Constant reminders that COVID-19 ‘does not discriminate’ seem in stark contrast to the social and economic consequences playing out in front of us. Some sectors are clearly being hit harder than others – perhaps none more so than transport. Laurence Monnier looks at the long-term implications for the industry and its supporting infrastructure.
7 minute read
Transport has provided rich pickings for infrastructure investors. From road renewal to new trains and airport privatisation, the sector has accounted for on average 35 per cent1 of European infrastructure investment in the past ten years. Growing economic activity and tourism (notably from Asia), has led to increased traffic levels.
In fact, until recently the sector has been relatively untroubled since the Global Financial Crisis, which exposed its vulnerability to economic cycles, as highlighted by debt restructurings in Spanish motorways and US ports. But even then, traffic rebounded fairly quickly after the recession.
Transport finds itself in the eye of the storm
However, with COVID-19 causing a near shutdown of economic activity in many industries, transport finds itself in the eye of the storm. Looking beyond the immediate impact, we make three predictions for the outlook for the sector in 2020 and beyond:
- In the near term, with goods transport more resilient than passenger traffic, ports and motorways with a high proportion of heavy goods vehicles should perform better. Airports look the most vulnerable, but strong government support is expected for key assets.
- In the medium term, tourism will rebound. However, demand for air travel is likely to be subdued for longer as the recession hits and international routes take longer to open. Additional health and safety measures could be implemented, at least until a vaccine is widely available, which may increase the operational costs of transport assets.
- Longer term, technological innovation tested during the COVID-19 pandemic, such as automatic vehicles (AV), is likely to benefit the transport sector, including public transport. The consumer trend towards more environmentally friendly travel may also be accelerated.
We see three phases for transport evolution:
- Lockdown (2-3 months): restrictions on general transport with the exception of essential public networks.
- COVID-19 management pre-vaccine (12-18 months): the lockdown is progressively lifted to allow more economic activity, but containment strategies remain, which will vary by country. This may combine social distancing (particularly for more vulnerable people), tracing and isolation, and widespread testing with the potential for further periods of lockdowns if the situation worsens. We expect to see some domestic travel during this period. Hotels and restaurants – if allowed to open – may have to introduce distancing measures. International travel is likely to be curtailed for longer as each country seeks to protect its population.
- Once a vaccine is available, transport restrictions are expected to be removed, but consumer preferences may have changed.
Rising unemployment and negative sentiment will combine with health worries to reduce travel demand
Concurrent with these phases, a severe recession appears now unavoidable. In the latest House View by our Liquid Markets investment teams, we examine three recession scenarios. Even in the most optimistic of these three scenarios, it will take until late 2021 for economic activity to revert to 2019 levels2. Rising unemployment and negative sentiment will combine with health worries to reduce travel demand.
Goods traffic and essential transport should prevail
The current pandemic is creating a shock to both production and consumption. Supply chains are being disrupted and many factories have been closed. Nevertheless, during the first three phases the flow of goods is likely to be prioritised and remain more resilient than passenger traffic.
Commercial ports should be less affected by COVID-19 than passenger ferries and airports
Indeed, the European Commission was quick to propose “green lanes”– fast-track border crossings open to all freight vehicles whereby checks and health screenings take no longer than 15 minutes. As a result, commercial ports should be less affected by COVID-19 than passenger ferries and airports.
However, there are nuances, and any useful analysis should assess the specific goods being transported. The graph below illustrates the volume through the top 30 UK ports, and across the EU respectively. It shows that, while the average volume drop was moderate during the last recession (less than ten per cent), it varied greatly with imported motors (i.e. roll-on/roll-off) and commodities faring particularly badly. Therefore, although the magnitude of the current economic shock could lead to a more severe downturn, similar patterns of differentiation could well be repeated.
Figure 1: UK major port traffic (000T)
Figure 2: Goods transported in EU ports (000 T)
For motorways, the impact of the lockdown has been drastic, with traffic declining by as much as 80 per cent compared to last year. However, as mentioned, the flow of goods should hold up better than car traffic. Heavy goods vehicles (HGVs) typically pay two to three times more than cars to use tolled motorways. So, a motorway with 25 per cent HGV that loses 60 per cent of traffic (five per cent from HGV and 55 per cent from cars) can lose 35 per cent of revenues during lockdown.3 Conversely, a motorway transporting only cars would lose 60 per cent of revenue.
Where travel can resume before the summer holidays, the overall impact on the year should remain manageable
Once the lockdown is removed, car traffic should rebound. Where travel can resume before the summer holidays, the overall impact on the year should remain manageable, although motorways carrying high volumes of cross-border tourism are more vulnerable. Many of the privately-owned toll roads have enough liquidity to cover six months of debt servicing costs, which should help them withstand a temporary but severe downturn in traffic.
Figure 3: Weekly motorway traffic, change v 2019
Clear skies are bad news for airports
Transport restrictions are inflicting a particularly heavy toll on airports and the outlook for them is bleak. Several large airports, including Orly in Paris and London City, have suspended operations as airlines ground their fleet.
In a recent report, International Air Transport Association highlighted that airlines held on average two months’ worth of liquidity at the start of the year, although stronger airlines had substantially more. In Europe, governments will support national airlines: Alitalia has been nationalised and rescue plans are being discussed elsewhere. Weaker airlines could fail, however, reducing competition.
We expect European airports, to be supported by their shareholders and potentially by European governments given their strategic importance
Some level of International travel restrictions could remain until a vaccine is widely available, although the exact extent is unpredictable. Even as routes do re-open, we expect them to do so progressively. And while government support for furloughed employees allows airlines to keep much of their workforce intact, they will likely focus on the most profitable routes. Amid this bleak outlook, the liquidity position of airports will be paramount. Ultimately though, we expect European airports, to be supported by their shareholders and potentially by European governments given their strategic importance.
