An Historic Disruptive Force

The COVID-19 pandemic has dramatically reshaped the global transportation industry like no other disruptive force in modern history. In three months, the precipitous decline in public transit ridership, cruise ship sailings, air traffic, parking, toll road transactions, port container volumes, and overall mobility--up to 95% in some subsectors--has contributed to the current sudden-stop recession and the sharpest contraction in economic activity since World War II.

As a result, we revised our sector in mid-March (see "U.S. Transportation Infrastructure Sector Outlook Update: Now Negative For All Sectors," published March 16, 2020, on RatingsDirect) and subsequently revised nearly all individual long-term debt rating outlooks to negative (see "Ratings Outlooks On U.S. Transportation Infrastructure Issuers Revised To Negative Due To COVID-19 Pandemic," March 26, 2020). Since then, we have been in contact with issuers in our rated portfolio, focusing our analysis on near-term liquidity challenges, identifying intermediate funding and budgetary risks, and gauging the shape of the economic and operational recovery as well as the likely effect on key criteria metrics over the intermediate term (see "Credit FAQ: A Review Of Transportation Criteria: Liquidity And Debt Service Coverage In Light Of COVID-19," April 23, 2020).

As restrictions on economic and social activities gradually lift in most states, mobility is on the rise and we are beginning to observe a recovery in demand indicators, albeit from severely depressed levels. Based on our analysis of various factors influencing future activity levels (see table 1) we believe transit systems and airports (and those facilities supporting them, like fuel facilities, consolidated rental car facilities, and certain parking facilities) will remain the most negatively affected within the U.S. transportation infrastructure sector with future activity levels of toll road operators and port operators generally less affected.

Table 1

To benchmark and evaluate management-provided forecasts against our criteria and financial metrics, S&P Global Ratings has developed forward-looking activity estimates for the U.S. transportation infrastructure subsectors. Our activity estimates consider our economists' April 2020 baseline and downside views (see "Economic Research: An Already Historic U.S. Downturn Now Looks Even Worse," April 16, 2020) to gauge the severity and duration of the COVID-19 pandemic and associated impacts on demand for various modes of transportation. We estimate the current recession will reduce economic activity by 11.8% peak-to-trough (roughly three times the decline seen during the Great Recession in one-third of the time) with unemployment peaking at 19% in May and a gradual recovery beginning not until the third quarter this year as fears linger and social distancing endures. The April 2020 downside forecast assumes an even steeper contraction in consumer spending with a peak-to-trough decline of 13.7% and a much longer timeline to bring COVID-19 under control than in the baseline. This would delay the start of the recovery in spending, reduce its vigor, and delay laid-off workers getting back to work, with unemployment peaking at 23% in May. These GDP forecasts are compared against our December 2019 baseline economic forecast in chart 1.

Chart 1

In addition to our economic forecasts, the activity estimates incorporate our views of actual operational data since March, discussions with management teams regarding their planning and budgets, observations from other regions as well as updated transportation industry projections. Based on our analysis, we are currently viewing the transportation demand impact across all sectors as severe, particularly for airports and mass transit (see "Airports Face A Long Haul To Recovery," May 28) and transit (see "Mass Transit Agencies' Priority Lien Revenue Bond Outlooks Revised To Negative On Anticipated COVID-19 Pressures," March 27). These estimates include both the April baseline (chart 2 and table 2) and April downside scenario (chart 3 and table 3) and reflect a steep decline and short-term shock followed by a more prolonged recovery to levels closer or equal to those achieved before COVID-19, depending on the subsector. Such activity decline and recovery curves represent a composite of each asset class; a specific credit's activity decline and recovery curve may be worse, better, or similar to ours given its unique advantages or disadvantages.

Chart 2

Chart 2 shows annualized declines in 2020 activity levels (relative to pre COVID-19 levels) for mass transit (55%), airports (50%), parking (45%), toll roads (25%), and ports (20%). Refer to table 2 for more information regarding our baseline estimated annualized declines by subsector for 2021-2023.

Table 2

Chart 3, the downside, reflects annualized declines in 2020 activity levels (relative to pre COVID-19 levels) for mass transit (60%), airports (60%), parking (55%), toll roads (30%), and ports (20%). Refer to table 3 for more information regarding our downside estimated annualized declines by subsector for 2021-2023.

Chart 3

Table 3

As this unique situation evolves, travel restrictions change, and the U.S. economy reopens in phases we will be monitoring how activity levels recover and the resultant impact on financial metrics. We utilize our activity decline and recovery curves to help evaluate cash flow and financial forecasts of our rated transportation issuers and expect to update them based on actual results and as our view of future declines and recoveries change.

S&P Global Ratings acknowledges a high degree of uncertainty about the coronavirus outbreak, the recession and their residual effects on transportation infrastructure. As this situation evolves, travel restrictions change, and the U.S. economy reopens in phases we will be monitoring how activity levels recover and the resultant impact on financial metrics. We utilize our activity decline and recovery curves to help evaluate cash flow and financial forecasts of our rated transportation issuers. Our activity estimates will change to the extent other factors like an effective and widely available COVID-19 vaccine, treatments, or other impacts that we believe will likely cause materially positive or negative lingering effects.

While most rated issuers have adequate liquidity, access to liquidity or have been provided federal support through the Coronavirus Aid, Relief, and Economic Security Act, which helps issuers manage the negative financial impacts, we believe overall financial impacts could lead to lower ratings as reflected by our current negative ratings outlooks. For those sectors relatively more exposed to those factors identified in table 1, we see downward rating pressures over the near term.

In particular, we view the mass transit and airport sectors to be most vulnerable based on the severity and duration of the decline in demand for their services. Broad-based or credit-specific rating actions of one or more notches are likely for those transportation credits that we believe will experience materially lower, uncertain, or volatile activity levels indefinitely or for an extended period. Conversely, modest downward rating actions or none at all are possible for those transportation credits we believe demonstrate recovery to financially sustainable levels in the near term. Due to the challenges posed by the pandemic-induced recession and concerns of COVID-19 outbreaks and associated impacts we believe activity levels could be unpredictable or materially depressed beyond 2020. As a result, many of the negative outlooks on debt ratings of transportation issuers with volume risk exposure are likely to remain on negative outlook beyond this year.