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
Airports revenues can be split between two main categories: revenues generated through the airlines (Aeronautical Revenues) and revenue generated through other amenities available to passengers at the airports, such as retail concessions, car parking, property and real estate, etc.(Non-aeronautical Revenues). For all major airports in the United States, these two types of revenues reflect a 55% and 45% split, respectively. But, with the growing presence of retailers and other non-aeronautical activates, the revenue split is becoming more even.
Furthermore, the aforementioned revenue sources cost an average passenger $14-19 per trip that goes to the airports, which varies based on the size and overall traffic in the airport. In addition to the operating revenues, state and local governments also contribute funding to make sure that their airports remain viable and meet the needs of local businesses and communities.
In some cases, state and local governments or airport authorities use tax-exempt bonds to fund major capital improvements, which are typically secured by the aforementioned revenue sources. Now, you can imagine the overall dependency on every airport and its revenues on the passenger traffic, especially when COVID-19 brought the global airline travel to a standstill.
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COVID-19’s Global Impact on Airport Operations
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
- 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
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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.
