Alaska's biggest airports continue to wrestle with fiscal uncertainty due to fewer trans-Pacific flights landing in the Anchorage airport, reducing the amount of cargo coming from the Far East. America’s economy factors largely into the situation, as iPads and digital watches fill fewer cargo boxes aboard international flights. And now, Moody’s Investor Service has downgraded its credit rating for the airport system's revenue bonds.
Alaska International Airport System’s manager John Parrott said they expected the downgrade. The airport system includes Ted Stevens and Fairbanks International airports.
Moody’s -- which along with Standard & Poor's downgraded its credit rating for the U.S. federal government from AAA to AA+ nearly two years ago -- downgraded the airport system’s revenue bonds Tuesday. The bonds, considered special because they guarantee repayment solely from revenue rather than from a tax, were downgraded to A1 from an Aa3 rating, effectively reducing them from Moody’s fourth-highest rating to its fifth-highest.
The downgrade reduces the bonds from what is considered a high-grade investment to an upper-medium-grade investment. The airport system's revenue bonds total $553.2 million, the amount of its outstanding debt.
“It obviously is not good news,” Parrott said, “but it is news we anticipated. Moody’s had us on a negative outlook for about two years, so since late 2010, we had expected at some point they would downgrade us.”
Cargo passing through Anchorage has fallen about 25 percent since 2007, with the decline continuing into 2013. The volume of freight coming through Anchorage rebounded a bit in 2011, thanks to federal stimulus money. But as the cash flow waned, freight dropped last year and has continued to fall.
Moody’s based the downgrade on changes in the airport system’s market position, primarily due to a slowdown in global air cargo. “The airport system’s ... financial strength has remained constrained by the marked reduction in air-freight activity at the airport, and a more-robust recovery does not appear likely in the near term,” Moody’s wrote.
Still, A1 isn’t a bad rating. Moody’s says the rating reflects the system’s strong market position as a major cargo destination, air transportation hub for the state and a key transportation asset for Alaska.
In its report, Moody’s listed the system’s strengths, such as its top-dog status for air transportation in Alaska, and substantial cargo revenue. The Anchorage airport’s largest tenant, Alaska Airlines, accounts for only 17 percent of operating revenues, and no other tenant accounts for more than 9 percent.
Challenges facing the airport system, according to Moody’s, include an above-average debt level and cargo traffic that’s more volatile than once expected. Parrott said the airport has been addressing those issues since 2009, when the global recession hit. “We have been dealing with a reduction in traffic, therefore a reduction in revenue ... prompting us to look for cost-cutting measures for four or five years now,” he said.
The airport is looking to refinance a small amount of its bonds, Parrott added.
Although refinancing debt and being bumped down by a credit agency aren’t the best morale booster for any industry, the downgrade came with some good news. At its new, lower rating, Moody’s outlook for the system is stable.
“They recognize that our airport system has stability, has a number of strengths. It’s obviously vulnerable to the global economy in general and in particular the American economy, and those are down. Therefore, our traffic is down. When that recovers, our traffic will recover.”
At that point, the Alaska airport system may go back to Moody’s and seek an upgrade, he said.
Moody’s contends “substantial and sustained increase in air cargo activity levels” could elevate the rating.
Contact Jerzy Shedlock at jerzy(at)alaskadispatch.com