29-Apr-2010 8:11 AM

Airline consolidation to have mixed credit effects on US airports: Fitch Ratings

Fitch Ratings stated (28-Apr-2010) it believes that US airports need to brace for new challenges should potential merger activity among the largest US legacy carriers take place. Details include:

  • Less-affected airports: Fitch believes airports with larger underlying markets with a high percentage of origination/destination traffic and limited competition from nearby commercial airports will be least affected by mergers of the airline legacy carriers. 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;
  • Most-affected airports: Fitch sees small market airports as well as domestic connecting hubs at the higher level of the risk spectrum for utilisation changes with some benefiting from expansion while others losing some if not most connecting operations. Fitch added that airports serving smaller markets (ie 2 million passengers or less) that are historically dependent on a few carriers are at risk. The company added that depending on the carriers in a merger, there will likely be locations where both 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 LCCmay not immediately take place. Under those circumstances, an airport's financial profile is likely to weaken thus pressuring credit quality. However, Fitch noted that airport managers have demonstrated the ability to adapt to the changing landscape as noted by the fact that many past mergers and liquidations of carriers have not led to bond defaults;
  • Repercussions of mergers: 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, Fitch believes 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;
  • Outlook: In Fitch's view, airport management should be prepared for possible carrier mergers that could change the status quo. [more]

Fitch Ratings: "Traffic demand and financial considerations will be the key drivers of airlines actions. 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," Seth Lehman, Senior Director. Source: Company Statement.

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