We are revising upward our forward-looking US air traffic assumptions due to the strong rebound in domestic air travel driven by increased US vaccinations and a surge in US leisure air traffic since March 2020, Fitch Ratings says. Travel volumes are expected to see additional growth in 2H21 and beyond, as business and international travel climbs from pandemic lows.
Risks remain for the industry, primarily uncertainties around the pace and timing of air traffic recovery, the potential impact of virus variants, and lagging business and international travel. However, the financial risk to airports that are on Negative Outlook has considerably diminished due to improving passenger volumes, effective management oversight of budgets and the three rounds of federal aid that appear to be sufficient to cover revenue losses.
Growing revenues will help cover costs and restore metrics to levels consistent with current rating levels. Several airports were revised to Stable Outlook during 1H21, and more airports could be positioned for a restoration of a Stable Outlook due to the new traffic assumptions.
In contrast, most US airlines continue to have Negative Outlooks, reflecting the relatively greater impact that the pandemic had on airline balance sheets compared with airports. While most airlines have Negative Outlooks, there have been a few stabilizations, and we believe that domestic- and leisure-focused carriers are poised to benefit from stronger US domestic traffic in 2H21. Additional ratings stabilization for the airlines will depend on their ability to sustainably return to positive cash flow and address pandemic-related debt balances.
Fitch’s updated coronavirus rating case forecast for calendar-year 2021 is a nominal improvement to our start-of-year expectations, as somewhat weak enplanements in 1Q21 were offset by stronger growth in 2Q21, with national TSA screenings reaching 74% of 2019 levels this June.
Recent information from airlines and airports provides increased confidence for further improvement in 2H21, absent virus setbacks. We believe that our prior severe downside case is no longer likely for the US, and a less harsh downside case more accurately captures the risk of a slower recovery.
Our rating case forecast incorporates conservative considerations about the overall aviation environment and assumes that domestic traffic remains around 10% below 2019 levels through the rest of the year. Domestic traffic will trend toward baseline levels in 2022, as lagging business travel is balanced by a nearly full recovery in domestic and near-international leisure traffic.
Fitch’s assumptions include domestic business traffic remaining roughly a quarter below 2019 levels in 2022, driven by a slow return for certain types of travel, such as trips for internal meetings and commuting employees, that are more easily replaced by virtual meetings. This assumption may prove to be highly conservative given the ongoing rebound in traffic and pent-up demand driven by missed business trips during the pandemic.
Full recovery in international traffic generally is expected to take longer due to patchwork travel restrictions and varying vaccination rates. We assume international traffic remains approximately 50% lower than 2019 levels in 2H21, which is an improvement from approximately 74% in May as reported by the International Air Transport Association, and incorporates reduced European travel restrictions and full recovery for leisure markets such as Mexico and the Caribbean.
Our revised enplanement assumptions reflect anticipated national trends, but will likely vary based on airport or airline type and possibly region within the US. We will adjust indicative air traffic ranges in our analysis for each entity as necessary, taking into account individual market fundamentals. For airports that have reached a consistent level of full traffic recovery, Fitch will revert to applying base and rating case methodologies.