A failure to raise the U.S. debt ceiling could have broad implications for the U.S. and global economy. This commentary focuses on how such a scenario, however unlikely, would affect the global airlines and airports sectors. If the debt ceiling is not lifted in a timely manner, we would expect the Treasury to prioritize debt payments. If this is short-lived, the macroeconomic impact could be modest. However, if this extends well into the summer months (the scenario contemplated in this analysis), the impact would be more severe. In the highly unlikely event that the U.S. government defaults on its debt, the economic and financial damage could be much worse. Note that we placed the United States of America’s AAA Issuer Ratings Under Review with Negative Implications on May 25 (see: “DBRS Morningstar Places United States Ratings Under Review With Negative Implications”).
Overall, we believe disruptions from the debt ceiling impasse would only slow air travel for later this year because most summer air travel is already booked. Furthermore, any disruptions in the short term would not be novel for the sector, which has traditionally been prone to numerous endogenous and exogenous shocks. Our ratings reflect these harsh realities, so they are unlikely to be affected. However, if the Treasury defaults on a debt payment, there certainly could be negative rating actions in the aviation sector.
Failure to Raise the U.S. Debt Ceiling Can Temporarily Affect the Aviation Sector
Without access to additional funding beyond tax collections, the U.S. Treasury may have to prioritize debt payments to avoid a default and delay noninterest spending. This would imply that all noninterest expenditures, including Social Security, Medicare, and civil servant and military compensation, would need to be cut by 27%.1 Beyond the direct impact of the federal government’s reduced demand for air travel, this might affect the aviation sector in two indirect, but more material, ways. First, many essential air travel functions are performed by state-run departments like the Federal Aviation Administration, Transportation Security Administration, and National Transportation Safety Board. While these functions are likely to remain operational because of their essentiality, some disruptions could happen if funding shortfalls were to draw out wait times. Second, consumer confidence and spending, especially discretionary tourism-related air travel, could come under pressure. Again, this may not play out until later as a considerable proportion of summer travel is already booked.
Exogenous and Endogenous Shocks Are not Uncommon; Little Risk to Ratings in the Short Term
Temporary disruptions are a hallmark of the aviation sector and to be expected. Economic downturns, aircraft supplier delays, regional conflicts, and natural disasters are just some of the exogenous shocks that regularly buffet the passenger air travel sector. Endogenous shocks include labour strikes, staffing issues, and airline strategies that have traditionally led to boom-bust cycles. All this is to say that our ratings reflect this inherent volatility. Therefore, a relatively short-lived exogenous shock from the debt ceiling stalemate would not likely lead to negative rating actions. However, if the Treasury defaults on a debt payment, there could be rating implications across the sector.
