Fitch: Airline consolidation to have mixed credit effects on U.S. airports

Airports with larger underlying markets with a high percentage of origination/destination (O&D) traffic and limited competition from nearby commercial airports will be least affected by mergers of the airline legacy carriers, according to a new report issued today. Alternatively, Fitch sees small market airports as well as domestic connecting hubs at the higher level of the risk spectrum for utilization changes with some benefiting from expansion while others losing some if not most connecting operations.

'Traffic demand and financial considerations will be the key drivers of airlines actions,' said Seth Lehman, Senior Director at Fitch. 'Regardless of where the economy is, service shifts have a varying degree of impacts on the operations from as little as one airport gaining or losing service to as many as dozens of airports being impacted nationwide.'

Fitch believes that each successful merger among the remaining legacy carriers can have meaningful repercussions to a number of domestic markets as carrier actions on capacity will likely be driven on cost considerations, yield opportunities, and elimination of duplicative services. On the other hand, mergers could have a positive effect as it could strengthen the merged carrier's ability to compete on more routes and possibly protect market share from the encroachment of low cost carriers. Therefore, stability and even gains in service levels are realistic where opportunities allow.

Another segment of airport types at risk are the ones serving smaller markets (i.e. two million passengers or less) that are historically dependent on just a few carriers for air service. Depending on the pair of carriers implementing a merger, there will likely be locations where both such carriers are the dominant airlines serving the market. On a combined basis, service reductions may be expected and a back-fill from other legacy or low-cost carriers may not immediately take place. Under those circumstances, an airport's financial profile is likely to weaken and thus pressuring credit quality.

Fitch notes that while the airline sector has elevated levels of volatility, airport managers have demonstrated the ability to adapt to the changing landscape as noted by the fact that the many past mergers and liquidations of carriers have not led to bond defaults. Airports as a transportation class operate successfully as self-supporting enterprises.

Fitch believes that larger airports with strong underlying demand and modest leverage are generally in a better position to address these circumstances with more options. Smaller airports or those with high debt burdens, high connecting traffic or elevated carrier concentration will likely face more difficulty in responding and maintaining their financial profile. In Fitch's view, airport management should be prepared for possible carrier mergers that could change the status quo.

The special report 'Airline Consolidations in a Recovering Economy: Will it be Beneficial for U.S. Airports?' is now available at 'www.fitchratings.com.

Additional information is available at 'www.fitchratings.com