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Brace position

12 Mar 2020 By Christopher Thompson, Karen Kwok

In “Come Fly with Me” crooner Frank Sinatra enticed travelers with “some exotic booze”. Investors in European airports could use a stiff drink after a U.S. travel curb savaged the supposedly secure asset class. Steady revenue made them attractive infrastructure investments for savvy investors with long-term horizons. Plummeting footfall in response to the coronavirus crisis and high debt levels could challenge their perceived safety.

President Donald Trump’s decision to restrict travel from mainland Europe smacked airport operators on the continent, which unlike in the United States are mostly privatised. Shares in Spain’s Aena and Germany’s Fraport fell by around a tenth on Thursday. France’s Aeroports de Paris slid 13% due to its greater reliance on long-haul flights. Yields on a benchmark bond in London Heathrow, owned by Spain’s Ferrovial, Qatar, GIC of Singapore, and China Investment Corp have increased by 150 basis points since the end of February, according to Refinitiv data.

That’s an abrupt reversal of fortunes. Rising passenger volumes saw infrastructure punters flock to hubs such as Paris-Charles de Gaulle and London Heathrow. Until it was pulled on Wednesday, President Emmanuel Macron planned to sell down France’s majority stake in ADP. With fewer travellers, another significant revenue stream is taking a hit. Retail sales contribute up to 25% of airports’ top lines, according to the Duty Free World Council, rising to nearly a third at ADP.

Combined with their national economic importance, revenue growth allowed airports to pile on debt while preserving strong credit ratings. That could now be compromised as traffic, and earnings, inevitably fall. UBS reckons that a 35% reduction in passenger volumes would see Fraport’s net debt rise to a risky 5 times earnings before interest, tax, depreciation and amortization.

An unfortunately timed recent acquisition in India, which banned all travellers from entering the country this week, means ADP’s net debt could grow to nearly 4 times 2020 EBITDA, according to S&P. Even before the coronavirus hit, leverage at Heathrow was expected to leapfrog to an eye-watering 6 times EBITDA.

Declines in passenger flows and retail after the 9/11 attacks in 2001 and global financial crisis in 2009 quickly reversed the following year, so shares and bonds could yet rally. As the coronavirus slams airports’ haven status, that will provide some comfort – so long as this time it’s not different.


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