The constant fear of COVID-19 and the uncertainty about the longevity of its financial impacts has shaken the world to new realities.
One of the very first sectors to be impacted was the airline and tourism sector around the world. As more and more countries assimilated to the reality of COVID-19 and how the coronavirus spreads, they started to impose serious travel restriction that were then adopted worldwide. Furthermore, people were already skeptical about traveling which worsened the overall impact on the travel and airline industry.
In this article, we will take a closer look at how airports around the world are coping with the new reality of minimal travel and the struggle to generate revenue to maintain their operations. Furthermore, what does this mean for municipal debt secured by these revenue sources that have now been slashed and their forecast looks grim?
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Airport Revenue Sources
The forecasts of prolonged impacts and effects of the COVID-19 pandemic have resulted in worsening predictions for traffic and revenue losses for airports across all regions. Airports Council International (ACI) now estimates a reduction of more than two billion passengers at the global level in the second quarter of 2020 and more than 4.6 billion passengers for all of 2020. This outlook provides yet another stark illustration of the need for government assistance for airports to preserve essential operations and to protect the jobs and livelihoods of the millions of people that work in airports around the world.
A report published by International Finance Corporation (IFC) on the impact of COVID-19 stated “The sudden drop in air traffic has led to almost complete paralysis of both aeronautical and non-aeronautical revenues. As airlines cut capacity, the aeronautical revenues airports receive from airlines, such as landing charges for aircraft and security charges, fall. As people stop flying, non-aeronautical revenue, derived from airports’ parking facilities, restaurants, or duty-free, also plummets. Total airport revenues fell by 35 percent worldwide in Q1 2020 (equivalent to $14 billion) and by 90 percent in Q2 2020 (equivalent to $39 billion). Projected estimates for 2020, as a whole, paint an even grimmer picture, with a 50 percent drop in total passenger traffic (to 4.6 billion) and a drop of nearly 57 percent in airport revenues (to $97.4 billion), compared to pre-COVID-19 forecasts.”
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Response to the Crisis to Protect Airport Revenues
Until we start to see an uptick in the airport traffic and the “return back to normal,” airports are in dire need of government support and cutting their operational costs any way possible.
- In the recent round of federal government support for transportation districts (train and bus agencies around the United States) struggling with their lost fare revenues due to a sharp decline in ridership – the airports will need additional funding to sustain their operations, while airlines have already received some financial packages, airports have not. The U.S. government approved a $58 billion assistance package for mainly passenger airlines, which included $3 billion in grants for airport contractors, such as caterers.
- Airports also need to scale back on their variable costs, which may include closing portions of airport and, given the decrease in airline traffic, operating with less runways and staff. In the same report by International Finance Corporation (IFC), it states that in early April, London Heathrow asked staff to take 10-15 percent pay cuts for the next nine months.
- As the return of revenue back to normal will take time, airports need to work closely with their credit rating agencies on the future of their outstanding debt and any new debt that may be issued in the future. If and when the credit ratings are downgraded, it will increase the cost of capital for airports and put a further strain on their operations.
The Bottom Line
The airport revenue recovery is dependent on the host country and their response to the COVID-19 pandemic, which will be needed to restore consumer and passenger confidence in many ways. Given the widespread fear and companies halting business travel for their employees, the airport sector may be the last sector to emerge from this crisis financially. Investors must carefully watch for any rating downgrades or negative outlooks put out by the rating agencies, as that will help investors understand the future of their holdings.
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Disclaimer: The opinions and statements expressed in this article are for informational purposes only and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned. Opinions and statements expressed reflect only the view or judgement of the author(s) at the time of publication and are subject to change without notice. Information has been derived from sources deemed to be reliable, the reliability of which is not guaranteed. Readers are encouraged to obtain official statements and other disclosure documents on their own and/or to consult with their own investment professionals and advisers prior to making any investment decisions.
