The sector could provide great opportunities post-COVID, but name selection will be critical.

While all airports were affected by COVID-19, some are likely to recover faster than others because of their unique characteristics—related to either the local market they service or how a given airport fits into the web of airline route structures. To successfully navigate the sector, municipal analysts must understand not only the local market, but also how the airport fits into the airlines’ business model and “hubbing” structure.

As we start to see some of the capacity come back into the market due to better demand trends, airline route structures look different from what they did in a pre-COVID world. This reflects a significant decline in business travel and small city routes. In reaction, airlines have shifted their route focus toward flights from hubs into leisure markets given the pent-up demand for consumer travel. The slower-growth profile at affected airports reduces several different revenue streams needed to secure bonds, such as landing fees, gate leases and sales traffic at stores and concessions at the airport. Having insight into airline management’s strategy is critical in selecting which routes and therefore which airports could benefit.

Large hub airports represent strategic assets for domestic U.S. airline carriers. These are typically located in large urban markets, many of which have seen positive economic trends as we emerge from the pandemic. When evaluating the universe of hub airports, we believe those with a focus on domestic and leisure routes will outperform in the current environment. As shown this past summer, we have seen improving leisure travel trends due to pent-up consumer demand. While leisure markets are more cyclical in nature and can experience slowdowns, we believe that this segment of travel demand will likely continue its rebound, although we do expect volatility around news on COVID variants.

There remain specific risks from economic, political and variant developments that can reverse positive strides made in recent months. A September post-summer slowdown in traffic is typical, but at this point it is possible that part of this year’s decline might reflect concerns over the Delta variant. We will be looking at next month’s data to determine if there is in fact a softening in demand. Return-to-office trends have been delayed, which is a headwind to overall airline profitability as well as airport markets that are more dependent upon business travel. We believe that the airport sector recovery will be uneven, and that large, domestic focused airports are likely to lead during the current economic recovery.