Posted on: 8 July 2015
The survey, entitled ‘The Way Ahead’ is the sixth transport survey report released by Norton Rose Fulbright. It details over 157 responses from a range of companies involved in aviation, rail and shipping globally including financiers, owner/operators, manufacturers, government entities and professional services firms.
In brief, the survey concludes that the sentiment in shipping is deteriorating but high levels of optimism are seen in aviation and rail:
· 33% of shipping respondents rate current market conditions as positive, compared with 88% of aviation respondents and 91% of rail respondents
· 64% of shipping respondents who report negative market conditions blame overcapacity
· 37% of aviation and 40% of rail respondents attribute positive market conditions to the availability of funding for growth
· Bank debt and debt capital markets are expected to act as transport’s primary sources of funding
· 81% of all respondents predict a rise in passenger numbers and freight volumes
· Increased dominance of larger participants is expected to be the most significant change to the transport sector in the next five years
· China is the market expected to offer the best investment opportunities
· An emerging markets slowdown, continued global political and economic uncertainty, and regulation are key concerns for the sector.
A real divide in sentiment is emerging between the shipping industry and the aviation and rail industries, according to the sixth The Way Ahead transport survey from global legal practice Norton Rose Fulbright.
Confidence among respondents from the shipping industry has deteriorated sharply over the past year. Just one third of shipping respondents believe current market conditions are positive for their industry, down from 69% in 2014. Overcapacity is cited as the key reason for this, by 64% of those respondents who rate current market conditions as negative.
In contrast, 88% of aviation respondents and 91% of rail respondents report that current market conditions are positive for their industries, up from 75% and 81% last year. Increased optimism is attributed to more readily available funding for investment and growth, an anticipated return to economic stability in key markets, and the emergence of new opportunities. A reduction in the price of oil and an associated fall in fuel costs are also assisting aviation.
Around half of respondents from aviation and rail and a third of respondents from shipping expect additional funds to be allocated to investment rather than operating costs over the next five years. The survey indicates that funding is likely to come from a wide range of sources, with the proportion of respondents who anticipate that traditional bank debt will become the main source of funding for transport at its highest level since The Way Ahead survey began in 2009.
81% of all respondents expect passenger numbers and freight volumes to increase over the next five years, and around half expect fares and freights to rise over the same period.
Aviation and shipping expect the increased dominance of larger participants to be the greatest change to their industries over the next five years, while rail respondents believe the availability of new funding sources will reshape their industry.
China is the market expected to offer the best investment opportunity for the transport sector over the next five years. As a result, an emerging markets slowdown is viewed as the greatest threat to the transport sector over the same period. The impact of continued political and economic uncertainty and geopolitical events worldwide are also concerns for respondents.
Harry Theochari, global head of Transport at Norton Rose Fulbright, said: ‘While the outlook for aviation and rail is increasingly encouraging, many sub-sectors of the shipping industry continue to suffer real pain, primarily as a result of a surplus in supply. Longer term, the anticipated growth in demand, rising fares and freights, and increased innovation and infrastructure investment is expected to create new opportunities for the transport sector.
‘China in particular will be a key market for transport over the next two to five years. Over the course of this year China may well become the world’s top exporter and importer, is increasingly focused on rail through its “One Belt, One Road” strategy, and longer term there is the view that it will overtake the US as the world’s largest aviation market. China provides real opportunities for businesses operating throughout the transport sector.
‘Despite the new opportunities emerging, transport also faces a number of very real challenges. The regulatory burden on the transport sector has been increasing and our respondents are clear that the sector would benefit from greater transparency over regulation, as well as increased investment in infrastructure. The threat of an emerging market slowdown is a key concern for aviation and shipping as they increasingly look to Asia for growth. For rail, continued political and economic uncertainty within the Eurozone presents a real threat.’
Industry findings
AVIATION
Increasing market confidence
Confidence in the aviation industry is rising. 88% of respondents from the aviation industry believe current market conditions are positive for their business, up from 75% in 2014. Aviation, together with rail, is considerably more positive than shipping, where just 33% believe market conditions are positive.
The principle reasons for the aviation industry’s confidence is the belief that funding and investment are now available (cited by 37% of respondents), and an anticipated return to economic stability in key markets (cited by 29%). Funding appears to be more readily available for the aviation industry this year; in 2014 just 11% cited the availability of funding as a reason for positive market conditions.
The small minority of respondents who do not believe current market conditions are positive point to global economic uncertainty, cited by 40% of respondents. This was followed by concerns over governmental operational restrictions, for example regulatory and trade barriers, and overcapacity, both cited by 20% of respondents.
Opportunities for investment
Almost a third of respondents (30%) believe that additional aircraft is the optimal investment opportunity for the industry currently, up from 25% in 2014. This is despite 20% of respondents highlighting concerns around overcapacity. Indeed, the survey indicates that concerns around overcapacity are growing; when asked what presents the greatest challenge to the operational efficiency of the aviation industry, 26% cited supply and demand imbalances, up from 12% in 2014. Respondents also indicated that consolidation presents an attractive investment opportunity, but in the form of joint ventures, pools and alliances (28%) rather than mergers and acquisitions (5%).
