Congestion is a Thing of the Future - Again

Kurt Krummenacker, vice president at Moody's Investors Service, is the lead analyst for the company's domestic airport sector.

Last year some mainstream press questioned the decisions of airport operators with large terminal and runway projects that reached completion just as demand fell and airlines announced capacity cutbacks. One article even quoted a major airline executive as saying that airport congestion was a thing of the past. While U.S. airport congestion is very clearly a thing of the past for now, the long-term history of industry growth indicates that it will also be a thing of the future.

Moody's Investors Service affirmed its negative outlook for the airport sector in our recently published 2009 U.S. Airport Outlook. While we believe most industry trends will remain decidedly negative for 12 to 18 months at the 92 commercial airports we rate, we also expect the industry to stabilize over the longer term. This expectation is supported by the historical trend of increasing demand for air travel through economic cycles and the strength and structure of airline agreements in place at most U.S. airports. Though the industry trends are negative, Moody's believes the majority of rated airports will be buffered from widespread negative credit actions by financial strengths of ample liquidity and debt service coverage margins as well as by the stability that comes from collective cost sharing agreements with the airlines.

Our short-term outlook through 2009 includes high single-digit enplanement declines similar in magnitude to what most rated airports experienced in 2008. A high degree of uncertainty remains, however, as both air carrier supply and passenger demand will be tied to economic and financial market conditions that remain in transition.

When positive capacity growth does return, we believe the structural shifts that have occurred in both the U.S. economy and financial system will not likely support the same rate of industry growth experienced since deregulation of the U.S. airline industry in 1978. The growth in that 30-year period was aided by a decline in air fares facilitated through increased airline competition, relatively inexpensive fuel prices, open access to capital markets, the proliferation of low-cost carriers and the pricing transparency afforded by the internet. Moody's believes the current weakness in global demand and reduced access of airlines to the capital markets and banking sector are likely to slow the pace of long-term industry growth.

One of the many factors contributing to our credit ratings for U.S. airports is management's approach to matching capital expenditures with growth expectations. As in the past, we will view the ability of an airport to plan effectively for the impact of this new growth environment as a credit strength. Some rated airports have capital plans that are not impacted by lower growth, but many may need to adjust capital plans to delay or remove projects altogether.

However, Moody's also notes the need for airport capital planning to continue through the current industry cycle. The large projects held up by the mainstream press as unnecessary in 2008 were undertaken years before they were required to support continued growth. To the extent enplanement growth returns, we expect these capacity-related projects will increase in importance. Credit stability requires an airport to balance facility development that supports growth with financing that remains affordable during periods of stagnant or declining revenue. We believe this balance should be based on realistic assumptions for traffic and revenue growth in both the short- and long-run. Our review of capital planning also considers the prioritization of capital projects based on necessity and the length of the project's planning horizon.

Finally, Moody's considers the risks of various debt financing structures that may jeopardize the financial strength and liquidity of an airport through high exposure to market risk, variable interest rate risk, principal acceleration risk, collateral posting and termination payment risk. Maintaining financial strength will be critical to sustain credit stability during the next industry downturn, which we know will be a thing of the future.
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Kurt Krummenacker, vice president at Moody's Investors Service, is the lead analyst for the company's domestic airport sector. Prior to joining Moody's, Krummenacker worked at the Port Authority of New York and New Jersey, most recently as senior airport project manager. He was also previously a captain in the U.S. Army, serving as a Blackhawk helicopter pilot and commanding officer of the Headquarters and Paralegal Company. He holds a B.S. in economics from the United States Military Academy at West Point, a master's of aeronautical science from Embry-Riddle Aeronautical University and an M.B.A. in finance from the Columbia University Business School.