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Fitch: U.S. enplanements, traffic & TEUs: downside risk more limited; upside uncertain

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17-Dec-2009 Looking ahead at 2010, Fitch Ratings expects a move towards stability for the U.S. transportation sector but a rebound in performance and credit quality will experience some roadblocks.

During 2008 and the first half of 2009, the major performance indicators of the U.S. transportation system (vehicle miles traveled (VMT), twenty foot equivalent units (TEUs), and enplanements) were down significantly, and Fitch's view of the throughput and financial performance of toll facilities, seaports and airports has been negative.

In fact, since August of 2008, Fitch's U.S. transportation credits saw a downgrade on approximately 10% of the universe of covered credits and many facilities saw throughput drop to levels seen in the early part of the decade, and in some cases the mid to late nineties. As we head into 2010 with a glimmer of stability, the question remains: what will 2010 bring in terms of performance and credit quality?

'Transportation credits should see more stability in 2010, with airports likely to experience the most pressure due to consistent high unemployment in the U.S. and travel demand far from pre-recession levels' said Mike McDermott, Managing Director at Fitch. 'Credit quality of toll roads and seaports will rely heavily on management of leverage and operating costs.'

On the toll road side, Fitch has started to see growth in monthly VMT, which should ultimately drive volume on toll facilities to improve as well since free roads operate much closer to capacity than do toll roads. In fact, a number of toll facilities do appear to have experienced relative stability in the third quarter, compared to the same period in 2008, with one or two months actually above levels in 2008. As the economy comes out of the downturn, Fitch still expects volumes to trend between stability and very modest growth over the course of 2010 and into 2011. During this period credit quality will be driven in large part by management decisions.

For some credits, a move to rating stability could occur by the end of 2010 if the recent stability that is developing holds and financial margins show improvement. For others, additional borrowing based on optimistic assumptions will likely be the primary reason for any negative credit action rather than actual performance. In all, Fitch expects traffic and credit performance for toll roads to exhibit stability for 2010, with the potential for small improvements.

For U.S. seaports, the stress started later in 2008 given longer lead times but the declines were much larger than what toll roads or airports experienced. To date, there has been some indication that waterborne trade has also started to stabilize, but growth still remains elusive. As consumer confidence begins to stimulate industrial output and inventory build-up, there will likely be a jump in port throughput.

In Fitch's view the bounce in throughput driven by a return to economic growth will likely be followed by much slower growth over the next few years as previous growth was tied to robust consumer spending and construction, two areas of the economy that will take longer to return to pre-recession strength. As a result, operating ports will need to focus on managing expenses and net revenue for rating stability while ports that generate the bulk of their income from terminal leases will need to renew terminal leases with favorable terms including minimum annual guarantees that provide downside protection.

Given consumer trends and economic expectations, favorable lease terms could be hard to come by. From a ratings perspective, both types of ports will need to carefully manage leverage over the next one to five years. The expansion of the Panama Canal and competition by rail will result in changes in goods movement. Ports that borrow in hopes of gaining market share before the impact of the changes are fully understood could be left with debt and facilities beyond what they can actually capture.

U.S. airports have experienced one of the longest and deepest passenger declines in the last two decades as passengers and airlines have been hit by a confluence of events. To date, most airports have responded to this stress through cost cutting measures, utilizing the balance sheet to ease the growth in airline use and lease payments and deferring capital spending.

While the large reduction in volume has not translated into a one-for one decline in net revenue, net margins and debt service coverage have narrowed in many cases. Management actions have mitigated the impact of the downturn but it is Fitch's view that business and leisure travelers still remain sensitive to price increases and industry consolidation remains a risk. While the decline in passenger volume appears to be bottoming out, the impact of price increases and/or consolidation could spell further changes for some airports. The U.S. airport industry, and thus credit quality remains in a state of flux.

Across the three sectors, toll roads have thus far demonstrated the least impact of the recession, with seaports and airports demonstrating more volatility. This is reflective of the purpose of the asset type, with most toll roads having a revenue stream with less discretionary attributes than ports which are more dependent upon consumption, and airports which can have a fairly high percentage of revenue derived from leisure travel.