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' November 2021 baseline and downside views (see "Economic Outlook U.S. Q1 2022: Cruising At A Lower Altitude," published Nov. 29, 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. In 2021, however, because of a combination of materially favorable developments, credit risks for many transportation issuers were significantly reduced or neutralized due to strong recoveries fueled by remarkable vaccine progress, unprecedented amounts of additional federal stimulus aid, improving economic conditions, easing mobility restrictions, and pent-up demand.

2022 Could Be The Year Demand For Most U.S. Transportation Infrastructure Providers Rebounds To Near Pre-Pandemic Levels

Due to the combination of federal stimulus money and vaccine progress boosting the recovery, along with increasing mobility patterns, we estimate this year's activity levels for most modes of transportation will recover to or near pre-pandemic levels. Although the current wave of coronavirus infections associated with the omicron variant could slow the pace of recovery for more-affected asset classes or exposed enterprises, we anticipate a return to the trend observed since widespread rollout of vaccinations in spring 2021.

We have based our estimates on various factors influencing future activity levels, including strong forecast economic growth (table 1). Overall, the factors influencing demand in the transportation sector are having less of a negative impact across the primary asset classes when compared with July 2021 (see "Updated Activity Estimates For U.S. Transportation Infrastructure Show Recovery For Air Travel Demand Accelerating And Public Transit Lagging," July 29, 2021). We anticipate the probability of a weaker economy negatively affecting the recovery in any transportation sector as low for 2022-2023, given the strength of GDP growth and low risk of recession. As vaccination rates have risen, so has the recovery of activity levels for most U.S. transportation infrastructure providers. In particular:

• We expect the recovery for public mass transit will materially lag all other U.S. transportation infrastructure asset classes due to a slow or partial return to office commuting patterns.
• The momentum gained in the second half of 2021 for U.S. airports, in our opinion, will allow most to recapture about 90% of pre-pandemic activity this year. We expect airports serving warm-weather and leisure domestic destinations will continue to experience strong recoveries, while those serving international markets will rebound more slowly.
• We expect parking operators, in general, will return to about 90% of pre-pandemic levels this year, like airports.
• Finally, for most toll roads, we expect traffic will return to pre-pandemic levels this year.

Continued vaccine progress and the reaction of governments, businesses, and the traveling public to an evolving health and safety landscape will influence our view for 2022 and beyond regarding how activity levels may change and the timing of when demand for certain modes of transportation will normalize.

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 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.

Table 1

We Forecast Still Strong, But Slower U.S. Economic Growth

The U.S. economy picked up in the fourth quarter of 2021 as COVID-19 infection rates subsided and vaccination rollouts progressed, allowing more people to get outside and spend. Supply-chain disruptions, however, the largest stumbling block for the U.S. economy, caused S&P Global Economics to lower U.S. real GDP growth to 5.5% for 2021 and 3.9% for 2022 under the current baseline forecast. Despite the slowdown, GDP is still likely to rise to a 37-year high in 2021, with solid readings for 2022, on continued economic demand from healthy balance sheets. Although there are signs that supply-chain issues are easing, we expect price pressures will last well into 2022 and inflation will not reach the Federal Reserve's average 2.0% inflation target until late 2023. Unemployed workers are getting jobs at a fast pace, while the decline in labor force participation, particularly among prime-age workers, is an issue for productivity and growth. The unemployment rate, at 4.6%, is closer to pre-pandemic levels; 6.4% when adjusted for the labor force exit; and down from its post-1947 record high of 14.75% in April 2020. We expect the adjusted unemployment rate will reach its pre-pandemic lows in first-quarter 2023. Our risk for recession over the next 12 months is still 10%-15%, which is around the U.S. economy's long-term unconditional recession risk average of 13%.

