Negative credit implications associated with the COVID-19 pandemic were limited in 2021 as the vaccine rollout and subsequent improving health and safety conditions along with a strong economic recovery contributed to higher demand levels across the transportation infrastructure asset classes. This, combined with massive federal assistance to the aviation and mass transit sectors, led to rating stability along with many positive rating actions for several ports and airports. Overall in 2021, there were 18 ratings upgrades (6% of the transportation portfolio) vs. five ratings downgrades (2%); and 77% with a stable outlook, 13% with a positive outlook, and %11 with a negative outlook (see Appendix-Rating Changes And Distribution, for details).

For 2022, the cautious optimism we expressed last 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 RatingsDirect), remains, arrival of the coronavirus variant omicron notwithstanding. Activity levels of many transportation infrastructure operators--that drive financial performance--have improved dramatically and are now closer to pre-pandemic levels with ports experiencing historic congestion and cargo tonnage totals, while transit ridership remains significantly depressed as return-to-office plans at many businesses are further delayed. In fact, most transportation issuers have been on a trajectory toward business-as-usual operations and financial performance due to generally strong management actions taken to control expenses, defer capital spending, restructure debt and use federal assistance to supplement operating revenues. Several positive developments are highlighted in chart 1.

Looking ahead, some activity measures may stall, or demonstrate sluggishness or variability in the near term due to the rise of the omicron variant. However, we anticipate that S&P Global Economics' growth forecast for 2022 and 2023, combined with other factors, will lead to stabilization in operational and financial performance across most transportation infrastructure asset classes with possible upside for airport credits and some port issuers.

We evaluate the performance measures and credit metrics of each issuer based on its own enterprise profile including its market position and overall financial profile. To benchmark and evaluate management-provided projections against our criteria and measures of financial strength, S&P Global Ratings has updated its activity estimates for the U.S. transportation infrastructure asset classes, using observed recovery trends across the sector along with S&P Global Economics' most current baseline and downside forecasts (see "Economic Outlook U.S. Q1 2022: Cruising At A Lower Altitude," Nov. 29, 2021). Overall, our activity estimates show continued positive trends across the asset classes but at different rates of recovery. We have also made a downward revision to the mass transit estimate which we believe will recover to only 75% of pre-pandemic ridership levels by 2024. (See "Updated U.S. Transportation Infrastructure Activity Estimates Show Air Travel Normalizing By 2023 And A Stymied Transit Recovery," Jan. 12, 2022.)

Chart 1

Questions That Matter

1. What is the 2022 credit view across the U.S. not-for-profit transportation infrastructure asset classes and does the omicron variant change anything?

The credit view for 2022 across the transportation infrastructure asset classes is largely stable; specifically:

• Toll road, ports, and mass transit are stable (unchanged since the revision of sector view to stable from negative on March 24, 2021);
• Airport and special facilities are positive (unchanged since revision of sector view to positive from stable on Nov. 10, 2021);
• Parking remains negative (unchanged since March 16, 2020) due to lackluster at many individual parking operators in our rated universe; and
• Federal grant-secured credits are stable and were not affected by the pandemic or the November 2021 passage of the Infrastructure Investment and Jobs Act (IIJA), referred to by federal agencies as the Bipartisan Infrastructure Law.

How this will shape 2022

Arrival of the coronavirus variant omicron has put yet another obstacle in the way of a more rapid return to pre-pandemic business-as-usual industry conditions. Historically, economic and demographic trends were the key drivers to the demand for transportation infrastructure operators (see Appendix-Key Transportation Sector Demand Indicators, charts 4-7). This correlation of activity measures (e.g. passenger, containers, vehicle miles traveled, toll transactions, etc.) to U.S. GDP growth was effectively de-linked for many transportation infrastructure operators as health and safety risks, mobility restrictions (either by state or local officials or self-imposed), and other factors produced both predictable (e.g. plummeting airline and transit passengers) and unforeseen (e.g. surging port cargo tonnage) outcomes on measures of demand. (See "Too Much Of A Good Thing? U.S. Ports Are Stable In The Face Of Challenges," Oct. 20, 2021.)

In 2022, we expect continued resilience and stability for operators of not-for-profit toll roads who saw traffic rebound in 2021 with some toll agencies raising tolls and fees, restructuring debt, or reducing operating expenses to offset revenue declines (from lower passenger car volumes) as activity recovers. (See "U.S. Transportation Infrastructure Sector Update And Medians: Not-For-Profit Toll Roads and Bridges," Sept. 22, 2021.)

