We Anticipate A Slow, Fragile Recovery Following An Unprecedented Shock In 2020

Although general mobility is improving, we consider the recovery in activity across most U.S. transportation subsectors fragile and generally materially depressed compared with pre-pandemic levels. Based on our analysis of various factors influencing future activity levels (table 1), transit systems and airports (and facilities supporting them, like fuel facilities, consolidated rental car facilities, and certain parking facilities) remain depressed and will take longer to recover within the U.S. transportation infrastructure sector, while future activity levels of toll road and port operators are better positioned for recovery or are well on their way. The key variables influencing our view for 2021 and beyond are when herd immunity to COVID-19 is achieved and the reaction of governments and the traveling public to an evolving health and safety landscape.

Table 1

In 2020, the COVID-19 pandemic dramatically reshaped the global transportation industry like no other disruptive force in modern history, causing a precipitous decline in public transit ridership, cruise ship sailings, air traffic, parking, toll road transactions, port container volumes, and overall mobility; a sudden-stop recession; and the sharpest contraction in economic activity since World War II. As a result, we lowered debt ratings in certain cases, reflecting a fundamentally weaker credit profile due to materially depressed and uncertain activity levels. For more information see "COVID-19 Activity In U.S. Public Finance," on RatingsDirect.

For 2021, our focus will be on assessing near-term liquidity challenges and intermediate funding and budgetary risks; gauging the shape of the economic and operational recovery; and determining the likely effect on key credit factors such as market position, financial performance, debt capacity, and liquidity over the intermediate term. For more information refer to table 4, which details some examples of possible situations we are likely to consider as we assess transportation infrastructure enterprise primary credit factors.

To benchmark and evaluate management-provided forecasts against our criteria and financial metrics, S&P Global Ratings has updated its activity estimates for the U.S. transportation infrastructure subsectors, using S&P Global Economics' December 2020 baseline and downside views (see "Economic Research: Staying Home For The Holidays," Dec. 2, 2020) to gauge the severity and duration of the COVID-19 pandemic and associated impact on demand for various modes of transportation.

S&P Global Economics' current baseline forecast anticipates a negative 3.9% real GDP growth rate in 2020, rebounding to a slower-growth phase heading into 2021, with 4.2% estimated for next year. The baseline forecast assumes passage of a $1 trillion stimulus package before year-end (2020). The unemployment rate declined to 6.7% in December from its post-1947 record high of 14.75% (in April 2020); however, we don't expect the unemployment rate will return to its pre-pandemic low until after 2023.

S&P Global Economics' current downside U.S. forecast, which shows real GDP declining 4.4% in 2020 and rising only 0.8% in 2021, assumes no more fiscal stimulus and a COVID-19 resurgence, crippling growth in the fourth quarter of 2020. In the downside scenario, GDP declines for two consecutive quarters and the economy returns to its pre-pandemic level in the second half of 2022, with higher risk of longer-term scarring. 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 2020, discussions with management teams regarding their planning and budgets, observations from other regions, data compiled by the U.S. Department of Transportation's Bureau of Transportation Statistics, and updated transportation industry projections.

Based on our analysis, we view demand across most transportation sectors as depressed for 2021, particularly for airports and mass transit (see "As COVID-19 Cases Increase, Global Air Traffic Recovery Slows," Nov. 12, 2020). These estimates include both our January 2021 baseline scenario (chart 2 and table 2) and downside scenario (chart 3 and table 3), which reflect a prolonged recovery to levels near or comparable with those achieved before the pandemic, depending on the subsector. Such recovery curves represent a composite of each asset class although a specific issuer's recovery curve could be worse, better, or similar to our scenario depending on its unique advantages or disadvantages. Given the nature of this shock, we expect certain periods could experience temporary spikes due to pent-up demand, especially once herd immunity is reached.

Chart 2

Chart 2 shows our estimated baseline recovery curves (relative to pre-COVID-19 levels) through 2023. Table 2 shows our current baseline estimated annualized declines by subsector compared with our June 2020 estimates. Chart 2 and table 2 show that U.S. public transit and airport sectors face the longest recovery relative to other U.S. transportation subsectors, with our current baseline activity estimates for 2021 compared with pre-pandemic levels showing annualized declines of approximately 50% for public transit; 40% for airports; 30% for parking; 10% for toll roads; and an annualized increase of approximately 5% for ports with activity levels potentially returning to or near pre-COVID-19 levels by the end of 2022 for most toll roads, in 2023 for most parking, in 2024 for most airports, and public transit ridership recovering to levels approximately 15% below pre-COVID-19 levels by the end of 2023.

Table 2

Chart 3 shows our estimated downside recovery curves relative to pre-COVID-19 levels. Table 3 shows our current downside estimated annualized declines by subsector through 2023 compared with our June 2020 estimates.

Chart 3

Table 3

Chart 3 and table 3 show 2021 annualized declines of approximately 60% for public transit; 70% for airports; 45% for parking; 30% for toll roads; and 5% for ports with activity levels potentially returning to or near pre-COVID-19 levels in 2022 for most ports and toll roads, but activity levels for most transit providers, airports, and parking still 10%-20% down in 2023.

We will continue to monitor how activity levels recover and the resultant impact on financial metrics as this unique situation evolves, travel restrictions change, and the U.S. economy recovers in phases. We use our activity recovery curves to help evaluate cash flow and financial forecasts of our rated transportation issuers and expect our activity estimates could change, depending on when herd immunity is reached or other factors (like coronavirus variants) that we believe will likely cause materially positive or negative lingering effects. These estimates serve as a benchmark to evaluate potential positive or negative effects when an individual issuer's operational performance falls outside the range we are estimating.

Although most rated issuers have adequate liquidity, access to liquidity, or have received support through the passage of federal stimulus packages that have helped mitigate near-term negative financial impacts, we believe overall credit quality could be weakened for an extended period, which is reflected by our negative outlooks on transportation provider debt ratings. For those sectors relatively more exposed to those factors identified in table 1, we see a longer recovery, longer time on negative outlook, and greater potential for downward rating pressure.

In particular, we believe the mass transit and airport sectors will generally experience a longer financial recovery compared with other transportation infrastructure providers whose finances are not materially influenced by changes in ridership and air travel or changes in user behavior compared with pre-COVID-19 levels. Downward rating pressure is likely for those financially vulnerable transportation issuers experiencing materially lower, uncertain, or volatile activity levels indefinitely or for an extended period absent offsetting management actions to alleviate financial impacts.

Conversely, we could revise the outlook to stable from negative in 2021 on debt ratings on certain transportation issuers, if we believe their operations have sufficiently recovered and have stabilized to levels we consider financially sustainable and consistent with the current rating. Nevertheless, due to the challenges posed by the pandemic-induced recession, a slow and fragile recovery, and concerns of COVID-19 or coronavirus variant outbreaks and associated impacts, we believe activity levels could be unpredictable or materially depressed beyond 2021. As a result, the outlooks on the debt ratings on some transportation issuers with volume risk exposure could remain negative beyond 2021.

Table 4

Andrew Stafford and Naim Hernandez contributed research to this article.

Related Research

• Activity Estimates For U.S. Transportation Infrastructure Show Public Transit And Airports Most Vulnerable To Near-Term Rating Pressure, June 4, 2020