Fitch: War Raises U.S. Airport Credit Risk

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CHICAGO, March 26 (UPI) — Fitch Ratings said the onset of hostilities in the Persian Gulf has significantly increased the financial risks facing the nation’s airports.

Fitch said its opinion reflected the likelihood of further erosion in the already depressed air travel market, the potential for additional Chapter 11 bankruptcy filings by the nation’s airlines, and an increased probability of the liquidation of at least one major domestic air carrier, all of which would further restrict the revenue generating capacity of the nation’s airports.


The past 18 months mark one of the most challenging periods American airports have encountered in their history.

The prolonged decline in passenger volume stemming from the weakened economy and the aftermath of the events of Sept. 11, 2001, has significantly affected non-aviation related revenue sources, particularly parking and car rental concessions.

“While airport managers continue to take action to reduce variable expenditures, the corresponding decline in revenues results in a greater share of fixed costs being passed to the airlines at a time when they can least afford them,” Fitch said.

“This reflects the cost-recovery model of most airport use and lease agreements, which allow airports to assess the airlines for expenses not covered by non-aviation sources. Furthermore, increased security requirements have challenged airports to adapt to more stringent operating conditions imposed by regulatory agencies and to absorb additional operating and capital costs.”

The Air Transport Association has projected that passenger volume will fall about 8 percent over the short term due to the current conflict based on actual travel patterns during the initial stages of the 1991 Gulf War.

In response, the major airlines have already announced service reductions on international routes and minor changes in domestic service.

“The airlines may need to consider additional adjustments in domestic service should the war extend for a protracted period of time and passenger demand wane to a greater extent than expected,” Fitch said.

“This additional damper on travel volume only exacerbates the financial challenges facing airport managers, who now confront the prospect of additional budget reductions and further adjustments to their capital programs,” the rating agency said.

Fitch believes that the airport industry in general maintains its strong credit fundamentals including the essential role of air travel in the national economy, limited competition for passengers within local markets, flexible capital programs, and the cost-recovery provisions of most use and lease agreements that insulate airports from the short-term volatility of the airline industry.

Due to these strengths, as well as the diversity in the operating nature of U.S. airports, Fitch anticipates that the average rating for the industry as a whole will remain near its current A level and continues to view the default of a general airport bond as a remote possibility.

However, due to the current economic conditions, individual airports may experience deterioration in their operating and financial condition and, as a result, their credit ratings.

“Second-and third-tier connecting hubs appear to be at greatest risk in the current environment,” said Peter Stettler, director, Fitch Ratings.

“Their reliance on the transfer traffic from a particular airline makes them vulnerable to potential scheduling changes as airlines react to a rapidly shifting marketplace,” Stettler said.

Connecting hubs with a favorable geographic location, a sizeable origination and destination passenger base, low operating costs and strong yields stand a greater likelihood of sustaining passenger levels in the current environment.

Smaller origination and destination oriented airports might also experience service declines as airlines adjust schedules to reduce service on lower yielding routes and capture more lucrative markets.

Fitch said a prolonged war might result in an even greater decline in passenger levels, raising the possibility of additional bankruptcies among U.S. airlines.

Copyright 2003 by United Press International. All rights reserved.