HK Airport Authority can absorb short-lived traffic downturn

    S&P Global Ratings said today that the credit profile of Airport Authority Hong Kong (AAHK; AA+/Stable/--) remains solid despite the recent decline of passenger and cargo volumes and operational disruptions at Hong Kong International Airport (HKIA).
  Nevertheless, Hong Kong's tourism, economy, and confidence have been hit hard since the onset of civil unrest. The potential for protracted protests, combined with improving infrastructure and efficiency at nearby airports, could threaten the long-term competitive position of the airport.
  In August 2019, passenger numbers at HKIA fell 12.4% year over year, aircraft movements dropped 3.5%, and cargo volume slid 11.5%. Total passenger volume from April to August also declined by nearly 0.8%.
  The lackluster operating performance is mainly due to a slump in passenger traffic from mainland China and around the region since the protests began in June, with the airport among the targets for demonstrators. S&P expects the air traffic figures to remain weak for the rest of this year.
  Both aeronautical and non-aeronautical revenue will be negatively affected by the slump in air traffic, the agency thinks. More than 60% of AAHK's revenue is derived from retail licenses (rentals) and advertising at the airport, and other non-aeronautical resources. In the fiscal year 2018-2019 (ended March 31, 2019), AAHK experienced the full-year effect of lower rents for new tenancies awarded in the previous financial year. But fewer major tenancies will be renewed in the next 12-24 months, and this should provide some protection for rental income. The decline in passenger levels would still undermine commercial activities at the airport.
  S&P estimated AAHK's EBITDA percentage growth in 2019-2020 will likely drop by a single-digit compared with 2018-2019 when EBITDA (excluding Airport Construction Fees) amounted to HK$12.4 billion.
  The agency thinks the key driver for AAHK's financial performance remains the significant capital expenditure (capex) associated with the construction of a three-runway system. Airport Construction Fees charged to departing passengers are likely to decrease in line with a reduction in passenger volume.
  In 2018-2019, AAHK collected about HK$3.8 billion in these fees, which the authority expects to finance about 18% of the HK$141.5 million costs of the mega infrastructure project. S&P anticipated the Third-Runway System project to be largely unaffected by the protests. Project works within the critical land reclamation areas should be completed on schedule by the end of 2020, given AAHK has taken remedial action to address a shortage of sea sand.
  The authority is currently in a net cash position, but its capex and leverage will be gradually ramping up from 2020 until the project is completed in 2024.