What we think and why

On the positive side, most transportation infrastructure operators are better positioned than they were in January 2021, with more experience managing in the new normal (for now) and, for the mass transit and airport sectors, more resources in the form of federal aid providing a financial cushion. Assuming a less severe or shorter duration impact of omicron on mobility and travel as generally experienced with each new variant, we anticipate a continued recovery across the more affected asset classes. And should vaccines provide defense against existing and new variants and more of the population become protected as it appears, the economic impacts from repeated identification of new strains could lessen, allowing for a stronger economic recovery. However, while recent experience with the delta variant would suggest a slowdown followed by continued recovery, we continue to believe the ability to develop accurate planning scenarios necessitates epidemiological assumptions that exceed the predictive abilities of industry experts.

What could change the trajectory?

While we are not predicting it, to the extent activity volatility returns and persists accompanied by travel restrictions, quarantine requirements and a slowdown in the recovery or economic instability, a full financial rebound for many transportation providers would be further delayed. However, we expect economic growth will continue with 5.5% U.S. GDP growth expected in 2021 and 3.9% forecast for 2022 will exceed any growth in the past 10 years. This growth is buffeted by multiple recessionary driven pressures including inflationary challenges, supply chain bottlenecks, staffing shortages, and volatile markets reacting to pandemic swings that influence consumer confidence and spending on discretionary travel. (See "Economic Outlook U.S. Q1 2022: Cruising At A Lower Altitude," Nov. 29, 2021)

2. Which transportation infrastructure sector is most challenged and what is driving our positive view on U.S. airports?

As highlighted in our updated January 2021 activity estimates, mass transit operators--in particular, those dependent on fare revenues to support operations with large scale urban rail systems--face the greatest longer-term challenges as the pandemic exacerbated already declining ridership trends (since 2015) while also rapidly accelerating remote working trends. A combination of prudent management actions and unprecedented infusion of significant federal aid ($69.5 billion) have stabilized mass transit credit conditions for now, but longer-term issues related to replacing lost fare revenues (if ridership remains depressed) and where capital investments should be made remain outstanding. (See "What Is The Next Stop For U.S. Mass Transit In A Post-COVID Era?," July 1, 2021.)

U.S. airports have fared much better as measured by recovery trends (see chart 2). Similarly, management actions taken to limit the financial implications of the precipitous drop in passenger traffic combined with an economic rebound, traffic recovery, and one of the largest federal assistance packages in U.S. history (over $112 billion to airports and airlines) which stabilized industry conditions and contributed to improving airports' market positions. (See "U.S. Transportation Infrastructure Sector Update And Medians: U.S. Airport Sector View Is Now Positive," Nov. 10, 2021.)

Chart 2

How this will shape 2022

We see 2022 as key in the recovery for mass transit and airport operators, which are highly exposed to both real and perceived health and safety conditions. Transit operators have been waiting for the return-to-office ridership that may be delayed further into 2022 because of the omicron variant and changing work patterns. U.S. airports, which experienced a significant traffic boost beginning in spring 2021 with a leveling off in the fall, were looking at 2022 as the year where significant passenger growth was expected to accelerate, particularly in business and international segments.

What we think and why

Overall, we believe activity trends and overall operational performance in 2022 for both airport and transit asset classes will influence financial metrics and shape management teams' approach to strategic decision-making related to fare or rate-setting, and sustainable capital investment, with possible longer-term credit quality implications. In the immediate and near term for mass transit operators, factors like increasing flexibility in remote working, along with changing consumer preferences, pose a significant risk for a recovery in ridership to a level comparable with pre-pandemic levels for what could be many years.

Less affected over the long term will be transit operators that rely on a variety of non-fare sources of revenue (e.g. sales or property tax) to support operating and capital costs, which we view as providing more revenue stability given their lesser reliance on farebox revenues and less sensitivity to ridership fluctuations.

For U.S. airports, we expect the uneven enplanement recovery led by the domestic and leisure market segments may slow in the near term but smooth out as business and international travel recovers. We believe a stabilization in activity levels could accelerate a recovery to the pre-pandemic market position assessments for some U.S. airports over the next 12 months. Our market position is a key rating factor and is defined as the strength of airport enterprises to generate sustainable, recurring revenue from operations to support fixed costs, which are typically derived from passenger demand as well as their flexibility to set and levy rates on airport tenants, based on economic, legal, and political factors.

