An uneven recovery ahead for airports
April 2022 | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE
Financier Worldwide Magazine
April 2022 Issue
The coronavirus (COVID-19) pandemic has dramatically reshaped the global transportation industry, with the ongoing decline in air traffic bringing severe consequences for airports. Now, with lockdowns easing across the globe, demand for travel is rising and a combination of materially favourable developments – such as strong vaccine rollouts and improving economic conditions – have reduced credit risks for the wider transportation sector.
In light of improving conditions, we expect airports with larger domestic bases may see passenger numbers recover to 80 to 90 percent of 2019 levels in 2022, and we expect domestic traffic to completely recover to pre-pandemic levels by late 2023. However, international travel still lags behind. Globally, airports more exposed to international traffic are projected to experience a slower recovery, with a return to pre-pandemic levels delayed until 2025 or beyond. As such, airports with a high reliance on international air traffic are likely to be most affected.
European airports lag behind on international traffic
Given rated European airports generally have greater volumes of cross-border travel than those with large domestic markets, the path to recovery is likely to take longer than initially anticipated. As highlighted by the emergence of the omicron variant – which disrupted what looked to be a promising turnaround for passenger traffic in 2021 – the emergence of new, more dangerous variants continues to pose a threat. As such, we now forecast European air traffic to recover to just 45 to 65 percent of pre-pandemic levels in 2022, with a full recovery unlikely to occur before 2025.
Thus far, ratings in the sector remain underpinned by solid liquidity and financial flexibility, which have been critical to buffer weak cash flows. However, given the uncertainty surrounding their recovery and limited financial headroom, almost all European airports currently carry negative outlooks.
Depending on characteristics and regulatory circumstances, each European airport will follow a different path to recovery. We believe this will be slower for those that depend more on international and business travellers or face stricter policy-based travel restrictions. Airports with higher domestic traffic should fare better, as will those reliant on short-haul leisure and transatlantic volumes, which should benefit from pent-up demand.
In addition, European airports’ credit quality will continue to hinge on the efficiency of booster jab rollouts, a return to more normal social and economic interactions, flexibility in capital spending and the sustainability of cost-efficiency measures. Some airports are entitled to tariff increases to compensate for investments and reduced passenger volumes, but those already charging relatively higher tariffs could experience greater difficulty in realising sharp increases.
Various regulatory decisions for European airports are due in 2022, and we believe regulators will have a hard job reconciling the requests of different stakeholders given they may be inclined to avoid any sudden or significant tariff increases. A more likely outcome could entail regulators phasing in tariffs to coincide with a stronger operational environment. However, this could mean that airports may not benefit from improved cash flow when they need it most.
Strong recovery underway across North and Latin America
Conversely, US airports have fared much better with regard to air passenger traffic. At the height of the pandemic, airport management took actions to limit the financial implications of the drop in passenger traffic. This, combined with an economic rebound, traffic recovery, and one of the largest federal assistance packages in US history – which saw over $112bn allocated to airports and airlines alone – has helped to stabilise industry conditions and improve airports’ market positions.
The momentum gained in the second half of 2021 will allow most American airports to recapture about 90 percent of pre-pandemic activity this year. Airports serving warm weather and leisure domestic destinations should continue to experience strong recoveries, while those serving international markets will rebound more slowly.
And while the recent surge in coronavirus infections from the omicron variant has somewhat dampened the positive momentum gained towards the end of 2021, we expect industry conditions to improve throughout 2022 as activity levels normalise. The recovery in enplanements, led by the domestic and leisure market segments, should return to near pre-pandemic levels by the second quarter of 2023. As a result, our current credit view for US airports and special facilities is positive and most of our outlooks on these entities are stable.
Similarly, the recovery in air passenger volumes in Latin America has been largely driven by domestic travel. On aggregate, domestic volumes have recovered to 70 to 80 percent of pre-pandemic levels, and passenger volume has shifted from international to domestic flights across various markets. In Brazil, for instance, domestic travel now represents 94 percent of total flights, up from a historical 80 percent share pre-pandemic. Domestic flights from Mexican airports recovered to almost 85 percent of 2019 volumes in 2021. On average, we forecast airports in the region to recover to 70 to 85 percent of pre-pandemic levels in 2022.
Meanwhile, international short-haul traffic – mainly driven by leisure traffic from the US – has contributed to the recovery in the Caribbean. Indeed, international traffic has recovered to over 50 percent of 2019 levels in the Dominican Republic, Panama and Mexico, and most airports in the region have managed liquidity cautiously during the pandemic and carry stable outlooks.
Asian airports face a difficult year
In the Asia-Pacific (APAC) region, we expect domestic passenger traffic to recover to 60 to 80 percent of pre-pandemic levels by the end of 2022, but a full domestic recovery is unlikely before late 2023. As with other regions, international travel will be much slower to recover, and we anticipate international passengers to reach just 10 to 30 percent of pre-COVID-19 levels by the end of 2022.
Countries that serve as international hubs, such as Singapore and Hong Kong, will therefore lag behind markets with higher proportions of domestic traffic, such as Australia and India – especially as most Asian countries have imposed stricter travel restrictions than those found in the US or Europe. China and Hong Kong’s zero-COVID-19 policy will pose operational challenges to airport operators, adding to costs while simultaneously limiting their ability to pass these costs onto users in the next one to two years. What is more, most APAC airports carry negative outlooks, reflecting further risk of a sluggish recovery that could delay an improvement in metrics. While airports manage liquidity well, in our view, credit metrics will remain weaker in 2022 and likely start improving in 2023.
Globally, airports have been affected by various stimuli to differing degrees, yet recovery will likely be contingent on common factors. Indeed, while at present it seems unlikely, the risk of a return to government travel restrictions or the reintroduction of border closures due to the emergence of new, more dangerous COVID-19 variants cannot be ruled out. Meanwhile, with the advent of remote working and virtual meetings, it remains to be seen whether business travel will ever return to pre-pandemic levels – though an increase in leisure travel could offset this. The recovery is underway, but it is fragile. As such, any developments that dampen consumer confidence in air travel could delay it further.
Julyana Yokota is a senior director at S&P Global Ratings. She can be contacted by email: julyana.yokota@spglobal.com.
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Julyana Yokota
S&P Global Ratings
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