Transportation outlook stable for 2018, but could change with tax reform, Fitch report says

Tax reform, trade policy and anticipated interest rate hikes each could impact the transportation infrastructure sector in the coming year, according to Fitch Ratings in its 2018 transportation infrastructure outlook report.

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In the recently released report, Fitch projected stability for U.S. transportation infrastructure, citing economic and population growth and low fuel prices as stimulants to the sector as a whole. Fitch projects traffic growth for U.S. toll roads, improved airport performance and steady growth trends for port cargos in 2018.

However, tax reform legislation may negatively impact projected growth for certain transportation sectors, the report said. Potential changes to the tax-exemption of certain municipal bonds, as well as shifts in interest rates could potentially slow growth.

But tax reform could also have some positive outcomes.

“While tax reform will increase costs for capital improvements for the U.S. transportation assets in the near term and may limit issuer options, it would deepen the pool by opening up investments to a larger investor base,” said Cherian George, Fitch’s managing director.

At the same time, the tax reform plan before Congress could eliminate the tax exemption for private activity bonds and non-profit bonds, which could slow momentum for public private partnerships (P3s) in transportation infrastructure development.

According to the report, the Trump administration’s foreign policies with Mexico could also potentially alter projected growth in traffic levels. Changes in relations between the United States and Mexico could negatively impact commercial traffic between the two countries and their bridge systems. Increased border security could also potentially make travel between the two countries less attractive.

Fuel prices could also impact growth for toll roads. Current gas prices are stimulating greater driving habits, the report said, but a shift back to higher gas prices as were seen between 2011-2014 could affect toll road growth.

Fitch rated airport performance as stable-to-positive, adding that rising traffic levels are expected combined with a continuation of generally positive industry fundamentals for airlines. Airport financial operations also are seen adding to the stable outlook. Fitch projects 2.5–3.5 percent passenger growth in 2018, mostly at large and medium hub airports.

Analysts said aviation-related proposals being debated in Congress might change that projection, including a proposal to increase the cap on passenger facility charges (PFC) from $4.50 to $8.50. PFCs are levied by airports on airline tickets for each departing flight on a round trip in order to help pay for capital improvement projects.

“The key thing will be whether they raise the PFC rate, which could negatively impact traffic levels,” said Scott Zuchorski, senior director with Fitch’s Global Infrastructure and Project Finance Group, told Transportation Today. “Whether it will or not is unclear. The president has indicated that he’s not interested in a raise in PFCs …,” he said.

The outlook for U.S. ports is stable as well, the report said, with projected 2–3 percent growth in cargos.

But again, the report said, tax reform and trade policies within the Trump administration could impact port performance.

The Trump administration’s efforts to renegotiate trade agreements and tariffs, such as the withdrawal from the Trans Pacific Partnership and efforts to renegotiate the North American Free Trade Agreement, if successful, could potentially affect import and export volumes, as well as shift trade routes.

Additionally, the report said, tax reform could impact demand for municipal bonds, and ultimately reduce the funding available for municipal issuers. Elimination of PABs would also limit options for ports in regards to funding their capital needs.

On Wednesday, the Federal Reserve announced it would raise interest rates for the third time in 2017, citing an improving economy and labor market. The benchmark interest rate rose to between a range of 1.25 percent and 1.5 percent.

While the rate hike will not impact transportation debt ratings, it makes projects more expensive, said Seth Lehman, senior director with Fitch’s Global Infrastructure and Project Finance Group. “Capital costs will remain the same, but the interest rate will increase, which could potentially make the projects cost prohibitive.”