S&P Global Ratings believes the new omicron variant is a stark reminder that the COVID-19 pandemic is far from over, causing many countries to close their borders with Southern Africa or reimpose international travel restrictions. We expect a precautionary stance in markets and governments to put into place short-term containment measures. With the U.S. potentially heading into another wave during the winter indoor season, disease experts believe that an outbreak today may not cause a severe health crisis, like in 2020, now that more than half of the U.S. population is fully vaccinated. The U.S. economy has adapted to past outbreaks with the impact on U.S. growth less severe with each wave, suggesting that subsequent waves combined with high vaccination rates may slow but not significantly hurt the U.S. economy, allowing the continued recovery or normalization of activity levels across the various modes of transportation.

S&P Global Economics' current downside U.S. economic forecast, which shows real GDP increasing 5.4% in 2021 (5.5% baseline), 2.8% in 2022 (3.9% baseline), 2.5% in 2023 (2.7% baseline), and 2.8% in 2024 (2.3% baseline), assumes slower growth from persistent shortages of labor and goods; distribution of COVID-19 vaccines; new coronavirus variants; increasing trade tensions with China; weaker growth in real disposable income due to persisting price inflation of 4% or more; the Federal Reserve raising rates earlier and faster than the baseline forecast, hiking rates three times in 2022, not lifting rates in 2023, then cutting rates once in 2024; job growth slowing by early 2022 with the unemployment rate stalling at 4.2% in 2022 and 4.1% in 2023, not reaching its pre-pandemic low until sometime in 2024. These GDP forecasts are compared against our pre-COVID-19 baseline economic forecast in chart 1.

Chart 1

Current Activity Estimates Show The 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 estimate demand across mass transit, airports, and parking will generally be lower than pre-pandemic levels for 2022 with the mass transit sector activity levels still materially depressed. These estimates include both our January 2022 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 than, better than, or similar to our scenario depending on its operating profile and unique advantages or disadvantages. We expect there could be some volatility as a result of temporary spikes due to pent-up demand or declines due to health and safety concerns from COVID-19 or coronavirus variant outbreaks, overlayed by typical seasonality 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 2024, with public transit and parking operators facing the longest recovery compared with other U.S. transportation subsectors. More specifically, our current baseline activity estimates for 2022 compared with pre-pandemic levels show annualized recapture rates of pre-pandemic levels at approximately 60% for public transit; 90% for airports; and 90% for parking, with activity potentially returning to or near pre-pandemic levels this year for most toll roads, in 2023 for most airports, in 2024 for most parking operators, 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 2024.

Chart 3

Table 3

Under our downside case, we estimate 2022 annualized recapture rates of pre-pandemic levels at approximately 55% for public transit; 85% for airports and parking; and 95% for toll roads, with activity levels potentially returning to or near pre-pandemic levels in 2023 for most toll roads, in 2024 for most airports, and longer for parking operators (95% in 2024) and transit providers (70% in 2024).

Fundamental Credit Factors Will Drive Ratings Trends

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 the transportation issuers we rate 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, have 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 specific 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 downgrades, absent timely actions taken by management to right-size operations.

With improving activity levels, we could take positive rating actions (such as revising outlooks to stable from negative, revising outlooks to positive, or raising ratings) within the next 24 months if we believe operations have sufficiently recovered and stabilized at levels we consider financially sustainable and consistent with the current rating or a higher rating. Nevertheless, due to an evolving health and safety landscape, activity levels could be unpredictable or materially depressed this year or longer 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 2022.

We believe certain mass transit and parking 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 parking demand, 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, if applicable), absent offsetting management actions to alleviate financial impacts. Alternatively, upgrades to individual transportation debt ratings that were lowered in the past 24 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.

Related Research

• U.S. Transportation Infrastructure Sector Update And Medians: U.S. Airport Sector View Is Now Positive, Nov. 10, 2021
• Too Much Of A Good Thing? U.S. Ports Are Stable In The Face Of Challenges, Oct. 20, 2021
• U.S. Transportation Infrastructure Sector Update And Medians: Not-For-Profit Toll Roads and Bridges, Sept. 22, 2021
• What Is The Next Stop For U.S. Mass Transit In A Post-COVID Era?, July 1, 2021