Chart 1

Sector View Is Driven By Recovery In Demand

With COVID in rearview mirror, airports and related special facility projects lead the way

Whether V-shaped or L-shaped, 2022 was the year of recovery (see charts 4-6 in the Appendix) where passengers, rental car users, and tolled transactions reached or nearly reached pre-pandemic levels on a system-wide basis with regional and individual operator variances. Airports experienced the most robust rebound, returning to about 90%-95% of 2019 levels by December 2022, in line with S&P Global Ratings activity estimates for the subsector. Rental car activity (measured by transaction days) at airport consolidated rental car facilities lags the passenger recovery but also experienced a heathy rebound. Most toll operators saw rapid transactions growth in 2020-2021 before the more gradual recovery in 2022 while many U.S. ports continued with record levels of containers and cargo imports. Parking has faced a slower recovery than other U.S. transportation subsectors, though by its very nature parking activity is largely site-specific, highly dependent on local economic conditions, employment and retail trends, events and entertainment venues, and the behavioral patterns of users.

Transit operators' ridership is lagging

The COVID-19 pandemic and its impact on how and where we work has reshaped the mass transit sector. U.S. nationwide ridership across all modes is slowly recovering but remains materially depressed at about 67% of pre-pandemic levels as of December 2022 and about 56% of 2014's peak national ridership level (chart 7). This is largely due to a significant increase in remote work or hybrid work arrangements combined with, in some instances, reliability, service-level, or safety concerns. Disparities in transit ridership recovery remain across regions and travel modes (rail, subway, light rail, and bus) and recovery within large coastal cities in the Northeast and on the West Coast is lagging somewhat compared with other regions with obvious impacts on fare revenue.

Our 2023 transportation activity estimates highlight transit ridership challenge

We evaluate the performance measures and credit metrics of each issuer based on its own enterprise profile including its individual market position as well as its overall financial profile. To benchmark and evaluate management-provided projections, S&P Global Ratings has updated its activity estimates for 2023 for airports, parking, and mass transit. We have excluded ports and toll roads as those asset classes have already recovered to pre-pandemic levels. (See "U.S. Transportation Infrastructure 2023 Activity Estimates Show Air Travel Likely To Fully Recover, With Transit Ridership Still Lagging," published Jan. 9, 2023, on RatingsDirect.)

Overall, our 2023 activity estimates show positive trends continuing across the asset classes with a full recovery to 2019 levels by 2023 for airports with parking and mass transit still lagging (see tables 1 and 2). We expect public transit ridership will only recover to about 85% of pre-pandemic levels by 2026 under our base case and 80% under our downside case. Since transit ridership nationwide was experiencing year-over-year declines before the pandemic, we believe it is likely that this metric will not recover to near pre-pandemic levels for a long time, as we see slowly developing demographic trends more likely to affect that growth than public transit experiencing a sudden renaissance.

Table 1

Table 2

Improving fundamentals boosted activity-based revenues in 2022, paving the way for a more predictable financial performance

The broad-based recovery in 2022 demand measures and market positions buoyed activity-based revenues as well as adding predictability to rate-making and forward-looking financial metrics. This translated into a sizable increase in credit rating upgrades. Overall, in 2022, there were 78 rating upgrades and three rating downgrades (chart 2), largely reflecting improved market positions in the airport asset class. These trends also supported more favorable directional changes in our rating outlooks where stable-to-positive and negative-to-stable changes outpaced positive-to-stable and stable-to-negative changes (chart 3).

Chart 2

Chart 3

Notable rating and outlook changes

Airports and related special facilities were the primary beneficiaries of a return in demand levels.  Most airport ratings (89%) were downgraded beginning in June 2020 with passenger volumes stalled, mobility restricted, and the efficacy of COVID-19 vaccines unproven. Alternatively, while all transportation infrastructure credit outlooks were negative, some airport ratings (11%) were not lowered at all in 2020 due to factors such as more diversified financial profiles. With depressed operating revenues, S&P Global Ratings-calculated debt service coverage declined as expected; however, airports' financial risk profiles did not change from 2020-2022 due largely to the $20 billion in substantial federal assistance airports received. By January 2023, 75% of airport ratings have been raised to or above their pre-pandemic levels, 19% of senior lien ratings have a positive outlook and the share of airports in the 'AA' category has increased to 25% from 8% as of Jan. 1, 2023.

