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Industry Economic And Ratings Outlook: The North American Transportation Outlook Remains Stable Despite Uneven Economic Growth Primary Credit Analyst: Philip A Baggaley, CFA, New York (1) 212-438-7683; philip.baggaley@standardandpoors.com Secondary Contacts: Michael E Durand, New York (1) 212-438-5655; michael.durand@standardandpoors.com Madhav Hari, CFA, Toronto 416-507-2522; madhav.hari@standardandpoors.com Lisa L Jenkins, Washington D.C. (1) 202-383-3625; lisa.jenkins@standardandpoors.com Ja
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  Industry Economic And Ratings Outlook: The North American TransportationOutlook Remains Stable DespiteUneven Economic Growth Primary Credit Analyst: Philip A Baggaley, CFA, New York (1) 212-438-7683; philip.baggaley@standardandpoors.com Secondary Contacts: Michael E Durand, New York (1) 212-438-5655; michael.durand@standardandpoors.comMadhav Hari, CFA, Toronto 416-507-2522; madhav.hari@standardandpoors.comLisa L Jenkins, Washington D.C. (1) 202-383-3625; lisa.jenkins@standardandpoors.comJamie D Koutsoukis, Toronto (1) 416-507-2552; jamie.koutsoukis@standardandpoors.comAnita Ogbara, New York (1) 212-438-5077; anita.ogbara@standardandpoors.comBetsy R Snyder, CFA, New York (1) 212-438-7811; betsy.snyder@standardandpoors.com Table Of Contents Economic Outlook Industry Ratings Outlook Rating And Outlook DistributionsRelated Criteria And Research WWW.STANDARDANDPOORS.COM/RATINGSDIRECTNOVEMBER 26, 2013 1 1221614 | 301674531  Industry Economic And Ratings Outlook: The North American Transportation Outlook Remains Stable Despite Uneven Economic Growth The outlook for most North American transportation companies remains stable, despite sluggish U.S., Canadian, andglobal economies. As a result of the U.S. government's partial shutdown and associated debt ceiling confrontation inOctober 2013, Standard & Poor's Ratings Services' economists lowered their estimates for U.S. economic growth thisyear and next. The overall growth trends, however, have not materially changed. Standard & Poor's outlook for business conditions and rating quality in the sector is broadly neutral for the remainder of 2013 and through 2014,although the different subsectors--which range from airlines to railroads to trucking companies--vary in their sensitivityto economic conditions and their balance of supply and demand. Our views on the sector as a whole primarily reflect: ã  Our 2013 and 2014 base-case sector scenario forecasts, which we base on key economic indicators for the sectorand the broader economy. Our baseline scenario forecast informs all areas of our credit analyses. ã  Our downside and upside scenarios for the sector. ã  Our view of the sector's business and financial risk indicators, which include fuel prices and each subsector's balance of supply and demand. ã  Our views on recent and projected access to the capital markets, along with any potential liquidity constraints somesubsectors could face.In our view, the transportation industry faces the following major downside risks this year and next: ã  Slow and uneven growth in the U.S. and global economies; ã  Potential economic and financial effects of further spending cuts or tax increases to address the U.S. budget deficitwhen negotiations resume early next year; and ã  Slower, albeit still solidly positive, economic growth in developing regions such as Asia and Latin America.Most (85%) of our outlooks on North American transportation issuers are stable, while 7% are negative (or onCreditWatch negative), 7% are positive, and 1% is developing. In 2013 thus far, the ratio of upgrades to downgrades inthe transportation sector is 8 to 9, compared with ratios of 5 to 11 in 2012 and 8 to 13 in 2011. Economic Outlook  Given the transportation industry's predominantly cyclical and energy-intensive nature, our base-case outlook primarily reflects those indicators that are the most correlated with general economic activity and energy prices (suchas real GDP growth and crude oil prices). For particular subsectors, we also consider narrower measures, such asindustrial production for railroads and disposable personal income for airlines. The foundation for our overall outlook on transportation encompasses the following expectations: ã  A 15%-20% risk that the U.S. will fall into another recession over the next year. We had lowered our expectation to10%-15% earlier this year, but have since revised the range back to where it was in late 2012. This still reflects animprovement over 2011, when our expectation was as high as 40%. ã  A 15%-20% chance for a quick turnaround of the U.S. economy. WWW.STANDARDANDPOORS.COM/RATINGSDIRECTNOVEMBER 26, 2013 2 1221614 | 301674531  ã  Increases in U.S. real GDP of 1.6% in 2013 and 2.5% in 2014. These expectations, which are lower than ourforecasts of 2.7% and 3.1%, respectively, earlier this year, reflect the impact of the government shutdown (which weestimate shaved 0.6% [annualized] from real fourth-quarter U.S. GDP) and our view that the sequester will likely lastthrough 2014. In our view, we could also see another government shutdown in early 2014. (We estimate the impactof the October 2013 shutdown at $24 billion annualized.). ã  Oil prices averaging $99.40 a barrel this year and $99.81 in 2014 (for West Texas Intermediate crude, or WTI),which compares with $94.21 in 2012.We believe that sequestration, the federal spending cuts that began at the end of March 2013 and are slated to kick inagain on Jan. 15, 2014 (absent a change in legislation), and uncertainty over another potential government shutdownwill likely remain a drag on the economy and prolong the slow recovery. This will likely translate into modest revenuegrowth, at best, for most transportation sectors and potential