EMEA airports stay resilient despite slowdown in growth and Brexit woes

Airport operators in Europe Middle East and Africa are likely to remain resilient despite slowing growth and Brexit-related risks, according to a leading rating agency. 

In a report for its clients, Fitch Ratings says it expects risks of airline consolidation to be contained, but with secondary hub airports in particular facing higher chances of permanent passenger losses following any key airline bankruptcy.

“We expect passenger growth to moderate over the next few years. In our base case, we forecast traffic growth to moderate to around 2% by 2021 for airports in our portfolio. European airports with over 10 million passengers a year grew by 3.9% in 2018 (and 6% in 2017). Last year, was the fifth consecutive year of growth in the 4-6% range.”

Furthermore, EMEA airports face risks of a disruptive Brexit. In particular, there are risks of some flights being grounded due to rules relating to shareholding and group structures, although this is unlikely to happen in practice. 

A deal was reached in November 2018 to allow flights between the US and the UK to continue. The EU has provisionally agreed measures to allow 'basic connectivity' for a period of time to prevent planes being grounded in the event of a no-deal Brexit. 

“We believe that any potential grounding of flights is likely to be temporary as regulators work on reciprocal agreements. Other risks include an economic slowdown as a result of Brexit and pressure on traffic and yields, as well as further sterling depreciation which could put pressure on UK airports' and airlines' margins,” the rating agency said. 

Fitch-rated UK airports are well positioned to weather any temporary disruption through a combination of liquidity, financial flexibility and rating headroom, it added. However, longer-term effects, which are subject to macro-economics, are more uncertain.

Airports with predominantly origin and destination (O&D) traffic in strong catchment areas are less exposed to airline bankruptcies due to resilient underlying demand as traffic usually recovers in one or two years after the bankruptcy of a major airline. Airports that are secondary hubs for their main airlines could face higher risks of permanent passenger losses following any key airline bankruptcy because they compete with the main hubs.

On the wider Fitch-related portfolio, Aeroporti di Roma and Copenhagen Airport are the ones most exposed to restructured airlines (Alitalia and SAS). Brussels Airport's exposure risk to Brussels Airlines fell after the latter's acquisition by Lufthansa. Domodedovo experienced a permanent loss of volumes after Transaero's bankruptcy, but it is less exposed to concentration risk. 

“We reflect associated traffic risk in the rating sensitivities if underlying demand is uncertain and reliance on troubled airlines is important,” Fitch concluded.