Airport Rally Seen Extending to Longest in 20 Years: Muni Credit
U.S. airport debt is on pace to beat the $3.7 trillion municipal market for the longest stretch in at least two decades as carriers’ finances improve and a growing economy spurs Americans to travel.
Airport bonds earned 8.6 percent in 2012, compared with the broader market’s 7.3 percent gain, data from Bank of America Merrill Lynch show. In 2011 the securities earned 14 percent to the market’s 11 percent. A third year of outsized gains would be unprecedented, according to the data, which began in 1993.
In a sign of investor confidence in the industry, the Bloomberg U.S. Airlines Index (BUSAIRL) rose to a two-year high Jan. 22 as the segment’s fourth-quarter earnings season started. US Airways Group Inc. (LCC), which is pushing for a merger with bankrupt American Airlines, yesterday reported profit higher than analysts estimated.
“Airlines have seen competition diminish, and they continue to have stronger balance sheets to pay revenues that the airports are highly dependent upon,” said John Loffredo, co-head of Princeton, New Jersey-based MacKay Municipal Managers, which oversees $7 billion of local debt.
Loffredo predicts the segment will beat the market again in 2013. He said he’s adding airport securities to his funds, including the flagship Mainstay Tax Free Bond Fund (MTBIX), which beat 87 percent of its peers over the past three years, Bloomberg data show. Dallas-Fort Worth International -- hometown hub for American Airlines -- and Chicago O’Hare International -- hub for United Continental Holdings Inc. (UAL) -- were among its 25 largest holdings through Nov. 30.
The 18-month recession that started in December 2007 helped reduce enplanements by 65 million in the two years through 2009, data from the Federal Aviation Administration show. An enplanement is a revenue-generating passenger departing from or arriving at an airport. With the economy’s recovery, passengers have since risen by 28 million.
Airports in travel destinations such as Chicago, Las Vegas, New York and Orlando stand to gain the most as households’ improved net worth drives tourism, Chris Mier, chief muni strategist at Loop Capital Markets in Chicago, wrote in a report this month. The Standard & Poor’s 500 Index (SPX) reached a five-year high this week.
“Many airports are obviously cyclical -- the economy does better, business travel goes up,” said Ebby Gerry, head of muni investments in New York at UBS Global Asset Management, which oversees about $15 billion in local debt. “The bigger the airport, the better, because the larger airports are really an essential service.”
Gerry counts Hartsfield-Jackson Atlanta International and O’Hare among his largest such holdings. The facilities rank first and second, respectively, in enplanements, FAA data show.
Baltimore/Washington International Thurgood Marshall Airport, which ranked 22nd in enplanements, is among facilities benefitting from demand for its bonds.
The Maryland Transportation Authority sold about $135 million in securities for the airport Nov. 29, with the portion maturing in 2022 priced to yield 2.26 percent, or 0.83 percentage point more than AAA munis, Bloomberg data show.
That gap was about 20 percent narrower than when the agency sold 10-year bonds in April for the airport. The debt is rated A2 by Moody’s Investors Service, sixth-highest.
Airport debt has returned 1.08 percent this month through Jan. 22, compared with 1.07 percent for the broader market, according to Bank of America data.
United and Delta, the world’s two largest carriers, filled 82.6 and 83.7 percent of seats last year, respectively, according to data from the companies. Those are near-record highs as carriers abstain from adding more capacity, which also gives them more power to raise fares.
Airport bonds “trade on the perception of the stability of those revenue streams coming to the airport” from airlines, Loffredo said. “The perception of the airlines is getting better, with traffic improving and the economy continuing to get better.”
In trading yesterday, yields on benchmark munis maturing in 30 years fell from the highest since November, by 0.02 percentage point to 2.83 percent, Bloomberg Valuation data show.
Following is a pending sale:
METROPOLITAN GOVERNMENT OF NASHVILLE & DAVIDSON COUNTY in Tennessee plans to sell $325 million of general-obligation bonds as soon as next week, according to data compiled by Bloomberg. The debt will be used for refunding, according to Moody’s. (Added Jan. 24)
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