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U.S. Not-For-Profit Transportation Infrastructure Sector View Is Now Stable For Airports, Mass Transit, And Toll Roads

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Updated Activity Estimates For U.S. Transportation Infrastructure Show Recovery For Air Travel Demand Accelerating And Public Transit Lagging

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U.S. Not-For-Profit Transportation Infrastructure Sector View Is Now Stable For Airports, Mass Transit, And Toll Roads

S&P Global Ratings' Transportation Infrastructure Sector View Has Improved Rapidly

S&P Global Ratings' 2021 transportation infrastructure sector view for business conditions and credit quality has improved markedly since the beginning of the year (see "Outlook For U.S. Not-For-Profit Transportation Infrastructure: Light At Tunnel’s End--But How Long Is The Tunnel?," published Jan. 13, 2021, on Ratings Direct) and we believe current positive trends--combined with substantial amounts of federal grants--have reduced the likelihood of credit erosion among the issuers that we rate. These trends suggest a likely return to sustainable levels of demand over a period broadly in line with or better than our baseline activity estimates, and supportive of stable, albeit lower levels of financial performance for many issuers. (See "Updated Activity Estimates For U.S. Transportation Infrastructure Show Public Transit And Airport Operators Still Face A Long Recovery," published Jan. 13, 2021.) The universe of almost 300 transportation infrastructure senior and subordinated credit ratings has a modal rating of 'A'. Almost all of the issuers that we rate are subject to volume risk--that is, they are dependent on passengers, riders, cargo, and vehicles to generate operating revenues necessary to meet operating requirements, debt service obligations, and capital needs. Some, particularly transit operators, benefit from a variety of taxes that support higher credit ratings.

We will review negative outlooks assigned to specific ratings and could revise them to stable either collectively or individually if issuer-specific conditions warrant. Currently, approximately 85% of our not-for-profit transportation infrastructure ratings have negative outlooks, suggesting a one-in-three likelihood of a rating downgrade over the next two years. We are more likely to revise outlooks to stable sooner for transit operators that derive a greater share of total revenue from sources that are less sensitive to changes in ridership, such as sales or property taxes.

Credit conditions are stabilizing across the transportation sector

Direct federal grants to transit and airport operators provide financial flexibility.   The $1.9 trillion ARP passed into law on March 11, 2021, will fund $30.5 billion across various grant programs for transit operators overseen by the Federal Transit Administration and $8 billion in grant programs for airport operators overseen by the Federal Aviation Administration. This is in addition to more than $60 billion in federal aid in the form of grants made available to mass transit and airports under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) enacted March 27, 2020, and the Coronavirus Response and Relief Supplemental Appropriation Act (H.R. 133) (CRRSAA), enacted Dec. 27, 2020. While these grants are no substitute for a recovery in re-occurring operating revenues, in our opinion, this latest infusion of federal dollars will bolster liquidity positions and provide important financial flexibility for the next 24-36 months as sustainable activity levels return, likely reducing any erosion in credit quality. In addition, we believe $14 billion in direct aid to U.S. airlines for payroll-support programs in the ARP will allow airlines to maintain or increase flight schedules as consumer confidence builds and travel increases. This, in turn, will provide airport operators with more predictable revenue performance and rate-setting ability. Including payroll support and secured lending programs, U.S. airlines have received approximately $82 billion in federal support since March 2020.

Rapidly improving health and safety conditions are allowing states to ease restrictions.   After a slow initial vaccine rollout, data reported by the Centers for Disease Control and Prevention indicate dramatic and rapidly improving health and safety conditions across the U.S., prompting many states to lift restrictions that have prohibited and discouraged mobility in all its forms and its associated economic activity. Since the highest seven-day average of 249,378 reported cases of COVID-19 on Jan. 11, 2021, the seven-day moving average has decreased 78.1%. In addition, one-quarter of Americans have received at least one dose of a vaccine, with a seven-day-average of 2.3 million vaccinations during the week of March 16, 2021. Combined with estimates that up to 35% of the population has some level of immunity due to previous infection, these trends suggest that conditions supportive of higher levels of overall travel within the U.S. are likely to improve more quickly than previously estimated. Although China and several Asia-Pacific countries have demonstrated more rapid recoveries, progress toward widespread vaccination in the European Union has been challenged by the availability of vaccines and the rise of coronavirus variants, which we believe will delay a more rapid return in international travel to those regions.

