DALLAS – Toll roads, airports, and seaports will benefit in 2016 from increases in traffic and trade triggered by a strengthening economy and falling fuel prices, Standard & Poor's said in an outlook for the public transportation sector.
"Decreased fuel prices lead to increased demand for transportation as it becomes less expensive for consumers to drive and to fly," said S&P credit analyst Peter Murphy. "We expect 2016 to be another year of stable credit quality for the transportation sector."
The S&P analysis is based an expected increase in gross domestic product of 2.7% in 2016, up from an estimated 2.5% in 2015, and a decline in the unemployment rate to 4.8% from the current 5.0%.
When employment increases, there is more demand for personal and business travel and for consumer goods, Murphy said.
"This tends to affect cargo shipping volumes and business and recreational travel," he said. "When unemployment rates are low, transportation authorities may be more willing to raise rates that improve financial performance."
The sector, which also includes bonds secured by parking systems, transit systems, and grant anticipation revenue vehicles (Garvees) backed by direct federal payments for highway and transit programs, dealt with a lot of uncertainties in 2015, Murphy said.
Capital needs are increasing across the sector because most of the U.S. transportation infrastructure was built decades ago and now must be repaired or replaced, according to the outlook report.
"The sector will continue to face some minor turbulence and bumps in the road in 2016, with perhaps some positive news for certain Garvees bonds," he said.
Garvees are supported by the federal transportation funding system, Murphy said, which was extended through fiscal 2020 by the five-year Fixing America's Surface Transportation Act (PL 114-95) that became law in early December.
"The FAST Act, we believe, alleviates uncertainty surrounding funding for the Highway Trust Fund, which we previously cited as a credit weakness," he said. "We will continue to monitor the sector to evaluate how individual issuers may readjust their capital spending plans given the new law."
S&P has capped 11 of its 26 Garvees sector ratings at AA, one notch below its AA-plus sovereign rating for the U.S, due to the link to the federal government as a funding source, Murphy said.
Significant drops in the price of gasoline, which fell by 93 cents per gallon in 2015, and diesel, which dropped by $1.01, are a credit positive for toll roads because they lead to more traffic, he said.
Motorists are also less sensitive to toll increases when fuel prices are low, which could result in more operators raising their rates in 2016, he said.
More states will be considering tolls on existing interstate highway lanes to increase their infrastructure funding in 2016, Murphy said.
Connecticut, which banned tolls in 1985, may toll trucks to help fund a $100 billion transportation plan, and Illinois is considering adding express toll lanes in the Chicago area, he said.
"Although implementing tolls can be politically difficult, we expect these discussions will become more common as needs continue to grow and if funding remains scarce," Murphy said.
Airline consolidations over the past several years have not harmed the overall airport sector credit quality, but small regional airports could lose traffic in 2016 to larger hub airports, Murphy said.
Most airport projects for the next few years will involve the reconstruction or rehabilitation of existing facilities, with new construction focused on security needs, according to the outlook report.
"Modest to slow-growing demand in the past several years has provided some airports with breathing room in terms of having to complete capital expansions," Murphy said. "Nevertheless, airport capital needs are sizable, and funding them will remain an issue."