Interest in North America is increasing among respondents from the aviation industry. North America is seen as offering the best investment opportunity for the aviation industry over the next two to five years, by 30% of respondents, up from 9% in 2014. China and South East Asia are also seen as offering compelling investment opportunities, selected by 28% of respondents respectively. Interest in China and South East Asia has increased considerably, up from 16% for China and from 11% for South East Asia in 2014.
Aviation is also increasingly confident that investment in infrastructure will increase, a belief held by 74% of respondents, up from 52% in 2014. Not a single respondent believes infrastructure investment will fall, compared with 12% in 2014.
Sources of funding and government support
Capital markets and bonds are expected to be the primary source of funding for the aviation industry over the next two years, cited by 27% of respondents. This is followed by bank debt (23%). The industry is expecting to draw on bank debt far more than it did in 2014 when just 13% of respondents believed that it would be a primary source of funding.
When asked what will form the most important part of aviation businesses’ strategy over the next 12 months, 20% of respondents cited reallocating existing capacity from stagnant to growth sectors and clients. This is followed by raising equity and debt (19%) and ordering new aircraft (17%), despite concerns over overcapacity.
Respondents believe that the most helpful form of government support for the aviation industry is infrastructure investment, selected by 58% of respondents. 55% of respondents believe that lowering passenger and fuel tax would support the aviation industry, and 45% believe deregulation would be the most helpful form of government support.
While 51% of respondents consider investment in airports the most crucial form of infrastructure investment for the aviation industry, the remaining respondents take a broader view. 44% believe a combination of rail, road, ports and airports infrastructure to fix supply chain bottlenecks is most needed, and 3% believe rail infrastructure is most crucial.
Areas of concern
State intervention in the aviation industry is a key concern for respondents. 15% believe state intervention and the creation of an uneven playing field presents the greatest challenge to the operational efficiency of the aviation industry, followed by general regulatory controls (13%). Fears over the availability and cost of fuel have subsided, with just 8% concerned about this, down from 27% in 2014, when it was the industry’s chief concern. 10% of respondents believe that a lack of suitably qualified people poses the greatest challenge, although similar to shipping and rail only a very small proportion of respondents (3%) see increased workforce numbers and skills as the optimal investment opportunity for the aviation industry.
The aviation industry’s greatest concern is the economic outlook for emerging markets. When asked what they see as the greatest threat to the aviation industry over the next five years 33% cited an emerging market slowdown, perhaps because of the importance the industry is now placing on China and South East Asia. This was followed by 23% who cited geopolitical events outside the Eurozone and 20% who cited a rise in terrorism. Only a very small proportion of respondents are concerned about a rise in interest rates and funding costs, with just 3% citing this as the greatest threat to their industry, compared with 14% of respondents from the rail industry and 12% of respondents from the shipping industry.
When asked which new regulations have had the greatest impact on the aviation industry, 30% did not select any particular legislation but cited uncertainty as to the application and enforcement of new and existing regulation. However, 18% cited the introduction of increased environmental regulation and 18% increased scrutiny by Competition Authorities. A further 15% pointed to the regulation of competition and barriers to entry.
RAIL
An optimistic outlook fuelled by new funding sources
Rail is the most positive industry within the transport sector. When asked if current market conditions are generally positive for the rail industry, 91% responded “yes”, compared with 88% of those from the aviation industry and just 33% from the shipping industry. 86% of respondents from the rail industry believe that passenger numbers and freight volumes will rise over the next five years, 59% believe fares and freights will increase and 59% believe investment in infrastructure will rise.
The primary reason for this optimism appears to be that funding for investment and growth is available, cited by 40% of respondents, followed by the emergence of new opportunities (25%).
Bank debt is expected to be the primary source of funding for the rail industry over the next two years, by 27% of respondents. This is followed by capital markets and bonds (24%) and government support (22%). Private equity is also expected to contribute a significant amount of funding, cited by 15% of respondents. Government support has previously been the primary form of support for the rail industry, indicating that the industry is now looking for increased private sector backing.
Target markets and strategic focus
62% of respondents believe that Western Europe offers the best investment opportunities for the rail industry over the next two to five years. This is followed by 19% who cite China, and 14% who cite Australia and New Zealand.
Half of respondents believe that the greatest threat to the rail industry is continued political and economic uncertainty within the Eurozone, presumably because such a high proportion of respondents (62%) believe Western Europe offers the best investment opportunities in the near term. A slowdown in emerging markets is also seen as a threat, cited by 23% of respondents. 14% report concerns about a rise in interest rates or funding costs.
Respondents believe that most important element of rail businesses’ strategy over the next 12 months will be ordering new rolling stock, cited by 24% of respondents. This is followed by 22% who believe it will be raising equity and debt, and 19% who believe it will be reallocating existing capacity from stagnant to growth sectors and clients.