Faster economic growth, lower recession risk, and higher levels of disposable income will propel the recovery.   S&P Global Economics has raised real GDP growth forecasts for 2021 and 2022 to 6.5% and 3.1%, respectively, from 4.2% and 3.0% in the December forecasts and now expects the U.S. economy will return to 2019 levels during the second quarter, one quarter earlier than without the stimulus. An accelerating U.S. economic recovery has also reduced the risk of recession over the next 12 months to a much lower 10%-15% from 20%-25%. After falling by 3.9% last year, a 73-year record low, consumer spending is expected to jump by 6.9% in 2021, a 66-year high, and 4.2% the following year. (See "Economic Outlook U.S. Q2 2021: Let The Good Times Roll", March 24, 2021.) Therefore, we see the positive tailwind provided by the ARP combined with a significant increase in the U.S. personal saving rate, disposable income, depressed spending on services in 2020, and pent-up demand for travel as positive signs for U.S. transportation infrastructure operators.

Improving traffic, ridership, and air travel demand are fueling the turnaround.   Activity reports across the airport, mass transit, and toll sectors show still depressed but generally improving trends in key operating metrics. More broadly, after non-cruise-related ports, operators of tolled facilities have demonstrated the best recovery in demand and financial metrics, particularly large, inter-, or intrastate systems with balanced commercial and passenger traffic transactions. Many toll operators are at 75%-85% of 2019 activity levels, with some issuers raising tolls or fees to offset revenue declines. We expect U.S. and regional economic growth will translate into continued improvement for these issuers. Transit ridership and air passenger travel, both at approximately 40% of pre-pandemic levels, are linked to GDP growth but are also dependent on perceived health and safety conditions, with recent data suggesting incremental-but-steady activity increases. As we've previously published, domestic air travel and connecting hubs have fared better than more origination-and-destination hubs with exposure to severely depressed international passenger levels. Transportation infrastructure providers able to benefit from cargo and commercial traffic have also fared better during the pandemic, as the dramatic increase in maritime shipping and port container volumes indicates. We expect cargo volumes currently resulting in severe congestion at several U.S. ports will be resolved in the coming months. Transit operators and parking operators face additional headwinds related to changes in user preferences and post-pandemic commuting patterns as the substitution of technology and remote working affects system utilization. The massive shift to remote working, alternate work schedules, and online shopping pose the greatest risk to traditional public transit systems and parking systems in general. We expect to see some recovery after widespread vaccination in mid-to-late 2021 but a return to near pre-pandemic ridership levels could be many years away. However, parking utilization could rebound to pre-pandemic levels sooner.

As noted in our January 2021 sector view, progress against COVID-19 and the vaccination rollout would be the key factors for the current year, and after a challenging start, the increased availability of vaccines and inoculation rates appear to be setting the stage for the waning of credit pressures across most of the transportation infrastructure asset classes. S&P Global Ratings will continue to monitor and update the market related to notable trends and rating actions as we gauge the shape of the economic and operational recovery.

Related Research

This report does not constitute a rating action.

Primary Credit Analyst:Kurt E Forsgren, Boston + 1 (617) 530 8308;
kurt.forsgren@spglobal.com
Secondary Contacts:Joseph J Pezzimenti, New York + 1 (212) 438 2038;
joseph.pezzimenti@spglobal.com
Todd R Spence, Farmers Branch + 1 (214) 871 1424;
todd.spence@spglobal.com
Sussan S Corson, New York + 1 (212) 438 2014;
sussan.corson@spglobal.com
Kevin R Archer, San Francisco + 1 (415) 3715031;
Kevin.Archer@spglobal.com
Kenneth P Biddison, Centennial + 1 (303) 721 4321;
kenneth.biddison@spglobal.com
Paul J Dyson, San Francisco + 1 (415) 371 5079;
paul.dyson@spglobal.com
Scott Shad, Centennial (1) 303-721-4941;
scott.shad@spglobal.com
Kayla Smith, Centennial + 1 (303) 721 4450;
kayla.smith@spglobal.com
Taylor Hahn, Centennial;
taylor.hahn@spglobal.com

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