Toll roads and bridges also benefited from a rebound in traffic.  Further, toll increases implemented since January 2020 combined with financial resiliency demonstrated during the pandemic declines buoyed the market position of several large operators.

Likewise, some large port operators saw upgrades in 2022.  For some operators, market positions strengthened and revenues grew to historic highs and debt requirements diminished.

The transit asset class saw one downgrade in 2022.  However, In addition, some transit issue credit rating outlooks were revised to negative from stable to reflect funding challenges that some operators will face over the next 12-36 months.

See the Appendix for ratings trends, and current rating and outlook distributions.

Sector Top Trends In 2023

Continued spend down of federal operating assistance

The aviation sector and public transit providers received a combined $170 billion in federal COVID-19 operating assistance, largely via reimburseable programs similar to existing grants-in-aid programs overseen by the Federal Aviation Administration and Federal Transit Administration. Many airport operators have fully utilized their federal assistance and others expect to spend their remaining federal assistance in 2023-2024, raising rates and charges to tenants to fill the void.

However, some public transit operators face an operating fund fiscal cliff--especially if they are unable to identify new revenue sources or right-size operations reflecting lower expected ridership levels--once the federal assistance aid now compensating for diminished passenger fare revenues is depleted. As a result, we are changing our view of the transit asset class to negative from stable to reflect this risk to financial performance that could, in turn, negatively affect credit quality of operators with a historical reliance on fare revenues.

Return to business-as-usual rate setting and full cost recovery

With air travel demand recovering and normalizing to predictable levels, airport operators either have returned or are on their way to business-as-usual financial metrics as they exhaust remaining federal pandemic relief aid. For example, by applying federal assistance to eligible operation and maintenance costs and paying debt service, airports collected less in landing fees and terminal rentals under the largely cost-recovery business models at U.S. airports. As a result, when including lower activity-based revenues, airports' operating debt service coverage declined while liquidity measures improved due to the federal aid.

Large capital programs are back

Capital spending to maintain assets or improve long-term capacity is back after a short pause. Airport operators have accelerated terminal projects, often at the behest of airlines scrambling to regain market share, while toll operators are continuing to maintain or expand road networks, managed lanes, and finance the ongoing shift toward all-electronic or open road tolling. This capital spending arrives as over $1.5 trillion in federal investment from the Inflation Reduction Act, the Infrastructure Investment and Jobs Act(Bipartisan Infrastructure Law), and some portions of the American Rescue Plan passed into law since 2020 is targeted over the next four years. In particular, the IIJA/BIL provides more than $108 billion for public transit and $102 billion for commuter rail, Amtrak, and other passenger and freight rail systems. With a local contribution requirement for most projects receiving federal grants, this could result in additional debt issuance by transit operators.

Continued implementation of Bipartisan Infrastructure Law

Although the law does not address the Highway Trust Fund's structural deficit, the Bipartisan Infrastructure Law did include a five-year surface transportation reauthorization (2022 to 2026) that authorized $237.2 billion in funding for the Federal Aid Highway Program and $69.9 billion for transit formula grant programs sourced from the Highway Trust Fund. The total authorized funding to the Department of Transportation is $660.8 billion (see table 1), including all programs and divisions.

Numerous headwinds add uncertainty

Known or still developing exogeneous risks to the global economy could negatively affect the transportation sector with the potential for unforeseen shocks always present. These risks include weakening economic conditions; lingering inflationary pressures; global trade and supply chain issues; and the Russia-Ukraine war. S&P Global Ratings economists believe that the U.S. economy is increasingly likely to fall into a recession during the first half of 2023, which could dampen the robust operational recovery and drag down financial performance across the transportation sector with rising operation and maintenance and capital expenses, although we believe inflation likely peaked in the third quarter of 2022. The highest construction cost inflation seen in decades along with supply chain delays and labor costs has and will continue to weigh on project budgets and timelines and could result in higher debt levels across the sector. While weakening economic conditions could cool inflationary impacts, the massive federal investment in infrastructure could keep input and labor prices elevated in many markets over the medium term. Slower growth is on the immediate horizon as we forecast U.S. GDP growth at 1.8% for 2022 and negative 0.1% for 2023 (see "Economic Outlook U.S. Q1 2023: Tipping Toward Recession," Nov. 28, 2022).