revenue declines for a few select companies. The goodnews is that companies have been adjusting capacity to reflect changing demand and, as a result, supply and demandare reasonably in balance in most industry subsectors, which should allow most companies to implement modest priceincreases.Narrower measures of economic activity also have an impact on individual subsectors. For instance, our economists'forecast of 2.4% growth in U.S. industrial production in 2013 and 3.1% in 2014 (which compares with 3.6% in 2012)means that railroads will likely see modest volume growth. These companies continue to face reduced demand forcoal transport due to low natural gas prices and environmental regulations, but are benefiting from stronger demandrelated to the transport of crude oil, automobiles, and domestic intermodal containers. Airlines' revenues correlatesomewhat with real personal income growth. We have lowered our near-term outlook for real personal income growthto just 0.6% this year, compared with 1.5% in 2012. That said, we expect growth will rebound to 3.4% next year. Whilethis favorable trend should bolster leisure travel demand in 2014, we expect business travel demand will remainsomewhat constrained by the impact of sequestration and uncertainties related to government funding and budgetissues.Oil prices remain high by historical standards, although they recently declined and are well below the peak level of 2008. We expect prices will remain volatile and range from $90-$105 per barrel (WTI). Fuel price volatility affects mosttransportation companies, but the impact varies by subsector. Freight transportation companies--particularly railroads,large trucking companies, and package express companies--usually have fuel surcharge mechanisms in their corporatecontracts that help mute the impact that rising or falling fuel prices have on earnings. Airlines, by contrast, have limitedcontractual fuel surcharges and must rely on fare increases to cover higher operating costs, which can be difficult toimplement when the economy is weak.Our base-case scenario for the transportation industry incorporates several key indicators in our economists' base-caseU.S. economic forecast (see table 1). Our economists also publish quarterly pessimistic and optimistic scenarios, whichcontemplate alternatives to the base case. Although we do not directly incorporate these alternative scenarios into ourratings, we do consider them in our rating process, particularly when we're contemplating an outlook revision or ratingchange. We believe these alternative scenarios are especially valuable in periods of economic volatility. WWW.STANDARDANDPOORS.COM/RATINGSDIRECTNOVEMBER 26, 2013 3 1221614 | 301674531 Industry Economic And Ratings Outlook: The North American Transportation Outlook Remains Stable DespiteUneven Economic Growth  Table 1 2013-2014 Scenarios For Transportation Forecast/scenariosActual Pessimistic Optimistic Baseline2012 2013 2014 2013 2014 2013 2014 Comment/outlookBaselineimpact Real U.S. GDP (%change)2.8 1.3 0.4 2.0 4.5 1.7 2.8 Sluggish GDP growth supports slowrevenue gainsNeutralCrude oil ($/barrel,WTI)94.2 97.3 90.8 102.0 104.1 99.6 96.0 Oil prices remain volatile in the $90-$105rangeNeutralWTI--West Texas Intermediate crude. Several alternative pessimistic scenarios--such as more severe U.S. federal budget reductions or tax increases or aworse-than-expected recession (hard landing) in Europe--could weigh on the transportation sector. Althoughsequestration does not appear to have set back the U.S. economic recovery significantly, further fiscal tightening couldcause the U.S. economy to slow even more, which would hurt all transportation sectors. Our economists are morepessimistic about Europe's economic outlook than previously. They see eurozone real GDP shrinking 0.5% this year,with only 0.8% growth in 2014. They also see a one-in-three chance of a more severe recession--a 1.6% contractionthis year and a further 0.3% decline in 2014. We believe such problems would hurt the aircraft leasing, airline, and carrental subsectors in particular. Industry Ratings Outlook  Airlines continue their gradual ascent The credit outlook for the North American airline industry is stable to improving, with stronger industry profitabilityaiding cash flow and credit metrics.Thus far in 2013, Standard & Poor's has raised its corporate credit ratings on four airlines: ã  Delta Air Lines Inc. (Delta): to 'B+' from 'B'; ã  Alaska Air Group Inc. (Alaska): to 'BB' from 'BB-'; ã  JetBlue Airways Corp.: to 'B' from 'B-'; and ã  US Airways Group Inc. (US Airways): to 'B' from 'B-'.In each case, we raised the ratings based on improved operating performance, and in some cases debt reduction,which led to stable to stronger credit metrics. For all U.S. airlines, these trends continued with their earningsperformance in the third quarter of 2013. Earnings and cash flow benefited, for the most part, from continued capacityrestraint, relatively strong traffic, modest pricing growth, and lower fuel prices. However, there were some laggards.For example, United Continental Holdings Inc.'s (United Continental's) earnings improvement was constrained byrelatively weak passenger revenue growth and ongoing integration costs associated with its 2010 merger of United AirLines Inc. and Continental Airlines Inc.Despite some pockets of weakness (e.g., reduced demand from the U.S. government due to the effect of sequestration),we expect these trends will persist over the next two years as the economy continues to grow modestly. Standard & WWW.STANDARDANDPOORS.COM/RATINGSDIRECTNOVEMBER 26, 2013 4 1221614 | 301674531 Industry Economic And Ratings Outlook: The North American Transportation Outlook Remains Stable DespiteUneven Economic Growth
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