Transit faces a fiscal cliff, S&P warns

Despite economic headwinds, most U.S. transportation sectors are expected to enjoy a continued post-pandemic recovery in 2023, along with a likely bump in capital spending – but it’s a different story for public transit operators, who face fresh challenges as federal support runs out.

That’s the view of S&P Global Ratings, which revised its sector view on public transit to negative from stable. Fitch Ratings, in its own transportation outlook, also said that airports, ports and toll roads should see continued growth this year.

“2022 was the year of recovery, with the exception of transit,” S&P analyst Kurt Forsgren said last week in a webinar.

With transit, “there’s a lot of talk about a fiscal cliff,” Forsgren said. “Clearly we’re going to be watching how those operators are responding to the challenge and filling the hole left by fare revenues.”

Economic uncertainties for the sector include a likely recession, high inflation and interest rates and a tight labor market.

“Although Fitch projects a mild and relatively short-lived economic softening in 2023, we expect growth to remain modestly positive for the year, and for transportation enterprises to retain recent years’ financial and volume gains following sizable losses early in the pandemic,” it said in a recent report.

“I view this as a time of fundamental transition for the transportation space,” Fitch analyst Scott Monroe said in a webinar Wednesday.

S&P’s negative view on transit comes as operators spend down more than $70 billion in federal aid that propped up credits as ridership plummeted during the pandemic. With as many as 50% of workers continuing to work from home most of the time, ridership is expected to remain depressed over the next few years, analysts said.

S&P estimates that transit ridership reached 67% of 2019 levels as of mid-December 2022, and will reach only 80% to 85% of pre-pandemic levels by 2026.

The highest post-COVID office occupancy rate reached 49% in November 2022, S&P said.

Large, fare-dependent operators like New York’s Metropolitan Transit Authority and Bay Area Rapid Transit are suffering more than those that rely on taxes, like the Los Angeles County Metropolitan Transportation Authority.

“We believe it’s likely that [the ridership] metric will not recover to near-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,” S&P said.

The key question for many operators is whether they’ll be able to find a replacement revenue as federal aid runs out, S&P said.

Fare-dependent agencies “will have to make tough decisions in the near term about sustainable tax and revenue models going forward,” S&P said. “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.”

Separate from pandemic aid, transit operators are in line for $108 billion from the Infrastructure Investment and Jobs Act. Most of the aid requires a local match, so the money could lead to more borrowing by transit operators.

For the transportation sector in general, higher interest rates will make capital projects more expensive, even as many issuers look to re-start capital programs that they’d paused during the pandemic.

Higher borrowing costs “could lead to delays or paring back of capital improvement projects,” but federal infrastructure aid may “serve as a positive counterbalance,” Fitch said.

Airports are back to considering large terminal projects, analysts said.

National air passenger traffic reached up to 95% of 2019 levels by December and S&P projects a full recovery to 2019 levels by 2023. Most airports have either spent all of their federal aid or are expected to do so by the end of 2023, S&P said.

U.S. ports “continued with record levels of containers and cargo imports,” S&P said. Toll road operators, which saw an early recovery from pandemic-related traffic declines, also have the ability to adjust rates based on inflation. Since 2020, 12 of the 15 largest U.S. toll-backed issuers as measured by debt outstanding, raised toll rates to compensate for weaker passenger vehicle traffic, S&P said.