Settling into the new normal

The longer-term impacts of the pandemic on transportation infrastructure operators and their users are still evolving. COVID-19 accelerated the implementation of technology and forced the acceptance of remote or hybrid work arrangements. Now-ubiquitous video conferencing has challenged the cost, efficiency, and environmental impacts of business travel. Declining business passengers (12% of airlines' total) have a more direct effect on airlines, but there could also be residual impacts along the travel value chain. As of October 2022, international arrivals into the U.S. were 30% below the 2019 level. Many urban congestion-reliever toll roads have different and lower peaks to their utilization patterns. And while ports experienced severe congestion during 2020-2022, shifts in global trade and supply chains along with more onshoring of manufacturing and production could modify the current commodity and product mix.

How Will Credit Quality Be Affected?

Transportation sector asset classes can weather a mild recession

In the years leading up to the pandemic, U.S. public transportation infrastructure sectors benefited from slow-but-steady economic growth and demand combined with historically low fuel prices, reliable federal funding, and benign global trade flows. Since 2020, the combination of federal operating assistance, recovery in demand, and prudent management actions to raise revenues, reduce costs and capex spending, and restructure debt have resulted in generally improving or strong enterprise and financial risk profiles. We expect to see inflationary impacts across the sector related to labor, materials, and capex spending with a corresponding increase in operations and maintenance expenses. However, we believe transportation infrastructure issuers will largely manage through a modest downturn without credit disruption.

Our range of key financial metrics used to evaluate credit quality and a sample of 2021 metrics from across the transportation asset classes are shown in tables 3 and 4. For more details, consult the medians reports listed in Related Research below.

Table 3

Table 4

Airports and related special facilities:  Most U.S. airport ratings are now at the same level or higher than they were before the pandemic. Although demand could soften due to inflation and recessionary pressures in 2023, we believe the potential drag will be relatively benign and temporary. We expect airport operators will experience improved debt service coverage (S&P Global Ratings-calculated) from a median low of 1.0x in 2021 and a likely erosion in liquidity levels from a high of more than 600 days' median cash on hand. Consolidated rental car facilities, most of which experienced downgrades of one or two notches in 2020 have been slower to rebound but conservative financial structures and strong liquidity protections kept credit quality from eroding further and several of these ratings now have positive outlooks (see "U.S. Transportation Infrastructure Airport Update And Medians: Sector View Is Now Stable After Historic Disruption," Dec. 8, 2022).

Toll roads and bridges:  This was among the most resilient of the transportation infrastructure asset classes--with no downgrades--throughout the pandemic. We expect U.S. not-for-profit toll road and bridge ratings will be stable, supported by continued commercial vehicle traffic and toll rate increases implemented by many operators. Since 2020, of the 15 largest U.S. toll-backed issuers as measured by debt outstanding, 12 raised toll rates often to compensate for weaker passenger vehicle traffic. Toll operators with rates or toll-setting policies linked to the Consumer Price Index or other inflation-linked measures may produce higher revenue growth in 2023, although some operators could defer allowable rate increases for fear of public opposition, to maintain toll affordability, or because of previously implemented toll increases in 2021-2022 (see "U.S. Transportation Infrastructure Toll Sector Update And Medians: Rebounding Traffic And Toll Increases Are Key Ingredients For Credit Strength And Stability" Nov. 17, 2022).

