How should investors and ratings agencies vet the financial health of public airports? Many traditional measures of financial efficiency and profitability aren’t entirely applicable to publicly-operated airports.

In a new paper, researchers propose some metrics for properly evaluating the financial health of airports, including liquidity and leverage. They apply this methodology and analyze the finances of large and medium hub airports in the U.S.

From the paper, published in a recent issue of the Journal of Air Transport Management:

Since the federal AIP grants and municipal bonds are two of the primary capital funding sources for these airports, bond investors and rating agencies, and government oversight bodies are interested in the financial operation, liquidity, and leverage of these airports. We, therefore, examine the relevant operational (operating financial ratio and net take-down ratio), liquidity (current ratio and days cash on hand), and leverage (debt-to-asset ratio and debt service safety margin) metrics that are more appropriate for large and medium hub airports in the United States.

Our analysis shows that overall large hub airports have tended to perform better in liquidity ratios, while medium hub airports had lower leverage ratios over the study period. However, the results are mixed for the two operating financial ratios. Further, the sample airports’ financial performance appears to fluctuate over the study period, especially for the large hub airports in terms of net take-down and current ratios. Therefore the key takeaway from our preliminary analysis is that the effect of airport size on financial performance is inconclusive.

Our pooled regression analysis shows that airports with high productive efficiency and those without a dominant carrier tend to have more surplus revenues for meeting their operational needs and capital spending. Airports with a higher proportion of international passengers are likely to have less surplus revenue available for capital spending. In contrast, airports with significant cargo operations are likely to have more surplus revenue. The result is less clear on the impact of the general economic environment as measured by the cost of living index on airports’ operating financial ratios. Airports with larger passenger traffic volumes and those deriving a larger proportion of their revenues from non-aeronautical sources tend to have better leverage, as indicated by higher debt service safety margins. Airports operated by airport authorities appear to have somewhat lower leverage than those operated directly by city, county, or state governments or by port authorities. Further, airports with a higher proportion of non-aeronautical revenues tend to have higher liquidity but airports dominated by low-cost carriers appear to have lower liquidity.