Most U.S. Airports' Credit Quality Comparable With Or Better Than Pre-Pandemic Level

Following a very turbulent period in aviation history during 2020-2021, U.S. air travel demand has fully recovered for most airport operators--and performance has even exceeded pre-pandemic levels for some--allowing management to return its focus to the future. This recovery and other factors have contributed to issuer upgrades for approximately 27% of S&P Global Ratings' airport ratings. For 2024, inflation-related expense growth, a ramp-up in annual capital improvement spending, or weaker-than-forecast U.S. economic growth could lead to weaker financial results--including debt service coverage (DSC)--but likely not enough to affect airport credit quality. Any potential drag on air travel demand caused by inflation and economic weakness will be relatively benign and short-lived, in our view, as remaining federal operating assistance is exhausted and management teams navigate through any slowing demand with improved balance sheets, cost recovery arrangements, and activity-based revenue performance. Median DSC in 2023 and 2024 could dip below the 1.5x that we observed in 2022, with rising annual debt service.

Chart 1

Air Travel Demand Has Largely Recovered; Growth Outliers Mirror State Migration

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Air Travel Trends Closely Linked To Economic Trends

Air travel demand has so far appeared largely resilient against prevailing macroeconomic headwinds

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, fuel price volatility, global trade and supply-chain issues (like delays in aircraft deliveries), and geopolitical risks such as the ongoing Russia-Ukraine war and conflict in the Middle East. We continue to monitor booking trends--which are typically short-term so revenue visibility is low--because sustained inflationary pressures and unexpected increases in unemployment levels are notable risks that could further weigh on consumer spending going forward. Domestically and globally, unemployment rates remain at historical lows, which supports demand for air travel; conversely, there have been industrywide shortages in staff across the supply chain and record-high labor costs persist.

The U.S. economy appears on track for 2.5% average growth this year, spurred by a sturdy labor market--repeating last year's outperformance versus peers. However, the average growth forecast gives an overly positive outlook of the economy. A strong handoff from last year--with 3.4% annual growth in fourth-quarter 2023--masks the forecasted gradual slowdown to 1.8% by fourth-quarter 2024 (see chart 5). S&P Global Economics forecast baseline U.S. GDP growth at 2.5% for 2024, 1.5% for 2025, and 1.7% for 2026 (see "Economic Outlook U.S. Q2 2024: Heading For An Encore," published March 26, 2024).

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Supply chain disruptions in the airline sector could have a more severe effect on traffic trends than a softening in air travel demand

We currently assume that the two main aircraft manufacturers, Boeing Co. and Airbus SE, can deliver narrow-body aircraft in 2024, with Boeing addressing manufacturing flaws and Airbus working on supply chain efficiencies. However, if supply chain and labor constraints or persistent manufacturing defects delay the delivery of new aircraft to carriers, the launch of new routes and the renewal of existing fleets could be at risk. This could lead to flight cancellations or further service cuts, such as Southwest Airlines' recent decision to pull its service from Houston George Bush Intercontinental Airport due in part to delays in getting new planes from Boeing.

U.S. Airport Ratings Are Stable

The majority of airport ratings have returned to or exceed pre-pandemic levels

Currently, 72% of airport ratings are at their pre-pandemic levels, with 27% higher and 1% lower with a median rating of 'A+' for senior-lien general airport revenue bonds (GARBs) compared with 'A' in 2019. The broad-based industry passenger recovery--faster in some markets than others--supported the rebound in financial metrics along with a combination of management actions such as increasing rates, fees, and charges; restructuring debt; and deferring capital projects rate increases. Upgrades relative to pre-pandemic levels reflect improvement in credit factors specific to each airport operator and include the following considerations:

• Airports that were on positive outlook pre-pandemic and returned to high growth as part of their post-pandemic recovery, such as Denver International Airport or Austin-Bergstrom International Airport;
• Smaller airports that outperformed during the pandemic such as Augusta International Airport; and
• Larger airports that demonstrated financial resiliency, strong passenger growth, or both leading to improved market positions such as Las Vegas-Harry Reid International Airport and Greater Orlando Aviation Authority.

Most airport operators have exhausted their federal pandemic operating assistance and have returned to business-as-usual rate-setting. Higher passenger volumes and inflation-related growth in concession revenues are fueling top-line growth, but rising operating expenses and debt service increases for those airports that restructured debt will hamper future financial performance. The trend of air travel demand will be a key credit factor for rated airports, as continued growth will support the multitude of rising costs whereas, conversely, weakening or stagnating demand will test management teams' willingness and ability to adjust revenue, expenses, and capital spending to maintain financial margins commensurate with credit quality.

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Large Capital Programs Are Back Across Hub Sizes

After a brief hiatus during the pandemic because of uncertainty, capital spending to maintain assets or improve long-term capacity resumed in 2023 and is continuing into 2024. Airport operators have accelerated terminal projects, often at the behest of airlines scrambling to regain market share. While the large hubs were the first to reboot, we are now observing some of our medium- and small-hub airports ramping up spending or either starting or revisiting near-term plans to do so (see table 1 for more detail).