The role of government
A third of respondents (32%) believe that state intervention creating an uneven playing field is the greatest challenge to the operational efficiency of the rail industry, equal to the 32% who cite inadequate infrastructure. In line with this, a large majority (91%) believe that infrastructure investment is the most helpful form of government support for the rail industry.. This is followed by 41% who believe that greater transparency in the application and enforcement of existing and proposed regulations is the most effective form of government support.
While 55% of respondents believe that investment in rail infrastructure is the most crucial form of infrastructure investment for the rail industry, 41% believe a combination of investment in rail, road, ports and airport infrastructure is necessary to fix supply chain bottlenecks.
Respondents also indicate that it remains a challenge to break into the rail industry, with competition law and barriers to entry cited by 38% of respondents as the regulations that have had the greatest impact on the industry. This is followed by 29% who believe that uncertainty as to the application and enforcement of new and existing regulations has had the greatest impact. This is a concern shared by 30% of respondents from the aviation industry and 25% of respondents from the shipping industry.
SHIPPING
Challenging market conditions anticipated
Just 33% of shipping industry respondents report that current market conditions are positive for the maritime industry, compared with 88% of respondents from the aviation industry and 91% from the rail industry. This indicates a substantial reduction in sentiment over the past year, when 69% of shipping respondents reported that conditions were positive.
This decline in optimism may be largely attributed to concerns around overcapacity and new ship building orders (64%), followed by global economic uncertainty (27%). Overcapacity was a concern for 40% of respondents in 2014. When asked what the greatest challenge is to the operational efficiency of the shipping industry, overcapacity is again the overwhelming response, with 55% citing supply and demand imbalances, up from 36% in 2014. This is followed by 15% who cite a lack of suitably qualified people, despite just 4% viewing increasing workforce numbers or skills as the optimal investment opportunity for shipping.
Opportunities for investment
In view of challenging market conditions, the shipping industry is looking to China. 37% of respondents believe that China offers the best investment opportunity for the shipping industry over the next two to five years, a considerable increase on the 18% who cited China in 2014. Interest in India has also risen dramatically, to 31% up from 5% in 2014, and South East Asia, to 21%, up from 11% in 2014.
Mergers and acquisitions are also cited as an avenue to growth. 29% of respondents believe that a merger or acquisition is the optimal investment opportunity currently for the shipping industry. This was followed by a joint venture, alliance or pool (28%). Despite significant fears of overcapacity, 9% believe that the acquisition of additional vessels would be an optimal investment opportunity for the industry.
The larger participants in the shipping industry are expected to become more dominant over the next five years (by 37% of respondents) and increased joint venture, alliance and pooling activity is expected to increase (26%). New sources of funding are considered more likely to enter the shipping industry than either start-up businesses new to shipping or start-up businesses as subsidiaries of existing participants. 18% believe that the most significant change to the shipping industry over the next five years will be the availability of new funding sources, compared with 6% who believe it will be more start-up businesses by those new to the industry or as subsidiaries of existing participants in the shipping industry, reflecting the difficulties associated with breaking in to the maritime industry, and the trend for new investors to enter the market via joint ventures with established participants.
20% believe that strategic alliances, joint ventures and pools will form the most important part of shipping businesses’ strategy over the next 12 months, followed by the strategic disposal of non-core assets (15%) and raising equity and debt (also 15%). Despite significant concerns about overcapacity, 7% believe ordering new vessels will be the most important part of shipping businesses’ strategy.
The fall in the oil price has meant that fears over the availability and cost of fuel have been alleviated, with just 2% of respondents viewing this as the greatest threat to the operational efficiency of the shipping industry, down from 10% in 2014.
Sources of funding and government support
There has been a spike in the proportion of respondents looking to bank debt as the primary source of funding for the shipping industry over the next two years. 28% are looking to bank debt, up from 21% in 2014 and the highest level since The Way Ahead survey began in 2009. Interest in capital markets and bonds and in export credit has also increased; 19% of respondents are looking to capital markets and bonds (up from 16% in 2014), and 11% to export credit (up from 6% in 2014).
Respondents believe that the most helpful form of government support for the shipping industry would be infrastructure investment, cited by 52% of respondents. While 32% believe that infrastructure investment should take the form of investment in ports, 66% believe it should address supply chain bottlenecks with investment in a combination of rail, road, port and airport infrastructure.
The weight of regulation
When asked which regulations have had the greatest impact on the shipping industry, 49% cited the introduction of increased environmental regulation. This is followed by 25% who cite uncertainty as to the application and enforcement of new and existing regulations as having the greatest impact. Shipping is more concerned about the introduction of new and extended economic sanctions (14%) than aviation (13%) and rail (0%). Indeed, 49% believe that greater transparency in the application and enforcement of existing and proposed regulations would be the most helpful form of support the government could offer the shipping industry.
