The effect of coronavirus on economies and markets throughout the world continues to widen and global infrastructure assets are not immune. Airports and ports are most exposed given the global and discretionary nature of much of the travel and trade they support. Reactions of caution from governments, private industries and citizens collectively combine to exacerbate the direct impacts of outbreaks of this nature.
Infrastructure assets have demonstrated resilience in prior times of stress such as the 2008/09 financial crisis, severe weather events or prior outbreaks like SARS and Zika. Adequate short-term liquidity provided protection during the stress period while the essential nature of the services provided have generally allowed for solid rebound shortly after.
A short-lived outbreak where the spread of infections peaks quickly then begins to moderate by the second quarter of this year. Government restrictions are largely lifted and a return to normal business activity is gradually restored. Under this scenario, we would expect volume and performance disruptions for ports and airports to recover quickly with credit ratings remaining unaffected, as these disruptions are within the range of our rating assumptions.The rapidly evolving nature of the coronavirus outbreak could drive the following outcomes:
- A medium-term disruption where the outbreak continues throughout 2020 with a number of additional countries imposing travel bans and global supply-demand dynamics continue to suffer. In such a scenario, some infrastructure projects would underperform revenue expectations and ratings with more limited headroom could be adversely affected. That said, most Fitch-rated infrastructure projects maintain sufficient cash reserves and have pricing flexibility or cost containment options to support current credit ratings, albeit with some execution risk.
- A longer or more expansive outbreak that permanently changes trading routes, supply chains or consumer behaviour. Then, business and leisure activity would remain depressed leading to material reassessment of long-term volume and revenue forecasts. This scenario would have the most profound impact as these shifts are well beyond the underlying assumptions built into Fitch’s rating case for infrastructure projects.
Airport pressure still manageable
Passenger traffic is the lifeblood for airports and an essential driver to revenue generation. First following the outbreak, air traffic interruptions started through a combination of government-imposed restrictions and carrier-specific actions focused around China. At the time of writing [11 March], airports outside Asia had thus far seen only limited effects due to flight cancellations or government interventions. This situation, however, remains fluid and further travel restrictions may drive more significant impacts for airports globally.
US airports with non-stop services to China, namely San Francisco, Los Angeles, Seattle, Chicago’s O’Hare and JFK in New York, currently do not rely heavily on China, with less than 10 percent of flights into and out of the country. Similarly, direct flights to China constitute a small share of European and Middle East airport traffic, ranging from 0.2 percent to around 6 percent. The Asia-Pacific region in general represents from 1.5 percent to 14 percent of total traffic.
“The financial impact of coronavirus on infrastructure assets may yet prove to be much wider and deeper than during past stresses”
The greater concern is the spread of the virus to a much larger number of countries, resulting in broader contractions in global travel. Travel bans would likely affect large hub and international gateway airports more severely, but leisure and tourism focused markets could also be affected. In addition, cautious behaviour from enterprises and citizens resulting in reduced business and leisure-driven travel would lead airlines to cut services regardless of government actions.
The US market is better insulated than most, as airports have more protections in their rate setting methodology with air carriers to limit revenue losses. Airports with price caps or regulated pricing may however be more vulnerable. A depression in overall passenger volumes would also erode ancillary airport revenues, such as parking, rental car and terminal concessions.
Ports more vulnerable
More acute effects on ports and trade volumes throughout the world have been experienced from the early stages of the covid-19 outbreak, as China is a crucial player in many global manufacturing supply chains. Decreased production in China is normal during the lunar new year holidays. However, covid-19 has resulted in extended work holidays and widespread factory closures. These are meaningfully affecting import and export volumes in first-quarter 2020 and possibly beyond.
Major US ports expect to see 15 percent to 20 percent volume declines during first-quarter 2020. Re-starting stuttering global supply chains will be challenging as weeks of blank sailings have led to pileups of empty containers at destination ports worldwide and limited availability of containers and vessels in China to ramp up exports.
Fitch would expect some ports in Asia to be affected if the slowdown is prolonged. Diversified revenue streams and long-term contracts should help shield revenues at most ports throughout the US, Europe and Latin America, though. In some cases, ports’ long-term guaranteed contracts or lease agreements with tenants provide a revenue floor, which helps to insulate revenues from volume volatility. This is the case for the more exposed US west coast ports, where minimum annual guarantees cover 70 percent plus of operating revenue, and the Port of Melbourne in Australia, where one-third of revenue is independent of shipping volumes. In addition, ports facing pileups of empty containers may potentially charge more for storage and handling to partially offset lost revenue.
For US ports, especially west coast ports, the virus-related production slowdown exacerbates the effects of the recent China-US trade war. Trade levels between the two were expected to gradually pick up following the Phase One trade deal, but this is now in doubt given lower Chinese domestic demand.
Most European and Middle Eastern ports have significant exposure to China through the global supply chain: some EU manufacturing sectors are dependent upon the Chinese market while Middle East export volumes will be primarily hurt by significant declines in Chinese demand for oil.
Travel shifts coming?
The pandemic may lead to short-term modal transportation shifts. Travellers are likely to refrain from long-haul flights, particularly to APAC, and depending on the extent of local travel bans are imposed, such as in Italy, the outbreak may also impact short-haul demand – for both business and leisure. While we do not expect these short-term shifts to immediately affect our transportation ratings, a significant escalation in the scope and reach of local and international travel bans due may erode rating headroom and affect transportation transactions to differing degrees. Projects and assets with less robust liquidity positions and those more exposed to traffic fluctuations may see greater erosion in their credit profiles.
Fitch believes that forward looking nature of our credit ratings and applied rating stresses applied will result in resilient infrastructure ratings against a moderate downturn scenario and most past event-related stresses. However, the financial impact of coronavirus on infrastructure assets may yet prove to be much wider and deeper than during past stresses, especially as the weight of China in global trade has grown since past stress events. Fitch will assess on a case-by-case basis should trade and traffic be severely curtailed over a prolonged period, resulting in erosion of existing liquidity cushion or permanent downward revision in rating volume assumptions.
Seth Lehman is senior director at Fitch Ratings’ Global Infrastructure and Project Finance Group