Canadian airports could see credit ratings tested if COVID-19 outbreak worsens: DBRS Morningstar

Morningstar does not currently expect negative rating action on Canadian airports

Vancouver International Airport's iconic tower stands in the distance as a Canada Line train passes by | Rob Kruyt

Canadian airports could see passenger volumes fall dramatically, prompting tests to their financial liquidities and their credit ratings if the COVID-19 pandemic spreads aggressively and a severe outbreak erupts in North America, DBRS Morningstar said March 12 in a commentary.

That worst-case scenario “could force government authorities to enact stringent measures to contain the virus, such as broader bans on air travel, the lockdown of major cities or countries such as in Italy, or a temporary shutdown of a major airport,” the global credit-ratings agency said.

“For this more severe downside scenario, DBRS Morningstar assumes that Canada could suffer the same degree of traffic decline as IATA currently estimates for some of the most infected countries in Europe and Middle East, which is up to a 24% loss of annual traffic volume across all segments.”

Under what DBRS Morningstar said would be a “conservative assumption” that aeronautical and nonaeronautical revenues each fall by 24% in 2020, while all costs remaining unchanged, major Canadian international airports would still be able to meet all debt service payments, although in some cases ratings may be negatively affected.

It said Canadian airport authorities are usually well supported by various sources of liquidity, such as cash and short-term investments, credit facilities or commercial paper programs, and six- to 12-month debt service reserve funds. These airports could weather a more severe outbreak for a short period of time but a more protracted outbreak could require emergency funding from the government, DBRS Morningstar said.

DBRS Morningstar said it does not currently expect negative rating action on airport authorities such as the Vancouver Airport Authority (VAA).

It rates the VAA with an AA (low) rating with what it calls a “stable” trend. In contrast, DBRS Morningstar rates Edmonton Regional Airports Authority with an A (high) rating, with a “stable” trend. Toronto Airports Authority is rated A (high) with a “stable” trend, and Aéroports de Montréal is rated A (high) with a “stable” trend.

The country’s largest airline, Air Canada (TSX:AC) has cancelled all flights to China and to Italy because of COVID-19 outbreaks in those countries and passenger volumes falling for those fights. Air Canada shares on the TSX hit a 52-week low of $21 on March 12, down more than 60% from its year high of $52.71, reached in mid-January.