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. We have examined industry operating trends and our most current economic outlook to gauge the evolving effects of the COVID-19 pandemic and associated impacts on transportation demand. For S&P Global Economics' current baseline view, see "Economic Outlook U.S. Q3 2022: The Summer Of Our Discontent," published June 27, 2022, on RatingsDirect.

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. However, in 2021, a combination of materially favorable developments, including remarkable vaccine progress, unprecedented amounts of additional federal stimulus aid, improving economic conditions, easing of mobility restrictions, and pent-up demand, significantly reduced or neutralized the credit risks for many transportation issuers. As people and businesses learned to manage COVID-19 risks, the recovery for most modes of transportation has been generally favorable. However, public transit is still being significantly affected because of an increase in remote work or hybrid work arrangements and, in some instances, riders' reluctance to return because of reliability, service level, or safety concerns.

Recovery Curves Are Mixed For Transportation Infrastructure Providers

We estimate the pace of recovery for different modes of transportation to or near pre-pandemic levels will vary. Although the combination of high fuel prices, inflation, rising interest rates, and coronavirus variants will create some headwinds that could affect demand for transportation (see "Will Prolonged Higher Fuel Prices Slow The Rebound In U.S. Transportation Demand?," May 12, 2022), we believe pent-up demand and the desire to return to pre-pandemic mobility will continue to propel the recovery assumed in our baseline estimates. Our downside estimates assume a slower pace of recovery due to the various factors mentioned above having a greater drag on the recovery.

We base our estimates on factors influencing future activity, including industry trends, discussions with management teams, and our economists' view of macroeconomic conditions (table 1). Overall, new factors have emerged since our last updated activity estimates ("Updated U.S. Transportation Infrastructure Activity Estimates Show Air Travel Normalizing By 2023 And A Stymied Transit Recovery," Jan. 12, 2022) that we believe will influence demand in the transportation sector. S&P Global Economics believes the current momentum will likely protect the U.S. economy from recession in 2022. However, it is less likely that the U.S. will avoid recessionary pressures in 2023, with supply-chain disruptions worsening as the weight of extremely high prices damages purchasing power and aggressive Federal Reserve policy increases borrowing costs. S&P Global Economics assesses the recession risk at 40% (35%-45% band) heading into 2023 with a low-growth recession and contraction caused by a larger spike in prices with even more aggressive Fed policy. Nevertheless, we anticipate the probability of weaker economic conditions negatively affecting the recovery in any transportation sector will be low for 2022-2025, as vaccination rates have risen and people and businesses learned to manage COVID-19 health and safety risks. Our updated baseline estimates for public mass transit, parking, and airports are summarized below:

• We expect the recovery in 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. Our revised baseline activity estimate for transit show a slower recovery (75% by 2025 instead of 75% by 2024) compared with our previous estimates.
• We expect parking operators will experience recoveries generally much better than those of transit providers, but not as strong as airports. Our revised baseline activity estimates for parking show a slower recovery (95% by 2025 instead of 100% by 2024) compared with our previous estimates.
• Finally, for most U.S. airports, we still expect air travel demand will return to near pre-pandemic levels by the end of this year with airports serving warm-weather and leisure domestic destinations continuing to experience strong recoveries, and those serving international markets rebounding more slowly, with no change from our previous estimates.

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 might change and the timing of when demand for certain modes of transportation will normalize.

For most toll roads, we expect traffic will still return to near pre-pandemic levels this year, despite the increase in gasoline prices, and will remain at more normal levels. Although most toll roads experienced a drop in traffic, especially from the second quarter through the fourth quarter of 2020, the recovery in toll traffic has been generally favorable, returning to near pre-pandemic levels. For some toll roads, passenger car traffic remains below pre-pandemic levels due to decreased commuter traffic and an increase in online shopping. Commercial vehicle traffic, however, has performed relatively well during the pandemic, with stable to positive traffic levels due to increased consumer spending and demand for goods. Consequently, many toll road operators are experiencing traffic and revenue performance near or better than pre-pandemic levels, except for those with more exposure to commuters. Since we believe toll road traffic for most operators has recovered to near or above pre-pandemic levels, we do not provide updated estimated recovery curves for this sector in this report.

Table 1

Momentum Bolsters The U.S. Economy This Year, But Higher Risk Of Recession Looms

Recent economic indicators show a resilient U.S. economy through June, despite rising prices and interest rates. S&P Global Economics expects U.S. GDP growth will slow to 2.4% this year (down from 3.9% in the December 2021 baseline forecast). As people have learned to live with COVID-19 and have proven resilient so far to higher prices at the checkout line, momentum will likely protect the U.S economy this year. In 2023, the U.S. economy will experience a low-growth recession with extremely high prices and aggressive rate hikes weighing on affordability and demand; and the Russia-Ukraine conflict and China slowdown exacerbating supply chain and pricing pressures. Heading into 2023, S&P Global Economics assesses recession risk at 40%, up from the U.S. economy's long-term unconditional recession risk average of 13%.

