Tracking the Transportation Sector during the Pandemic

A survey of how public transit systems, toll road operators, and airports are responding to the crisis.

Read time: 4 minutes

This article is from the Q2 2020 edition of The Muni Quarterly.

Within municipal markets, the transportation sector encompasses a wide range of activities, mainly public transit, toll roads and airports. As such, it was one of the sectors hardest hit by COVID-19. Given the essential nature of the services and strong government support, we believe each area of transportation is likely to recover, although not all at once.

Transit Operators Get Support from Governmental Subsidies

At the peak of the COVID-19 outbreak in April, the country’s largest transit system, New York’s Metropolitan Transportation Authority (MTA), saw subway and bus traffic down more than 90% from the prior year, as well as a large amount of employee infections.  Similar drops in traffic occurred across the country for other transit operators. Reduced ridership yielded sizable operating deficits and created questions over the long-term demand for transit in metropolitan areas.

Despite ongoing pressure, support from the State and Federal government keeps the MTA solvent.  All transit lines across the country are subsidized in some way by the local, state and federal government, as fares aren’t sufficient to cover the cost of operations.  It is typical for transit system bonds to be supported by sales tax revenues or other local taxes, which results in high credit ratings.  For example, Metropolitan Atlanta Rapid Transit Authority’s (MARTA) debt is backed by a pledge of a sales tax levied in the three surrounding counties, garnering the system an AA+ rating from Standard & Poor’s (S&P).   Washington Metropolitan Area Transit Authority (WMATA) finds support in payments from the District of Columbia, State of Virginia and Maryland, and recently priced a deal rated AA by S&P.  A variety of taxes and fees also support the MTA (A- by S&P). Although revenues backing these bonds have also come under pressure due to lower economic activity, they typically remain more than adequate to continue to cover the required debt service payments for their respective transit systems.

The federal government identified the need of transit systems across the country when it passed The CARES Act in March, allocating $25 billion for transit.  The disbursed funds helped stem operating deficits for transit operations.  Although issuers in this the sector have already experienced some pressure from ratings agencies, they continue to access the capital markets, as transit systems like the MTA and  WMATA recently issued bonds.  We believe it is likely that additional federal and state and funding will be received to prevent cuts to service.

Figure 1. Pandemic Derails Subway Ridership in New York City

Data for the period February 3, 2020–May 22, 2020

Source: New York Metropolitan Transportation Authority.

Toll Roads and COVID-19

As businesses and office buildings shuttered during the outbreak, traffic on the roads dwindled and so did revenue for municipal toll operators.  From March 8 through the end of April, the New York State Thruway Authority saw a 48% drop in traffic and 36% drop in revenue from the prior year.  For some roads, such as Ohio Turnpike, the New Jersey Turnpike and North Texas Toll Authority, traffic was down more than 50% during the month of April.  However, truck traffic didn’t see the same declines as passenger traffic due to the essential nature of services provided.  For the Pennsylvania Turnpike, where truck traffic represents 44% of revenues, volume for trucks fell only 25%, while passenger traffic decreased 67%.  In Ohio truck traffic declined only 13% while total traffic narrowed by 68%.  We are seeing some indication that traffic is again building as business and offices reopen across the country, following a similar path as seen in Asia.

For most toll operators, the revenue plunge during the first half of 2020 can be offset by strong liquidity cushions.  Per the last available fiscal audits, we found that over 60% of toll road operators had over a year’s worth of operating cash, with the average day’s cash calculation for our sample group of 75 borrowers at 527 days’ cash on hand.  Another offsetting strength for the sector is that most borrowers have full rate-setting authority to partially offset the drop in traffic. The New Jersey Turnpike passed a 36% increase in tolls in May 2020, with Governor Phil Murphy’s approval, while many other facilities have the fully ability to raise rates without legislative or state authorization.

Toll roads were not granted any funding as part of the CARES Act, but we believe they should be able to manage, given strong liquidity and what will likely be a quicker recovery than, say, airports and transit credits.  There are still some questions regarding the long-term impact of COVID-19, with many companies transitioning to work-from-home, but that challenges could be offset by increased car trips in lieu of flying.  There is also potential for additional funding down the road as infrastructure spending remains an important topic in Congress.

Airports’ Liquidity–and Federal Aid–Drive Resiliency

The pandemic substantially reduced U.S. air traffic, with throughput falling through March and remaining 95% below 2019 levels throughout all of April. Activity has since begun to pick up though travel is still 85% below last year’s levels as of the first week of June. International travel has been particularly hard hit due to restrictions on flights to and from the United States imposed by Washington and governments elsewhere.

Figure 2. Aisles of Empty Seats for U.S. Airlines during the Pandemic

Data for the period March 1, 2020–June 1, 2020

Source: U.S. Transportation Security Administration via www.tsa.gov.

It is assumed by many that airports receive revenues directly from passengers using the airport.

What is not widely understood is that it is the airlines themselves that pay landing fees and terminal rentals to operate at the airport; these payments support airport municipal bonds. The airlines have long-term fee agreements with airports; failure to pay would mean losing the ability to operate at a given airport. So although there is a slowdown in traffic now, it is hard to imagine a circumstance where airlines would abandon terminals in cities that have significant economic bases.

Airport resiliency will come largely from their strong liquidity position going into the pandemic. Based on a sample of the 55 largest airports in the country, average liquidity position was 601 days cash on hand with average unrestricted cash balance covering annual debt service by 4.6x. Additional relief came from the CARES act, with airports receiving $10 billion, allocated according to enplanements, debt service requirements and reserve levels. For the group of 55 airports, the average CARES Act grant was 1.5x debt service. Airports also benefit from a relatively high degree of flexibility when it comes to capital spending. Most capital projects are expansionary in nature and can be deferred in times when demand is depressed.

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