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Transportation

A boost from post-pandemic demand but higher costs ahead

Last update – December 2022

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SENSITIVE RISK FOR ENTERPRISES
Fragmentation

Internationalization
Business environment risk
Capital Intensity

Political risk
Profitability
Commercial risk

Strengths & weaknesses

  • Transportation benefits from pricing power, given its important role in ensuring global trade, tourism and professional/daily mobility
  • Shipping benefits from two factors: 1) bunker fuel is cheaper than car diesel or jet fuel, as it is not refined, and 2) it has a larger transport capacity as today’s largest vessels can transport up to 23,000 containers. Thanks to this, 80% of world trade is transported by sea.
  • Rail transportation companies are state-owned in most cases, which gives them relatively easy access to financing (vs airlines which have a low credit profile)
  • Higher fuel prices (bunker, diesel and kerosene) have been weighing more on operating margins.
  • Increasingly criticized sector due to its negative environmental impact, especially airlines (anti-flying social movements).
  • Capital-intensive sector as companies need to purchase an expensive fleet (airplanes, buses, trucks, ships etc), which also must be renewed and have high maintenance costs
  • Transportation companies are highly leveraged as they need to rely on a huge amount of debt in order to acquire and expand their fleet
  • Road transport companies face a high labor cost (vs maritime) that is not proportional to transport capacity. While a ship can transport 15,000 containers on average, a truck only carries 1.
  • Road transport is also dependent on government budgets for investments in road infrastructure. In developing countries, the road network is not fully developed so companies do not have easy access to all regions (limiting expansion). In other geographies, the toll system is too expensive.

Sector overview

What to watch ?

 

  • Stricter environmental regulations: Transport accounts for around 24% of global CO2 emissions, and road travel accounts for 3/4 of transport emissions. We believe that international regulations in favour of reducing the amount of produced CO2 are going to become increasingly tougher, affecting all means of transportation. To cope with this, a lot of investment is expected in the sector, both for the acquisition of less-polluting vehicles (E-cars, E-trucks, bio-fuel planes, green methanol ships etc) and for the supply of non-fossil fuels (such as SAF for aviation, which is 2.5x more expensive than conventional kerosene). This shift to green fuels could force transportation prices up further.

    Airlines:
  • 2023 will finally be the breakeven year for airlines: We expect they will manage to report a positive net profit after three years of losses. However, there are three factors threatening airline margins in the short term: higher wages (high personnel bargaining power, constantly threatening the business with strikes), higher jet-fuel prices and higher ground charges (airport fees). Another risk for airlines in 2023 is the fact that some economies may fall into recession, which may reduce the volume of leisure travel.
  • Throughout 2022, air fares were constantly on the rise in all geographies. This upward trend will continue in 2023 as companies need to pass on higher fueling costs as much as possible. This may represent an opportunity for low-cost airlines to attract more customers, given that in the current inflationary context people will prefer to sacrifice service/comfort in exchange for cheaper air tickets.
  • In recent years, there has been a growing trend towards leasing aircraft instead of buying them as this allows airlines to operate without high indebtedness and without recurring maintenance costs. Today, around 40% of the global fleet is leased and 60% is owned. We estimate that in the next five years, the ratio will be 46%/54%. However, due to increasing demand for aircrafts, leasing fees have been increasing as well.
  • Maritime:
  • Capacity is expected to grow in 2023-2024 as all the extra cash generated during 2021-2022 allowed the sector to increase capex for the purchase of new ships. However, it should be noted that a large portion of the new ordered ships will be intended to renew the old fleet (as old vessels do not comply with current and upcoming environmental regulations). As a reference, today’s global container fleet has an average age of 21.4 years and the technical lifetime of this kind of ship ranges from 25-30 years.
  • Containers: Weak macroeconomic conditions in 2023 will make prices for shipping continue to decline. Still, the profits made in 2021-2022 will allow shipping companies to be financially robust to face the global trade turmoil.
  • LNG: Freight rates for LNG transportation continue to soar. The trend will continue as long as demand for LNG remains strong (as long as Europe plans to eschew Russian natural gas), considering the limited number (641) of LNG ships worldwide.
  • Dry bulk: The dry bulk shipping market has been suffering a major slump in the past two quarters, in line with the decline of iron ore and coal prices, which are the top commodities leading this market. With slowing demand for dry commodities, we think the downward trend for freight rates could continue in the coming quarters.
  • Rail:
  • One of the biggest constraints of rail transport is the constant need for investments, both for the development of railway networks and signalling systems and for the purchase of trains. Yet, through government grants, companies can cover these capex needs. Increasing environmental awareness will also boost the industry in the coming years as people will prefer to take a train over a plane for short distances, which represents revenue growth potential.
  • Road:
  • The shortage of drivers for trucks, buses and coaches continues in many regions (notably in Europe, the US and Canada), affecting not only the transportation of merchandise (and businesses' supply chains) but also people’s mobility within cities. This problem is expected to persist in the short-term, although with at a a less serious level than that observed in 2021-22, to the extent that new wage negotiations are achieved with unions in conjunction with state measures to encourage employment in the sector.

