Persistent, Historic Factors Correlated with Airport Bond Returns

Abstract

The factors that are associated with returns on airport bonds are explored, using a proxy for an airport bond portfolio with the S&P Municipal Bond Airport Index. Six spread-based factors representing the tax status, term length, credit quality, bond type, infrastructure, and insurance status of airport bonds provide the independent variables. Five models are developed to test for bonds’ risk exposure to these characteristics and to analyze how these exposures for airport bonds differ from those of general transportation bonds or municipal bonds. Over 90% of the variation in returns on the airport index is explained by these factors. When determining risk premiums on airport bonds relative to other transportation bonds, investors appear to consider the bond type and infrastructure factors as being most relevant. However, when transportation bonds are compared with other municipal bonds, all factors except the insurance factor act as risk premiums. The component of airport bond returns not associated with these factors is partially explained by monthly changes in jet fuel prices and enplanements across all U.S. airports. These results can help airport bond issuers to evaluate the relative costs of raising funds through debt issues, and understand the trends in the bond market that are more strongly associated with prices and expected returns in the airport bond sector. Hedges against fuel price, enplanement changes, or both, may also be actions that airport bond issuers could consider outside of traditional financial planning practices to manage trends in the bond markets.