According to a special comment issued by Moody’s Investment Service, the plan for Southwest Airlines to buy AirTran Airways is expected to “put further pressure on the U.S. airport industry in general and has the potential to significantly impact the credit of certain airports in particular.”
“While Moody’s believes the event itself does not immediately threaten the credit stability of any particular airport, it brings greater potential for changes in the operating model of the two airlines with resulting capacity reductions at certain airports,” the report says. “The two carriers have fairly complementary route structures, and in the markets where they do overlap Moody’s would expect some limited reduction in total capacity. Moody’s observes a number of risks for airports served by these airlines, given our expectation that the combined carrier would reduce some flights in an effort to cut costs post merger.”
Risks include airports that are heavily serviced by both carriers would probably see the largest route consolidations and seat capacity reductions, depending on O&D demand; also, at airports where neither is the dominant airline but a combined entity would change the competition in the air carrier market, such markets would likely see changes in fares and capacity.
The merger continues a trend of airline consolidations, which brings negative credit pressure to airports across the U.S.,” the report continues. “Industry consolidation, which is usually accompanied by fleet reduction, reduces the number of available airline seats and increases the prices of the remaining seats. These two effects reduce the total number of passengers in the system and lowers airport revenues across the board. Since airports recover much of their costs through charges to the airlines, some of the impact is absorbed without affecting airport revenues. However, lower passenger levels reduce many other airport revenues dependent on passenger volume including concessions, parking, and rental cars. Lower revenues can pressure key credit metrics such as debt service coverage and financial liquidity.”
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