Moody’s Sees a Loser in the Delta Deal: Airports

For lots of reasons, hubs and non-hubs could be hit financially by acquisition of Northwest.
Stephen TaubApril 21, 2008

The merger between Delta Air Lines and Northwest has its obvious winners and losers. And one loser, according to Moody’s Investor Services, could well be airport finances around the country.

“The combination could eventually result in significant route restructuring and a reduction in available seats that could lead to enplanement declines at some airports, challenging those airports to maintain revenue growth,” said Moody’s Assistant Vice President Kurt Krummenacker, in a new report.

He said the greatest potential for substantial route restructuring would be at the secondary hub airports used by the two carriers, and at airports where the two carriers otherwise have a strong presence.

“Although any impacts would be at least a few months away and both airline management teams have stated their intention to maintain current hubs, the secondary hub airports would be most at risk for substantial service declines as connecting traffic would likely be consolidated at fewer hubs in order to reduce operating costs for the consolidated carrier,” said Krummenacker.

Another group of airports at risk is the group at which neither airline is dominant, but could experience a change in the competitive landscape because of the merger because of changing fare structures and capacity, the Moody’s report noted.

“Moody’s current A2 median rating for U.S. airports reflects the maintenance of solid liquidity levels, growth in non-airline revenues, and management’s control over operating and capital budgets,” said Krummenacker. “The economic strength of the underlying O&D service areas is also key to the fairly high median airport rating.”

However, in light of the Delta-Northwest announcement, Moody’s said it will focus on those airports that lack one or more of these credit strengths as the proposed airline consolidation will likely bring increased credit risks to those airports.

“These airports offer less-profitable routes, and rely heavily on airline-derived revenues in service areas that are below the median in terms of generating demand for air travel,” said Krummenacker. “They also have below-average liquidity levels, and a limited ability to cut airport operating costs and scale back capital programs.”

He warned that the impacts across the U.S. airport sector could be more severe if this combination produces a chain reaction of other airline consolidations.

“A substantial contraction of the number of carriers could have a negative impact on the credit of airports throughout the U.S. as declining seat capacity would pressure airfares higher, leading to
significant passenger level reductions,” said the analyst.

He added that high fuel prices have contributed significantly to a number of recent airline failures, and the threat of more failures could add to the contraction of the airline market until airlines are able to cover increased operating costs with adequate revenues.

In general, Moody’s pointed out that Delta’s long-term corporate family rating is B2, and is on watch for possible downgrade. Northwest, with a backed senior secured bank credit rating of Ba3, is also on watch for possible downgrade.

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