How is air traffic reopening in China
Chinese domestic routes have reopened but the number of flights remains approximately 60 per cent below the start of the year, while international routes remain currently closed, 3.5 months after the start of the crisis.
Figure 4: Chinese domestic flights (January 1 – April 7, 2020)
Figure 5: Chinese International flights (January 1 – April 7, 2020)
Tourism rebound may be blunted by recession
At some point in the next couple of years, a vaccine will be available for COVID-19 and travel restrictions will be fully lifted. While it is difficult to predict with any confidence what will happen to tourism over the short-term, there will likely be strong demand from those people who are able to travel who once fears over health risks subside.
Asia has been leading tourism growth in the past decade, and there are tentative signs that demand for travel is returning there. A recent survey by the China Tourist Academy,4 showed that about half of respondents expect to travel before the end of June if the health situation is controlled. This small sample survey does not, however, reflect the impact of the economic turmoil.
In Europe, unemployment is already rising and consumer confidence plummeting
In Europe, despite massive stimulus packages, unemployment is already rising and consumer confidence plummeting. This may moderate demand for some months. Business travel will be particularly affected as companies slash travel budgets. Essential client meetings should continue, but event-based business travel could be curtailed until later in the recovery phase.
Looking beyond the recession, experience has shown how quickly tourism can rebound.
Figure 6: International arrival per region and departure/population
Of course, travel by train or plane will involve coming into close proximity with a lot of strangers. Pre-COVID-19 pictures trigger questions over whether our obsession with travel will be resumed or whether people might decide to shy away for a while.
After a long quarantine, some Wuhan inhabitants are reportedly afraid to leave their homes. Adjustments may be needed to reduce crowding. India’s aviation regulator, for instance, is considering measures to ensure social distancing among air passengers, such as leaving middle seats empty, and implementing social distancing measures at airports.5
Measures will vary by country and will impact operational costs and efficiency
Other forms of control are being employed, such as additional sanitation, health checks and medical certificates. These measures will vary by country and will impact operational costs and efficiency. This particularly applies to ports and airports as they are more operationally intensive, requiring more staff than other infrastructure assets. On March 19, Port Houston suspended operations at two of its container terminals as an employee tested positive for COVID-19. This short-term closure highlights the operational fragility of ports and airports. Operational leverage also has a financial impact: margins fall faster as revenues drop.
It is too early to say how long additional safety measures will remain in place. However, they may provide reassurance. Over the medium term, tourism should rebound as the demographic trends underpinning its growth are intact, and fears of crowds are unlikely to curtail the pent-up demand for long.
Longer term: Towards more flexible, greener travels?
The current crisis has accelerated innovation that will have benefits in many areas, particularly public transport.
Flexible working patterns in many industries are likely become more widespread
Nowhere is crowding more intense than on urban public transport. Yet, many key workers continue to rely on these essential services. This is not without personal risk: nine bus drivers in London have so far died of COVID-19, as of early April. Many workers across Europe are now working from home, including those in professions where home working was not prevalent previously, such as doctors and teachers. After this experience, flexible working patterns in many industries are likely become more widespread. Face-to-face meetings will still be important, but their location and times may become more variable.
These changes to people’s working practices could have long-term consequences for the way public transport is used. They may even reduce peak demand and better distribute usage. The need for demand-responsive transport will therefore rise. In some places, such systems already exist. For example, Oxford utilises an app that helps manage an on-demand minibus ride-sharing service.
It is possible more flexible public transport systems will emerge, potentially using automated vehicles to reduce drivers’ exposure to viruses
In future, it is possible more flexible public transport systems will emerge, potentially using automated vehicles to reduce drivers’ exposure to viruses. The crisis has created conditions for such technologies to be fast tracked. For example, a Chinese company JD.com made its first delivery in Wuhan by autonomous logistic vehicle in February, and another is piloting automated vehicles for delivery in Beijing. These initiatives rely on the support of 5G networks – due to be rolled out in Europe. While automated, demand-responsive, low emission bus networks remain some way off, advances in technology should speed up this evolution.
Another trend that could be accelerated is clean transport. While the lockdown has harmed the economy, it has highlighted the environmental cost of capitalism. NASA satellite pictures of pollution before and after lockdown in China clearly illustrate this.
Figure 7: Clearing the air
Transport causes significant pollution, and no clean alternative is currently available for air travel. In 2019, some signs of air travel reduction started to emerge. For example, in Germany demand for domestic and European travel fell. However, environmental concerns do not appear to have impacted demand in Asia yet.
Figure 8: Greta effect?
Too early to predict how much European customers will have changed their consumption attitude to improve the environment
Whether or not environmental awareness will spread as lockdown measures reveal the true polluting impact of economic activity remains to be seen. In the near term, pent-up desire for mobility could outweigh any environmental concerns. Furthermore, mounting health and economic concerns could mean that concerns over climate change take second place; the postponement of COP26 in Glasgow hints at this. Ultimately, it is too early to predict how much European customers will, after some months at home, have changed their consumption attitude to improve the environment. Yet, we expect the preference for greener means of transport to accelerate.
One thing we can be sure of is that the transport sector will remain at the heart of this crisis. However, understanding the true supply and demand dynamics, particularly which are temporary versus structural, will be key. The varying underlying characteristics of assets could result in very different outcomes, and government intervention for certain strategic assets will complicate matters further.