the global energy transition is occurring among U.S. airports as well, with a handful taking action or planning decarbonization efforts in the near future. Several airports have invested in increasing their renewable energy production, particularly solar power given their ideal location on large, flat swaths of land with minimal shading from trees or buildings. According to a 2020 study conducted by the University of Colorado, 20% of U.S. airports have added solar panel capacity over the past decade. Large hubs such as Denver International Airport and Austin-Bergstrom International Airport have led the way, but Chattanooga Metropolitan Airport, a smaller entity, recently became the first U.S. airport to run entirely on solar power. In addition, many others have recently announced plans to invest in future solar production, such as Kansas City International Airport, where the city government is planning to build a solar array across 3,000 acres of airport land. Many airport management teams have cited an opportunity to cut airport operating expenses through reduced energy costs and to meet broader sustainability goals as reasons for these investments.

Solar is not the only renewable energy source that U.S. airports are investing in. Louisville International Airport is tapping into the state's geothermal sources; this project, which began in 2021, is the largest at any airport in the U.S., and airport management expects the project, when fully completed, will reduce annual utility costs by approximately $400,000. Much of this renewable energy investment at U.S. airports is being aided by significant grant money provided by the federal government through the IIJA but also the FAA's 2021 Aviation Climate Action Plan, which sets the 2050 as net-zero emissions target.

Beyond generating their own power, airport operators will increasingly be required to upgrade connectivity to their regional electrical grid to accommodate increasing load and reliability requirements of electric vehicles of travelers, tenants, airline ground service equipment, rental car providers, employees, and at some point, aircraft.

Rental Car Activity Levels Exhibit A Similar Trend

Rental car special facilities located at U.S. airports have also seen a continued strong recovery in rental car transaction days with all but two in our rated universe recovering to their pre-pandemic rating and two exceeding their rating from 2019. Consolidated rental car center activity levels are highly correlated with air travel demand and enplanements, and in general, rental car demand moves in lockstep with enplanements.

However, this is not always the case, as recent performance at San Diego County Regional Airport Authority shows. While enplanements have recovered to 96% of 2019 levels as of fiscal 2023, rental car transaction days have only recovered to 80% of 2019 levels. These levels are a marked improvement from those seen during the depths of the pandemic, but we attribute the notable difference between air travel and rental car demand to the weaker comeback of inter-California business travel demand for rental cars and note this case is unique among our rated customer facility charge (CFC) universe.

Although many of the facilities in our rated universe are relatively new and therefore have limited capital needs, the challenge going forward for many of the management teams will be navigating potential changes in consumer travel choices away from rental cars and toward alternative options such as rideshare or mass transit as well as reduced business travel over the long term leading to reduced rental car activity and CFC revenues.

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Related Research

• Outlook For U.S. Not-For-Profit Transportation Infrastructure: COVID In The Rearview Mirror, Yet Transit Stuck In Second Gear, Jan. 11, 2023
• Economic Outlook U.S. Q4 2023: Slowdown Delayed, Not Averted, Sept. 25, 2023
• U.S. Not-For-Profit Transportation Infrastructure 2022 Medians: Demand Recovery And Management Actions Powered A Financial Rebound, Oct. 18, 2023