S&P downgrades credit ratings of Australia and NZ airports

‘We believe visibility and confidence in the recovery are unlikely before the end of 2020’, S&P Global Ratings said.

S&P Global Ratings has downgraded the credit ratings of one airport in Australia and two in New Zealand due to the assets facing a “protracted recovery” to return to pre-covid levels of passenger volumes.

The ratings agency downgraded Australian Pacific Airports Corporation, the owner of Melbourne Airport, to BBB+ from A-.

APAC has operated Melbourne Airport on a 50-year lease since 1997. It is owned by a consortium comprising AMP Capital (27.32 percent stake), IFM Investors (25.17 percent), Future Fund (20.34 percent), SAS Trustee Corporation (18.47 percent) and Utilities Trust of Australia, managed by Morrison & Co (8.7 percent).

S&P Global Ratings said it had lowered APAC’s credit rating because weak travel demand due to covid-19 restrictions will reduce cash flows and increase debt, outweighing the steps the business has taken to control operational and capital expenditure. The funds from operation to debt ratio should settle at 9-9.5 percent from fiscal year 2022, S&P Global Ratings said, assuming traffic grows steadily over 2021-22.

The ratings agency said it does not expect traffic levels to return to pre-coronavirus levels at Melbourne Airport until 2024, but that as Australia’s second-largest gateway airport that serves the country’s second most-populous city, it could bounce back quicker than other global airports.

S&P Global Ratings estimated that APAC’s 2021 EBITDA could decline to between 33 percent and 38 percent of 2019 levels, before rapidly recovering from fiscal 2022 onwards.

The agency also lowered the rating of Wellington International Airport in New Zealand from BBB+ to BBB, and lowered Christchurch International Airport’s rating from A- to BBB+, because it expects both airports “to operate with weaker metrics for the foreseeable future”.

Listed infrastructure manager Infratil, which is managed by Morrison & Co, owns a 66 percent equity stake in Wellington International Airport, with the remaining 34 percent held by Wellington City Council. Christchurch International Airport is jointly owned by Christchurch City Council and the Crown.

All three airports, alongside five other airports in Australia and New Zealand that had their ratings affirmed by S&P Global Ratings, have “at least adequate” liquidity over the next 12 months.

The ratings agency said: “A slight pick-up in flight capacity is likely to occur over the next two months. New Zealand leads the way with a slow resumption of domestic flights from mid-May 2020. Australia is likely to expand some domestic travel from July 2020.”

Based on domestic airlines’ forward schedules, S&P Global Ratings estimated that New Zealand’s domestic seat capacity would be about 55 percent of pre-covid levels by July or August 2020, while in Australia, Qantas is aiming to operate 60 percent of its pre-covid domestic capacity by August 2020. The uncertainty surrounding Virgin Australia’s survival and future operations create further uncertainty.

“We retain a negative outlook for the airport sector in Australia and New Zealand given that it is still early days to predict the pace, extent and timing of recovery in travel patterns,” the ratings agency said. “We believe visibility and confidence in the recovery are unlikely before the end of 2020, if not later. This is despite a likely ramp-up of domestic travel over the next three months and potentially international travel thereafter.”