Ports:  The key near-term challenge for U.S. ports will be managing through economic, trade policy, supply chain, and labor issues for U.S. West Coast ports. The logistical bottlenecks that the ports of Los Angeles and Long Beach became since 2020 will likely end and revert to lower, more typical operations in 2023. However, the congestion hangover and uncertainties ahead related to possible labor issues or slowdowns could accelerate the shift of import container traffic from the West Coast to the East Coast. Ports are inherently exposed to volatility due to normal business and economic cycles but benefit from very strong enterprise risk profiles and exhibit strong financial metrics--particularly debt service coverage and low debt levels (see "U.S. Transportation Infrastructure Port Sector Update And Medians: Ports Are Resilient In Shifting Tides," Dec. 13, 2022).

Parking:  We expect to see a continued recovery in transactions and revenues across the rated parking universe in 2023. The experience and knowledge gained from handling the challenges of the COVID-19 pandemic will better prepare parking management teams to address both any weakness from recessionary impacts as well as future shocks of various degrees of complexity and severity. We expect parking operators will experience recoveries generally much better than those of transit providers, but not as strong as airports with our current baseline activity estimates as of January 2023 for parking at 95% of pre-pandemic levels by 2025 and near pre-pandemic levels by 2026 (see "U.S. Transportation Infrastructure Sector Update And Medians: U.S. Parking Sector View Is Now Stable," May 4, 2022).

Grant-secured (GARVEE):  We view the federal grant-secured transportation sector as stable, reflecting our expectation of reliable funding and continued strong support for transportation infrastructure investment across all levels of government. Key financial metrics show that grant anticipation revenue vehicle programs have very strong maximum annual debt service coverage that we do not expect will materially change. While the change of the majority party in the House of Representatives could slow or alter final appropriations and spending approvals, GARVEE programs continue to largely enjoy bipartisan support (see "Reliable Funding From Bipartisan Infrastructure Law Supports Stable View Of GARVEE Sector," Dec. 6, 2022).

Public mass transit:  Our negative sector view reflects our view that many public transit operators that depend on fare revenue face uncertainty as pandemic-related federal aid runs out over the next few years. We expect providers that have looked to fare revenue to support service levels will have to make tough decisions in the near term about sustainable tax and revenue models going forward. As ridership recovery remains slow, we believe the long-term credit quality of many transit operators will depend on their ability to adjust operations and align financial performance to achieve structural balance after federal aid is depleted. Even public transit systems not as dependent on fare revenues face challenges related to weak ridership levels as they balance funding sources and service level while supporting their public missions. However, our data suggest public transit operators receiving significant tax support will likely continue to demonstrate relative credit stability in 2023, with those in the 'AAA' and 'AA' category that generally derive more than 60% of revenues from taxes maintaining debt service coverage (DSC) and debt-to-net revenue metrics near pre-pandemic levels (see "U.S. Transportation Infrastructure Transit Sector Update And Medians: Long-Term Funding Decisions Loom For Many Mass Transit Operators" Sept. 8, 2022).

Appendix

Key transportation sector demand indicators

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Chart 11

Related Research

Commentary

• U.S. Public Finance Year In Review: Credit Stability. Will It Last? Dec. 6, 2022
• Global Credit Outlook 2023: No Easy Way Out Dec. 2, 2022
• Cyber Risk In A New Era: U.S. Transportation Infrastructure Providers Remain Vigilant On The Road To Cyber Preparedness, Oct. 26, 2022
• Industry Report Card: Global Toll Road Industry, Oct. 11, 2022
• Will Prolonged Higher Fuel Prices Slow The Rebound In U.S. Transportation Demand?, May 12, 2022
• Construction Cost Inflation Weighs On U.S. Public Infrastructure Investment, April 14, 2022

Ratings lists

• U.S. And Canadian Public Port Facilities Ratings And Outlooks: Current List, Dec. 13, 2022
• U.S. And Canadian Airport Ratings And Outlooks: Current List, Dec. 7, 2022
• U.S. And Canadian Municipal Toll Road Ratings And Outlooks: Current List And Recent Rating Actions, Nov. 18, 2022
• Global Mass Transit Ratings And Outlooks As Of Sept. 23, 2022, Sept. 23, 2022
• U.S. Public Parking Facilities Ratings And Outlooks: Current List, May 4, 2022