An increase in passenger traffic from the lifting of certain restrictions on travel to the U.S. from international destinations on Nov. 8, 2021, may be more limited over the first half of 2022 as countries respond to omicron by pulling back on more liberalized travel. In our view, airports and related special facility issuers that demonstrate recoveries generally better than our activity estimates or exhibit demand levels sufficient to produce financial metrics we consider consistent with a higher rating on a sustainable basis are relatively more likely to receive positive outlook revisions or upgrades in the near term.

Tables 1 and 2 provide an overview of our 2022 updated activity estimates across the transportation infrastructure sectors still operating at or below pre-pandemic levels. (See "Updated U.S. Transportation Infrastructure Activity Estimates Show Air Travel Normalizing By 2023 And A Stymied Transit Recovery," Jan. 12, 2022.)

What could change the trajectory?

As noted, if volatile activity levels for mass transit and airports return and persist accompanied with a slowdown in the recovery or economic instability, a full financial rebound would likely be further delayed.

3. What the IIJA mean for credit quality across transportation infrastructure?

While its arduous journey to final passage was emblematic of the current divisive political and policy-making environment, the $1.2 trillion IIJA is indeed an investment of historic proportions and S&P Global Ratings views it as a credit positive for the transportation sector. (See "Construction Ahead: Roughly $1 trillion Infrastructure Act Tackles Backlog And Future Risks," Nov. 10, 2021.) It provides $284 billion in new funding for transportation projects and keeps the baseline funding for surface transportation spending at the state level, providing ongoing funding to allow for planning and approvals. While the structural deficit in the highway trust fund was not addressed, the law identified $118 billion to be transferred from the general fund to the trust fund should allow this ongoing program to remain fully funded for the next five years. (See "Infrastructure Law Paves The Way For Transportation GARVEE Bonds' Federal Support And A Stable Sector View," Dec. 7, 2021.)

How this will shape 2022

The breadth and ambition of the 2,703-page IIJA is almost as large as the dollars behind it. Some money that flows through existing federal programs with formula funding mechanisms has already been awarded. But as usual, the devil is in the details and exactly how portions of the new law are implemented will play out in 2022 as the various new programs and "strings attached" provisions of certain policy initiatives and reforms are detailed by federal administrators. Also, not all expected state, local, and regional recipients have "shovel ready" projects lined up, so we expect 2022 to be a year where the other portions of issuers' and project sponsors' capital funding requirements are identified and planning proceeds.

What we think and why

The sheer size and scale of transportation investment associated with the IIJA/BIL will translate into spending for many years to come. Formulae funding levels are higher and there is significant increase in available federal dollars in new and discretionary programs giving authority to the U.S. Department of Transportation to advance policy objectives of the current administration. To the extent additional federal funding reduces overall debt supported by transportation operators and lowers overall leverage, we could see improved financial metrics at the margin which could enhance credit quality for some issuers.

More likely in our view is, given the historic underinvestment in maintaining or improving infrastructure, issuers will use federal dollars to expand spending, increasing projects' size or scope. We could see a more active consideration of public-private partnerships through federal support of technical assistance to consider asset concessions and a requirement for projects over $750 million that anticipate using federal loan support under the existing Transportation Infrastructure Finance and Innovation Act to include separate value-for-money studies that will compare alternative delivery methods. The federal cap on tax-exempt private activity bonds was increased by $15 billion and the environmental streamlining policy "One Federal Decision" was also included in the final law; both could advance the use of public-private partnerships by project sponsors.

What could change the trajectory?

After years of industry lobbying and many "Infrastructure Weeks" that produced no meaningful results, the proverbial federal investment train has left the station and we don't see near-term obstacles to the beginning of a historic ramp-up in transportation-related spending. There are challenges related to growing inflation worries and labor shortages across the construction trades, which could translate into higher costs or slow project delivery and erode the benefits of federal funding at the margins.

