European transportation sectors were unequally affected by the coronavirus crisis and will recover at different paces, Fitch Ratings says.
Air traffic is most affected by travel restrictions and will take until 2024 to recover to 2019 levels, putting pressure on airlines and airports. Although these sectors will improve in 2021 compared to 2020, supported by vaccination roll-outs, passenger traffic will still be 55% lower than 2019, which was revised down from 45%.
Leisure and domestic traffic will recover faster than business and long-haul traffic, causing recovery speeds to vary within the aviation sector. Low-cost carriers (LCCs), such as Ryanair and Wizz Air, are better-positioned due their agility and pent-up demand from leisure travellers.
In contrast, legacy carriers, such as BA, are facing lacklustre recovery due to high exposure to long-haul traffic, single-country base operations and weaker corporate demand. Domestic markets in large countries such as Russia proved resilient, cushioning the performance of Aeroflot and Domodedovo.
Airport tariffs and slot rules will be important in the pace of airports’ and carriers’ cash flow recovery. Airport tariffs are re-set regularly, but it will be more difficult to increase them in a situation of massive overcapacity. There is an incentive for airports to offer tariff discounts to attract higher passenger volumes, which would also support commercial revenues. Airlines are also focused on offering competitive fares to stimulate a demand recovery and are seeking cost efficiencies, including potential airport fee reduction. Therefore, airport fares may remain fairly flat – or even be cut.
Slot extension rules favour legacy carriers in prime airports. This disadvantages LCCs that are unable to move to prime airports and their existing base airports would have less incentives to offer discounts on airport charges to retain them. Airport charges constitute a higher portion of LCCs’ costs than that of legacy carriers.
Toll roads’ recoveries will depend on relaxation of social distancing in Europe. We expect traffic to remain 15% lower in 2021 than in 2019, and to fully recover in 2022 at the earliest. Regulatory asset base pricing mechanisms in some toll road concessions should allow concessionaires to recover revenue lost due to traffic declining during the pandemic, although high tariff increases may lead to growing political interference risks.
Recoveries in the railway sector will depend on issuers’ business models. We expect a full recovery in infrastructure managers’ revenue (including grants and contributions) by end-2021 due to a recovery in train traffic, especially freight volumes, further supported by a regular annual increase of access charges. However, re-introduction of severe in-country travel restrictions could postpone this recovery to 2022.
We do not expect passenger numbers to return to 2019 levels during 2021. Train operators, including transport operator businesses within integrated groups, will recover more slowly, with revenues reaching 2019 levels by end-2022 at the earliest. EBITDA recoveries will follow operating revenue trends, but could be accelerated by cost-cutting.
A drop in rail traffic does not fully translate into a revenue decline as a large share of a railway company’s revenue comes from public service contracts. Furthermore, state support has been forthcoming to offset revenue losses, with a spate of recapitalisation and operating subsidies for SNCF, Deutsche Bahn and Ferrovie dello Stato Italiane. State support will remain the main driver for these companies’ ratings.
A recovery in trade will drive ports’ performances, with larger, vertically integrated and geographically diversified port operators, such as DPW, recovering faster than single-asset or concentrated operators. We expect ports traffic to reach 2019 levels by 2022.
Most companies in the European transportation sectors have comfortable liquidity positions and could access capital markets issuing long-term bonds and hybrids in 2020, which should help sustain operations while revenue and cash flow are recovering.
