To benchmark and evaluate management-provided forecasts against its 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' June 2021 baseline and downside views (see "Economic Outlook U.S. Q3 2021: Sun, Sun, Sun, Here It Comes," published June 24, 2021, on RatingsDirect) to gauge the severity and duration of the COVID-19 pandemic and associated impact on demand for various modes of transportation.

In 2020, the 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, and overall mobility; a sudden-stop recession; and the sharpest contraction in economic activity since World War II. As a result, S&P Global Ratings lowered debt ratings in certain cases, reflecting fundamentally weaker credit profiles and financial capacity for operators whose finances were materially negatively affected by depressed and unpredictable activity levels.

However, a combination of favorable developments in the first quarter of 2021--including vaccine progress, additional federal stimulus aid, improving economic conditions, pent-up demand resulting in rebounding activity trends, and the easing of mobility restrictions--significantly reduced credit risks. As a result, we revised the outlooks on many individual debt ratings to stable from negative.

We See The Pace Of Recovery As Uneven And Mixed Across The Transportation Infrastructure Asset Classes

Due to the combination of federal stimulus money and vaccine progress boosting the economic recovery along with increasing mobility patterns, we estimate a return to near pre-pandemic levels this year for toll traffic, in 2022 for parking demand, in 2023 for air travel demand, and longer for public transit ridership.

The port sector experienced weakness before the pandemic but, as consumers remained at home and substituted online purchases for discretionary spending on services, cargo and container activity increased at most ports. Consequently, many large port operators are experiencing activity levels and revenue performance at or better than pre-pandemic levels, except for those with material exposure to cruise activity. As a result, we did not provide updated estimated recovery curves for this sector.

We have based our estimates on various factors influencing future activity levels including strong forecast economic growth (table 1). Given the strength of economic growth and low risk of recession, the probability of a weaker economy negatively affecting the recovery in any transportation sector is much lower this year. As we have noted since June 2020, transit systems and airports (along with the facilities supporting them, like fuel facilities, consolidated rental car facilities, and certain parking facilities) remain the most affected and, although they are demonstrating a recovery, we anticipate a full return to pre-pandemic levels will take longer compared with other U.S. transportation infrastructure asset classes. Many U.S. airports serving warm-weather and leisure destinations have been the beneficiaries of the "vacation-deprivation" bounceback in domestic U.S. travel and the large, primary hubs have seen more connecting passengers due in part to the reduction in the airlines' point-to-point service. Toll roads are generally better positioned for a quicker recovery, likely in 2021, while parking operators are expected to return to pre-pandemic levels by the end of 2022. Continued vaccine progress and the reaction of governments and the traveling public to an evolving health and safety landscape will influence our view for 2021 and beyond regarding how activity levels may change and the timing of when demand for certain modes of transportation will return to some form of normalcy and predictability.

Table 1

We Forecast Strong U.S. Economic Growth

A better vaccination outlook this summer, a faster reopening schedule, and $2.8 trillion from two stimulus packages have turbocharged the prospects for a U.S. economic recovery this year and the next, following the pandemic-induced slump. S&P Global Economics' current U.S. economic baseline forecast anticipates ending 2021 at a 6.7% real GDP growth rate and rebounding to a slower growth phase heading into 2022, with 3.7% estimated for next year. Our risk for recession over the next 12 months is now 10%-15%, down sharply from the 20%-25% range in January and around the U.S. economy's long-term unconditional recession risk average of 13%. The U.S. unemployment rate fell to 5.8% in May from its post-1947 record high of 14.75% in April 2020; however, we expect the national unemployment rate will not likely reach its pre-pandemic level of less than 4% until the first quarter of 2023.

S&P Global Economics' current downside U.S. economic forecast, which shows real GDP rising 6.0% in 2021 and 2.8% in 2022, assumes negative news regarding new strains of the coronavirus keeps consumers cautious, the pace of businesses reopening and nonresidential investment is slower, the S&P 500 index barely moves up, and employment improves at a slower rate. The downside forecast also assumes the impact of government stimulus and spillover effects is less significant; supply chain disruptions keep inflation above the Federal Reserve's average target of 2% into 2022, only to decline to levels well below the Fed's 2% target rate through 2024; and the Fed does not lift rates through 2024, although the unemployment rate finally returns to pre-pandemic levels in 2024. These GDP forecasts are compared against our December 2019 baseline economic forecast in chart 1.