Table 1

U.S. airports issuing new debt to fund their investment needs in a higher interest rate market.   Although central banks are discussing interest rate cuts throughout 2024, we expect the cost of debt will remain higher than it was in the past 10 years. For airports issuing new debt, this will lead to increases in higher annual debt service, and the potential for reduced DSC and could potentially weigh on credit quality.

Significant federal investment dollars are offsetting the increased leverage

Since 2020, 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 have passed into law, bringing $1.5 trillion in federal capital investment, 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 (ACI-NA) estimates in its 2023 report that 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. Our airport issuers frequently share with 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. Nevertheless, we are still expecting GARB proceeds will remain the main funding source for capital improvement programs. Airport operators can expect a level of predictability from future grants with reauthorization of the FAA through 2028 including $105 billion in funding.

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Construction Costs--Higher Forever?

After four years of pandemic-induced increases in construction costs spurred by commodity and labor shortages, we anticipate that the overall inflation rate for projects will moderate in 2024 even as some higher component costs look to be permanent. Specifically, construction input costs have stabilized at levels 35%-40% higher than pre-pandemic rates while many market participants see labor costs still rising at a 4% annual pace. Although price volatility seems to be under control, there's little likelihood that prices will revert to early 2020 levels any time soon.

Positively, some construction cost inputs have largely come down from 2022 levels (table 2), bringing welcome relief from pandemic peaks. Overall, building materials and supplies prices were lower, but still elevated relative to historical levels (chart 8). For example, some estimates have concrete material prices falling 1%-2% annually through 2025, while other inputs like wood, plastics, composites, plaster, gypsum, and thermal protection could average increases of up to 6.5% per year (for additional detail, see "Record U.S. Infrastructure Spending Is Colliding With Higher Construction Costs And Other Hurdles," published May 14, 2024).

Table 2

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Complex Operating Environment Increases The Need For Risk Management Strategies

Business strategies guarding against social capital, physical risks, cyber security, and decarbonization are becoming increasingly important to airport management teams, as many were faced with unanticipated contingency plans during the pandemic. Below, we highlight key trends and considerations in our existing 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 with providing reliable and safe infrastructure is a primary public-purpose mission of airport operators and can add to operating costs. U.S. airports have yet to experience significant operational interruptions associated with labor actions such as strikes that have occurred at many airports in other countries.

Physical risk.   Given the capital-intensive nature of airports, physical climate risks 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 projects 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).

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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, and are able to acquire cyber insurance are likely more prepared to mitigate cyber risks, as we reflect in our management and governance assessment.

Decarbonization.   The emerging conversation and action related to the global energy transition is appearing among U.S. airports as well, with a handful taking action or planning to do so in the near future. Several airports have invested in increasing their renewable energy production, particularly solar power given their ideal site with airports located on large, flat swaths of land with minimal shading from trees or buildings. Many airport management teams have cited opportunities to cut operating expenses through reduced energy costs and to meet broader sustainability goals as reasons for these investments. Much of this investment 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 2050 as net-zero emissions target.

However, most carbon emissions in the industry comes from airlines and not airports but related future cost increases could be passed through to the airport rate base. Global airports' scope 1 and 2 emissions represent less than 1% of the airline industry's total carbon emissions, which amount to 900 million-1 billion metric tons of CO2. The International Air Transport Association (IATA) approved a resolution in October 2021 that requires airlines to achieve net zero by 2050. We think the airport sector will only achieve this goal by combining several approaches. In the short term, carbon-offsetting mechanisms--such as the U.N.-sponsored International Civil Aviation Organization's Carbon Offsetting and Reduction Scheme for International Aviation and the EU's Emissions Trading System--will be the main tools (see chart 10). Once the commercial production of sustainable aviation fuel (SAF) has reached scale, it will be key to reduce emissions.

Chart 10

SAF production is not viable yet.   According to IATA's forecast, SAF production should reach about 1.9 billion liters by the end of 2024, representing a mere 0.53% of jet fuel needs. SAF production is still about 6 billion liters short of IATA's goal to achieve 7.9 billion liters by 2025 (see chart 11). We think it is highly unlikely that SAF production rates will increase in line with IATA's goal over the next 18-24 months.

U.S. regulations not affecting airport traffic at this time.   While our rated European airports could come under pressure if mobility transition and socially motivated regulations impair air travel such as certain governments--Austria, France, and Spain, for example--placing restrictions on short-haul flights, there have not been such steps taken in the U.S. by either federal or state governments. However, the future regulatory environment is something we will continue to monitor as the industry's decarbonization strategies continue to evolve (see "European Airports Trundle Along", published May 13, 2024).

Related Research

• U.S and Canadian Airport And Special Facility Ratings And Outlooks: Current List And Year-To-Date Actions, June 14, 2024
• Record U.S. Infrastructure Spending Is Colliding With Higher Construction Costs And Other Hurdles, May 14, 2024
• Global Airlines Outlook: Clear Skies, For Now, April 30, 2024
• Economic Outlook U.S. Q2 2024: Heading For An Encore, March 26, 2024
• Outlook For U.S. Not-For-Profit Transportation Infrastructure: Back To The Future For Most Operators, While Mass Transit Minds The Gap, Jan. 10, 2024
• U.S. Not-For-Profit Transportation Infrastructure 2022 Medians: Demand Recovery And Management Actions Powered A Financial Rebound, October 18, 2023