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January 18, 2021

Smith's Research & Gradings

Fitch on Transportation

Fitch on Transportation

The Fitch 2021 US Transportation Outlook webinar was moderated by Scott Zuchorski, head of North America infrastructure and project finance group. He was joined by his colleagues, Seth Lehman, Scott Monroe, and Emma Griffith, who lead Fitch's efforts in the airport, tollroad and seaport sectors respectively.

Mr. Zuchorski said, "It certainly is an understatement to say 2020 was a year unlike any other due to the devastating impacts of the coronavirus pandemic, with no infrastructure asset being hit harder than demand-based transportation."

Fitch expects airport traffic in 2021 to remain under pressure; air traffic has not recovered meaningfully over the past six months. Fitch's forward-looking perspectives on the environment for air travel has focussed on travel demand, which received the most questions during 2020. Mr. Lehman said, "It is clear that 2020 is a year most airports will not want to remember for the massive disruption of the aviation sector caused by COVID-19, leading to traffic declines at unprecedented levels."

Airports, even in the most stable mature markets, both in the US and Canada, were impacted. The pandemic has been transformative and will result in the longest downturn in air travel in history, according to Mr. Lehman. Daily U.S. air traffic remains down in the 60% to 70% range compared to 2019. Traffic at some leading Canadian airports are down 80% primarily due to travel restrictions to and from the United States and other foreign destinations.

Not all airports in the U.S. are facing the same severity of loss levels. Domestic regional airports used for leisure travel and airports operating in states that are less restrictive in keeping businesses open, are showing better results.  Airports more dependent on international business travel are performing worse. Mr. Lehman explained these trends may continue for at least the next several months and some of the performance factors will have a multiyear recovery time frame.

Studies have shown that there is uniform strong correlation between air travel growth and key economic indicators such as national GDP or income levels.  However, COVID-19 has created temporary decoupling of the typically strong tie between the major economic metrics and air traffic performance. In 2020-2021,

Fitch expects a great separation of this relationship, but in the years that follow, there will likely be a somewhat more normalized correlation.

Airports and industry consultants have expressed cautious optimism for recovery now that a vaccine has been approved and distribution is underway.  But, none are understating the challenges ahead for a rebound. In the near term, Fitch expects an uphill battle for three reasons: Coronavirus case counts are currently at peak levels; the rollout of approved vaccines is not as rapid as anticipated; and airlines are still facing financial challenges, operating at cash burn rates that are not sustainable.

Fitch still believes that air travel remains an essential component to transportation when taking a medium or longer-term time frame under consideration. Air travel plays a key role in sustaining the global economy and there is pent-up demand for business and leisure travel once the virus is behind us. Timing is the greatest area of uncertainty.

The second spike in coronavirus has hit since publication of Fitch's most recent tollroad traffic forecast, with restricted lockdowns being reimposed in some states towards the end of 2020. This development impacted December traffic so the question Fitch asked: How does it affect the traffic performance and the credit views moving forward?

Scott Monroe explained that it usually takes about six weeks to get traffic and revenue data from toll roads — so extensive data is not available. Fitch is starting to get a trickle of data from a small subset of tollroads showing a marked slowdown through late November and continuing into December. It is not clear whether this is indicative of the sector as a whole.  

"What we are likely to see for Q4, based on the subset of data, is performance moderately below Fitch's forecast, which was about a 20% decline in Q4 compared to the year prior. It's important to look at Q4 in the context of what happened in calendar year 2020. Tollroads performed pretty well compared to Fitch's expectations, especially because of the fairly rapid rebound in Q2 and Q3."  Fitch expects fiscal stimulus under the Biden Administration will be a positive to the sector. And, Fitch economists expect that the U.S. economy will be back on track to 2019 levels by the third quarter of 2021.

Ports have been somewhat resilient in 2020 compared to airports and tollroads, especially on the cargo side. There were some substantial dips in May and June, but overall there was an 8-10% decline in cargo volume during 2020 among the ports that Fitch tracks. Issuers had been expecting a 25% decline.

"While overall consumer spending has been down, the demand for goods has remained pretty strong, in part due to the support of fiscal policy, home improvements, as well as other drivers," Ms. Griffin said. "We continue to see recovery with some ports having problems with record throughput performance and they are struggling with handling congestion"

The biggest negative impact has been with cruise ports. Cruise revenues fell to zero. The bulk of the negative actions for ports have been those with 10% or more of their revenues tied to cruise activity. Some ports with real estate components, such as San Francisco and San Diego have seen heightened revenue stress, but not to the extent seen with cruise.

Looking forward, cargo may be pressured depending on economic performance and political uncertainty. Fitch does not expect a full recovery to 2019 levels until early 2022. Cruise will be more of an uphill battle and will not see pre-pandemic levels before 2024.

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