Airlines: Airlines lost tens of billions of dollars in 2020 and 2021 due to the Covid-19 pandemic. However, their outlook improved significantly in 2022, especially after the summer (Q3) and the end-year holiday (Q4) seasons, when air-traffic increased remarkably, despite increasing air fares. The global load factor (how much capacity is used) at the end of 2022 (92.5%) already surpassed that of end-2019 (91.8%). In summer 2020, it was only 63.4%. By region, the US and Europe are the leaders in the recovery path, while Asia-Pacific is lagging due to the sanitary restrictions in China that cloud tourism in the region. Overall, we think 2023 will be a breakeven year and airlines will manage to report a positive net profit on average. The IATA, for instance, expects a net profit of USD4.7bn for the industry next year, with more than 4bn passengers set to fly.

Maritime: As recession fears rise, the expectations for trade growth in the coming quarters has declined. For 2023, we expect almost a flat performance for global trade (+0.7% y/y in volume terms, vs growth of +10.6% in 2021 and +3.9% in 2022). The observed decline in demand for goods has helped ease port congestion worldwide, in turn dissolving bottlenecks in supply chains. As a result, prices in the ocean-freight market have been falling progressively towards pre-pandemic levels (USD1,450/forty-foot box on average between 2017-2019), after reaching a never-before-seen peak in September 2021 (USD10,377/forty-foot box). However, 2022 as a whole was a good year for shipping companies, which ended the year with strong balance sheets and liquidity. M&A activity has been increasing recently, driven by the overabundance of cash and the need to invest more in the logistics business (aiming to rely less on purely transportation), buying warehousing facilities and port terminals. This in parallel will improve the business and credit profiles of companies as they will have a more diversified source of income and more power over port activity.

Rail: Europe is one of the regions where rail transportation has developed the most, given the small size of the continent (reduced distances between cities/countries), the flexibility for crossing borders within the Schengen Area and the capital investments made by governments to install an extensive railway network. In Europe, this sector has historically been state-owned. That is, each country has its own rail-transportation company that ensures mobility through the entire territory. For this, each country is in charge of the necessary investments for the expansion and renovation of the railway networks as well as for the purchase of rolling stock. In the same way, governments can fix the prices, which creates a certain monopoly within each country. Nevertheless, since 2021, an EU “rail-market liberalization” project has been implemented, which aims to liberalize the commercial long-distance rail market in order to encourage competition between operators and therefore improve services. Other regions also rely on rail transportation, such as the US, China, India and Japan. However, in these countries, trains are mostly used for the transport of merchandise (cargo) rather than for the transport of passengers.

Road: The 2020-2021 health crisis halted government investment in roads and infrastructure in many regions, especially in developing ones such as Asia, LatAm, and Africa, precisely where the lack of transport infrastructure investment has been inhibiting growth. In contrast, in developed regions such as Europe and the US, governments implemented new infrastructure projects during the crisis, aiming to drive economic and employment growth. As an example, the European Commission has been working on a Trans-European Transport Network (for railways and roads), aiming to connect 424 cities and imposing a minimum speed of 160km/h. The network is planned to be fully completed by 2040. For inter-city buses and coaches, one of the main challenges is to be able to transform their fleets towards electric vehicles, which is relatively easier to finance in Europe than in any other region of the world. But before they can fully switch away from diesel, more electric charging stations are needed, both on highways and in cities.

Subsectors

The transportation sector encompasses all kind of companies providing the means for transporting people and goods from one geographical place to another.

1. Air transport: Companies that use aircraft (owned or leased fleet) as a means of transportation, regardless of the distance (short or long-haul).
a. Traditional airlines.
b. Low-cost airlines: They offer the same transport facility of traditional airlines but with a reduced offer of services that enables lower costs, and therefore lower air-ticket prices.

2. Maritime transport: All kind of transportation services through boats, including:
a. Cruise ships: large passenger ships used mainly for vacationing purposes.
b. Vessels: container ships, oil tankers, chemical tankers, gas and LNG tankers, dry bulk carriers, car carriers (ro-ro ships).
c. Ferries: mainly for short trips across rivers, harbors and channels or between islands.

3. Rail/train transport: Another way for moving people and goods over short and long distances (both underground and over the surface). Train systems run on metal rails, which allows the rolling stock to benefit from lesser frictional resistance and therefore to attach more load in terms of wagons or carriages. Besides being the means of transport that emits the least CO2, it is also the one that is less affected by weather turbulence.

4. Road transport: This segment includes companies that offer the movement of people and goods through trucks, buses, coaches and taxi-cabs, both in urban perimeters and on highways.

Contact 

Maria Latorre
Allianz Trade
+33 1 84 11 50 50
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