With purchasing power squeezed, household spending will slow to 3.4% and 1.9% in 2022 and 2023, respectively, from its 73-year high of 7.9% in 2021. Given limited direct trade and capital flow linkages between the U.S. and the Russia-Ukraine region, and since domestic activity largely spurs the U.S. economy, S&P Global Economics does not believe the conflict, on its own, will tip the U.S. into recession.

S&P Global Economics expects the Fed will continue to frontload rate increases this year, with the federal funds rate reaching 3.0%-3.25% by year-end, climbing to 3.5%-3.75% by the end of 2023, and remaining there until the first rate cut in third-quarter 2024 as the Fed waits for inflation to fall near the 2.0% target, which will occur in second-quarter 2024.

The job market remains tight, with the unemployment rate at 3.6% in May and just above its pre-pandemic level, as unemployed workers quickly find jobs. S&P Global Economics projects the unemployment rate will remain near 3.6% until early 2023 when it climbs as successive Fed rate hikes take hold, topping 4.3% by the end of 2023 and rising to above 5.0% by the end of 2025. Offering the COVID-19 vaccine to young children might help reverse the decline in labor force participation--now at a 45-year low--particularly for women, which has been an issue for productivity and growth.

S&P Global Ratings believes recurring emerging coronavirus variants are a stark reminder that the COVID-19 pandemic is far from over, causing many countries to continually reevaluate their international travel restrictions. We expect a precautionary stance in markets and that governments will continue to put into place short-term containment measures, where necessary. In addition, disease experts believe that a new outbreak might not cause a severe health crisis, like in 2020, because almost 70% of the U.S. population is fully vaccinated. The U.S. economy has adapted to past outbreaks and the impact on growth has been less severe with each wave. This suggests that subsequent waves combined with high vaccination rates could slow but not significantly hurt the U.S. economy, allowing the continued recovery or normalization of activity across the various modes of transportation, which has played out so far in the U.S. with this pandemic.

Transit Ridership Recovery Is Still Expected To Materially Lag All Other Subsectors

In addition to our economic forecasts, our 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, parking, and airports will be generally lower than pre-pandemic levels for 2022, with the mass transit sector still materially depressed. These estimates include both our July 2022 baseline scenario (chart 1 and table 2) and downside scenario (chart 2 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 believe there could be some volatility because of temporary spikes due to pent-up demand or declines due to health and safety concerns from coronavirus variant outbreaks, overlayed by typical seasonality observed across the asset classes during the year.

Chart 1

Chart 1 and table 2 show our estimated baseline recovery curves by subsector through 2025, 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 show annualized recapture rates of pre-pandemic levels at approximately 60% for public transit; 80% for parking; and 90% for airports, with activity potentially returning to or near pre-pandemic levels by the end of this year for most airports, in fourth-quarter 2025 for most parking operators, and later for public transit (80% in fourth-quarter 2025). 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. Although higher gasoline prices in the past may have increased transit ridership, we expect this dynamic will be muted, given the rise in remote work.

Table 2

Chart 2 and table 3 show our estimated downside recovery curves by subsector compared with pre-pandemic levels through 2025.

Chart 2

Table 3

In our downside-case scenario, we estimate 2022 annualized recapture rates of pre-pandemic levels at approximately 55% for public transit; 80% for parking; and 90% for airports, with activity potentially returning to or near pre-pandemic levels in 2024 for most airports, and further out for parking operators (90% in 2025) and transit providers (70% in 2025).

Credit Fundamentals Will Spur Rating 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 gradually transitions to a post-pandemic state. 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 potentially positive or negative effects when an individual issuer's operational performance falls outside the ranges we are estimating.

We believe certain mass transit and parking operators 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 persistently lower activity (that outlasts the availability of federal pandemic operating relief grants, if applicable), absent offsetting management actions to alleviate financial impacts, including credible plans to return to structural operating fund balance, particularly for transit providers reliant on revenues that are sensitive to changes in ridership. 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 that we consider reasonable and that demonstrate a return to sustainable financial performance metrics comparable with pre-pandemic levels.

Related Research

• Will Prolonged Higher Fuel Prices Slow The Rebound In U.S. Transportation Demand?, May 12, 2022
• U.S. Transportation Infrastructure Sector Update And Medians: U.S. Parking Sector View Is Now Stable, May 4, 2022
• 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