The downturn in the U.S. economy has had a major impact on many industries within the public sector – some sooner than others.
Rising unemployment and increasing financial worries kept many would-be travelers at home, causing the airlines to experience the effects of the recession early. In turn, many airports around the country soon felt the financial sting as well.
“The airport industry has been under pressure for the past two years,” says Peter Stettler, a municipal bond analyst and director at Chicago-based Ricondo & Associates.
Just how hard has the airport sector been hit? In the interview that follows, Peter discusses how current trends in the airport industry are affecting airport finance, including the issuance of airport bonds.
MuniNet: How has the ripple effect of the troubled economy affected the airport industry?
Stettler: The airlines felt the effects of the downturn early, as the onset of the recession led to a downturn in passenger activity in 2008 and 2009. The airlines responded by reducing capacity industry wide, to the point that the reductions almost equaled the loss of a carrier the size of the former Northwest Airlines.
Certain airports experienced enplanement declines exceeding 10 percent, which was greater, and has lasted longer, than the declines seen during the last major downturn in 2001-2002.
MuniNet: Is the airport sector feeling the same type of financial pressure as other public sector agencies?
Stettler: Whereas general governments were gradually affected by the downturn, through lower sales and property tax collections, the decline in enplanements had an immediate effect on airport revenues. All major sources of airport revenues declined, including both airline landing fees and rents and non-airline sources such as parking and concessions. While most airports reacted by trimming operating costs and delaying capital projects, a sizeable portion of their costs are fixed, thus expenses did not decline as quickly as revenues. As a result, some airports did experience declines in cash reserves and debt service coverage.
Combined with the significant reduction in airport capacity, the decline in airport revenues led to all three rating agencies placing a “negative outlook” on airport industry in 2008 – a stance they still maintain. Rating actions have also been negative over the past few years, with both rating downgrades and downward adjustments to rating outlooks outpacing upgrades.
MuniNet: How heavily does the airport industry rely on passenger versus cargo traffic?
Stettler: With a few notable exceptions, including Memphis and Louisville, where FedEx and UPS have extensive hubbing operations, airports depend on passenger traffic to a much greater extent than cargo traffic for their revenues. This reflects the fact that airports can generate ancillary revenues from passenger traffic, such as parking fees, concessions and the like, which are not present on the cargo side of the equation.
Also, passenger air service represents a much bigger proportion of the travel market than air cargo represents in the freight industry, due to alternatives including truck, rail, barge, and trans-ocean shipping services. While air cargo is a generally growing industry, with the exception of the last few years during which all categories of transportation declined, it is still best suited for high-value, time-sensitive products which can absorb the premium costs associated with air transport.
MuniNet: How do airports typically secure funding from public (or other) sources?
Stettler: Airports have a few sources of public funds, the largest being the FAA’s Airport Improvement Program (AIP). AIP is funded through the ticket tax levied on each passenger, and distributed by formula. Airports receive a certain level of AIP funds based on activity, known as entitlements, while another portion is distributed on a discretionary basis based on project eligibility, timing, need, and availability of funds. AIP grants have to be matched with a local share, the amount of which varies with the size of the airport. Some states also have grants or other programs in which airports may participate.
Airports also generate funds through the passenger facility charge (PFC), which is a local revenue source overseen by the FAA. Airports must apply to levy the PFC, and the projects must meet eligibility requirements. Currently the PFC can be levied up to $4.50 per passenger, but there is strong interest among airports to see this limit raised as it has not kept up with inflation.
The version of the pending FAA reauthorization bill passed by the House provides for an increase to $7.00. However, the Senate version does not provide for an increase in the PFC rate. It has been almost two years since the FAA’s last authorization expired, and Congress has since passed 16 extensions to keep FAA funding in place. It is not certain whether Congress will be able to pass the current proposal before the end of the session. If it does not, the process would start again when the new Congress is seated after the November elections.
MuniNet: What other financing tools are available to airports for improvement projects or other purposes?
Stettler: A major source of capital funding for airports comes through the issuance of bonds, particularly general airport revenue bonds (GARBs). Airports have benefitted from the stimulus legislation passed in 2009, which provided for a holiday for private activity bonds from the alternative minimum tax (AMT). Airports have taken advantage of this respite to lower their borrowing costs over the past 18 months.
Unless Congress acts to extend the holiday, which expires at the end of 2010, we are likely to see more airport bonds come to market in the last few months of the year to take advantage of this opportunity.
Some airports have taken advantage of another provision of the stimulus bill, the Build America Bonds (BABs). However, as private activity bonds are not eligible for this program, and much of the bonding activity of airports is considered to be private activity under the tax code, it limits the ability of airports to issue BABs. As a result of the low interest rate environment and the lower borrowing costs due to the AMT holiday, airport bond issuance has been strong this year and should remain so through the end of 2010.
Airports also issue bonds backed by PFC revenues, and some issued bonds backed by customer facility charge (CFC) revenues. CFC’s are a fee levied on rental car activity, either on a per-day or per-rental basis, for the purpose of financing rental car related facilities. Also, airports may issue special facility bonds, which are backed by a specified revenue stream. Typically special facility bonds have been issued by airports to support a project desired by a specific airline, such as a terminal or maintenance hangar. The bonds are payable from the lease revenue generated from the facility and bondholders do not have recourse to the general revenues of the airport.
MuniNet: What factors would help the airport sector recover from the economic challenges of the past few years?
Stettler: Actually, the airport industry is beginning to rebound. Passenger volumes appear to have bottomed out and have been growing over the past six to 12 months. Airports are seeing favorable year-over-year comparisons, while several airlines recently reported quarterly profits. The strength of the economy is a key factor in travel activity; thus, as the economy improves, travel is likely to increase as well. While recent activity is positive, there is still concern that the economic rebound may not last; therefore, airports remain cautious in their outlook. Many of our industry forecasts have reflected stable or slightly decreasing passenger activity in 2010, stable levels in 2011, with an increase only beginning in 2012.
About the Expert
Mr. Stettler has over 18 years of public finance experience. As a member of Ricondo & Associates, Inc.’s financial planning services practice, he assists in the preparation of revenue bond feasibility studies and related documentation, rating agency presentations, capital development programs, passenger facility charge (PFC) applications, and other financial planning activities. While at R&A, Mr. Stettler has served as project manager overseeing the development of feasibility studies for several airport bond issuers, including the Port Authority of New York and New Jersey for JFK International Airport; the City of Chicago for Midway International Airport; and the Metropolitan Nashville Airport Authority for Nashville International Airport.
Prior to joining R&A in 2008, Mr. Stettler was a lead transportation analyst for Fitch Ratings, where he analyzed the credit ratings of many of the nation’s largest airports. Prior to Fitch Ratings, Mr. Stettler was a transportation and general municipal bond analyst with EVEREN Securities.
Mr. Stettler has written several reports regarding the financial condition of the aviation industry and other matters of concern to industry leaders. He has received several industry awards, including the Award for Excellence from the National Federation of Municipal Analysts in 2005, for his contributions to the industry.