4. How will environmental, social, and governance factors influence credit quality for transportation issuers in 2022?

From a credit perspective, we view environmental, social, and governance (ESG) credit factors as those that can materially influence the creditworthiness of a rated entity or issue and for which we have sufficient visibility and certainty to include in our credit rating analysis. S&P Global Ratings recently articulated our approach to incorporating ESG credit factors into ratings (see "General Criteria: Environmental, Social, And Governance Principles In Credit Ratings," Oct. 10, 2021). For 2022, the most prominent ESG factor for the transportation infrastructure sector will continue to be how health and safety considerations influence operational and financial performance across transportation, with environmental, physical, and climate transition risks as more benign in the near term.

What we think and why

We view social risks for the transportation infrastructure industry as higher than for the other public finance sectors and the most pertinent among the ESG factors, as evidenced by our credit rating actions across several asset classes (airports and transit) since March 2020.

Transportation infrastructure is a heterogeneous industry that includes various subsectors with different exposures to social factors, such as health and safety, inclusive of events like pandemics, and social capital, given the impact on--and relations with--adjacent communities. Physical risk is a growing consideration in our analysis of transportation infrastructure assets, given the rising frequency of severe weather events and given the assets' long-term nature and fixed locations. Airports, ports, and some transit systems are likely more exposed to physical risks than other asset classes such as toll roads. However, the credit impact on airports has been moderate and limited to few rated entities exposed to extreme weather events.

Other social factors related to human capital social risks have contributed to supply chain issues for transportation issuers, including moving cargo from congested ports of entry and challenges reaching adequate staffing levels at other transportation operators as demand levels recover. (See "ESG In U.S. Public Finance Credit Ratings: 2022 Outlook And 2021 Recap," Nov. 29, 2021.)

Climate transition risks are important for the transport sector, but overall have a benign credit influence on our rated transport infrastructure providers. This is because emissions are mainly indirect among its users (airlines, cars, trucks, and shipping, which represent a combined 29% of U.S. greenhouse gas emissions (see chart 3). We view the risk of secular change to replace the type of services provided as low, despite the transition to a low-carbon economy. Physical risks, notably that of rising sea levels, is relevant to ports, but their credit quality hasn't been affected, because such phenomena is extremely long term and potentially can be mitigated. (For examples for corporate issuers see "ESG Credit Indicator Report Card: Transportation Infrastructure," Dec. 13, 2021.)

Chart 3

What could change the trajectory?

The evolution of the pandemic in 2022 will dictate how impactful this ESG credit factor will be on credit quality. We expect that the historical federal support provided the most-affected sectors--airports and mass transit--will prove credit-supportive under all but the most severe downside scenarios. Over the longer term, transportation infrastructure operators will be required to adjust to evolving demand trends, consumer preferences, regulations, changes in business conditions of their users and tenants and accommodate other macro impacts resulting from the transition to a low-carbon economy that will influence their own overall financial performance and credit quality.

APPENDIX

Key Transportation Sector Demand Indicators

In the years leading up to the COVID-19 pandemic, U.S. public transportation infrastructure sectors benefited from slow-but-steady economic growth. Combined with historically low fuel prices, greater certainty in federal funding, and benign global trade flows, demand across aviation, maritime, and roadway sectors was generally positive, with the exception of public transit sector, which had been generally experiencing year over year declines in ridership. In 2020, however, the COVID-19 pandemic changed all that resulting in dramatic declines across several key transportation demand indicators, as illustrated in charts 4-7.

Chart 4

Chart 5

Chart 6

Chart 7

Rating Changes And Distribution

We define U.S. transportation infrastructure as comprising seven subsectors, consisting of airports; toll roads and bridges; ports; parking systems; transit systems; special facilities (like consolidated rental car facilities at airports); and bonds backed by direct federal payments for highway or transit programs (GARVEE bonds).

This transportation infrastructure report highlights broader economic and industry trends that could lead to changes to credit quality (ratings and outlooks) over the near to intermediate term ignoring changes in criteria. The 2021 modal U.S. transportation infrastructure rating (including all senior and subordinate ratings) is 'A'.

In 2020, rating trends were overwhelmingly negative after several years of generally positive trends, reflecting the weakened market position of mostly airport, transit, and parking credits (measured by dramatically lower activity trends and weakened rate-raising flexibility) along with anticipated reduced financial performance (measured by debt service coverage).

During 2021, the transportation sectors saw more rating upgrades (18) than rating downgrades (5). The upgrades were across the asset classes inclusive of airports (9), airport special facility projects (2), ports (2), and transit (5).

Chart 8

Chart 9

Chart 10A

Chart 10B