Chart 1

Current Activity Estimates Show Transit Ridership Recovery Notably Lagging All Other Subsectors

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 still depressed for 2021, particularly for mass transit, airports, and parking. These estimates include both our July 2021 baseline scenario (chart 2 and table 2) and downside scenario (chart 3 and table 3). The downside scenario reflects a slower 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 operating profile and unique advantages or disadvantages. We expect there could be temporary spikes due to pent-up demand, as we observed when capacity restrictions were lifted or during holiday travel periods, and the typical seasonality overlay observed across the asset classes over the course of the year.

Chart 2

Chart 2 and table 2 show our estimated baseline recovery curves by subsector (relative to pre-pandemic levels) through 2023, with the U.S. public transit and airport sectors facing the longest recovery compared with other U.S. transportation subsectors. More specifically, our current baseline activity estimates for 2021 compared with pre-pandemic levels show annualized declines of approximately 55% for public transit; 30% for airports; 20% for parking; and 10% for toll roads, with activity potentially returning to or near pre-pandemic levels this year for most toll roads, in 2022 for most parking, in 2023 for most airports, and later for public transit. The prospect of a continued or permanent shift by some workers to remote or hybrid work arrangements and online shopping could, in our opinion, limit the recovery in transit ridership.

Table 2

Chart 3 and table 3 show our estimated downside recovery curves by subsector relative to their pre-pandemic levels through 2023.

Chart 3

Table 3

Under our downside case, we estimate 2021 annualized declines of approximately 60% for public transit; 40% for airports; 25% for parking; and 15% for toll roads, with activity levels potentially returning to or near pre-pandemic levels in 2022 for most toll roads and some parking operators, but most transit providers and airports still 10%-25% 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 will change, depending on vaccine progress or other factors (such as coronavirus variants) that we believe could 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 ranges we are estimating.

Although most rated issuers have adequate liquidity, access to liquidity, or have received support through federal operating grant programs made available to the transit and airport sectors that has helped mitigate near-term negative financial impacts, some more exposed asset classes such as parking or certain toll issuers could experience weaker credit metrics for an extended period, which is reflected in our negative outlooks. For operators relatively more exposed to those factors identified in table 1, we see a longer recovery and greater potential for downward rating pressure, absent timely actions taken by management to right-size operations.

With improving activity levels, we could revise the outlooks on individual debt ratings to stable from negative later this year if we believe operations have sufficiently recovered and stabilized to levels we consider financially sustainable and consistent with the current rating. Nevertheless, due to an evolving health and safety landscape, activity levels could be unpredictable or materially depressed beyond 2021 for some asset classes or specific issuers. As a result, the outlooks on the debt ratings on some transportation issuers with volume risk exposure that we believe weakens financial performance could remain negative beyond 2021.

We believe certain mass transit and airport operators, in particular, 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-pandemic levels. Downgrades are likely for those financially vulnerable transportation issuers experiencing materially lower, uncertain, or volatile activity levels indefinitely or for an extended period (that outlasts the availability of federal pandemic operating relief grants), absent offsetting management actions to alleviate financial impacts. Alternatively, upgrades to individual transportation debt ratings that were lowered in the past 12-18 months will depend on our assessment of the staying power of current recovery trends along with issuer forecasts demonstrating a return to sustainable financial performance metrics consistent with their pre-pandemic levels. Table 4 details how we would view certain credit situations in connection with assessing transportation infrastructure enterprise primary credit factors.

Table 4

Related Research

• What Is The Next Stop For U.S. Mass Transit In A Post-COVID Era?, July 1, 2021
• Rating Outlooks On Most U.S. Transportation Infrastructure Issuers Revised To Stable From Negative, April 22, 2021
• Updated Activity Estimates For U.S. Transportation Infrastructure Show Public Transit And Airport Operators Still Face A Long Recovery, Jan. 13, 2021