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Home > Sector Profiles > Transport and Logistics

Sector Profiles

Transport and Logistics Industry


Major Industry Trends

Air Traffic Looks For Upturn in 2014

The fortunes of the transport and logistics industry are closely connected to the economic cycle. When economic activity is buoyant, demand for its services is high. Inevitably—particularly in the age of the Internet where warehouse-to-your-door deliveries have replaced a significant proportion of shopping in person—consumer boom times keep demand for road haulage high and also have a very positive impact on sea and air freight services.

The converse is spectacularly true when economies contract. Thus, the sharp slump in global economic growth that occurred in the second half of 2008 and during 2009 caused global trade volumes to plummet, with a consequent severe impact on the transport and logistics industry. Continued weakness in advanced market economies, with weak to near-zero growth in major markets, has kept conditions challenging. However, by the end of 2013, the global economy was showing signs of picking up. In its forecast for 2013–2017, released in December 2013, the International Air Transport Association (IATA) said that international freight volumes are expected to grow some 17% over the next five years, based on what it calls “a conservative estimate of the recovery in global economic activity” over the coming years.

IATA points out that with more than US$6 trillion worth of goods being air freighted annually, accounting for some 35% of world trade, air cargo continues to be a key enabler for the movement of high-value products and perishable goods around the world. International air freight volumes are expected to grow at a five-year compound annual growth rate of 3.25%, while China looks set to supplant Germany as the second largest air freight market by 2017. The United States will continue to be the world’s largest air freight market through the forecast period. Africa looks like being the fastest growing region, with a compound growth rate of 4% year on year, with the inter-Africa air freight market set to grow at 5.3%. The Middle East and Latin America are both set to grow their air freight markets by 3.8% over the next five years. By 2017, IATA says, the five largest international freight markets in the world will be the United States, China, Germany, Hong Kong, and the UAE. Freight carriage within the Asia-Pacific region will account for around 31% of the expected total increase in freight tonnage over the period.

According to IATA, air cargo represents about 10% of the airline industry’s revenues. After years of gloom, IATA was finally able to announce, one day after the press release linked above, that it was revising upward its financial outlook for the airline industry in 2013. Airlines are expected to return a global net profit of US$12.9 billion in 2013, rising to US$19.7 billion in 2014, IATA says. The increased profits represent both improvements in operational efficiencies and lower prices for jet fuel, while growth in the number of passengers carried continues to be strong at between 5% and 6%. Although the profit numbers look impressive, they in fact continue to reflect dangerously low profit margins. The 2013 profit figure represents just 1.8% of revenues, while the 2014 figure would yield 2.8% on projected revenues of US$743 billion. This equates to a profit of just US$5.94 per passenger for 2014.

A further cloud on the horizon is that air freight companies may be affected by stricter environmental regulations over the next few years, according to Cargonews Asia. The website said that the likely advent of more stringent global environmental regulations “would impact not only the economics of using air transport, but would also possibly result in punitive sanctions against goods produced with environmentally questionable practices.” It added that the latter element would significantly erode the comparative advantage enjoyed by manufacturers in Asia, which have fueled the growth in demand for air cargo in recent years. These concerns appear to be shared by IATA. Cargonews Asia quoted the organization’s chief economist Brian Pearce as saying that “the cost of protectionism and deglobalization, higher taxes, and climate-change policies will all have an impact on the industry.”

Environmental Laws and the impact on Transport Firms

Road transport is particularly impacted by environmental legislation. States who move too quickly to impose "green" levies on fuels in an attempt to force lower fuel consumption risk massively disadvantaging their own logistics and haulage companies. The same is true of other "green" taxes. One promising avenue though being looked at in Europe is the waste-based biofuels sector. The Institute for European Environmental Policy (www.ieep.eu) points out that a new report produced by a consortium led by the International Council on Clean Transportation, found that Europe has significant potential for converting biomass waste to advanced low-carbon biofuels. The report, entitled: Wasted: Europe's Untapped Resource (http://europeanclimate.org/wp-content/uploads/2014/02/WASTED-final.pdf ), and published in February 2014, argues that energy from wastes from farming, forestry, industry and households, could provide 16% of road transport fuel demand in 2030.

Shipping

The shipping industry is, if anything, in a worse position than air transport, with its recovery from the 2008 crash—which looked promising in 2010—now seemingly stalled, and the sector still suffering from overcapacity. The Baltic Dry Index, which gives the daily average cost to ship bulk dry commodities (such as grain products or coal) around the world, is highly sensitive to global economic activity. Because the freight costs it measures move in response to demand for shipping services, the index is another excellent barometer of world trade. In April 2010 the Baltic Dry Index had risen by 58.5% over the previous 12 months and there was considerable optimism that the world had moved into a recovery phase, with strong emerging market growth pulling advanced markets out of their slump. However, by mid-2011 almost all that optimism had faded in the face of the European sovereign debt crisis and persistent weakness in the US economy. Inevitably, the shipping industry suffered as a result, and its woes continued through 2012, which by consensus was a very bad year. Problems continued through 2013 (see the industry sector article on shipping for more detail).

Logistics Industry Looks For Gains in 2014

Road and rail freight hauliers and general logistics businesses have had much the same experience as their peers in the air cargo and shipping industries. In August 2012 Deutsche Post DHL, the world’s largest postal and logistics group, called the economic environment “difficult” but expected to grow revenues by roughly 5% year on year. Its third-quarter results were up 5.7% on the same period for 2011. “Looking beyond the current year, the company remains optimistic and expects the positive earnings trend to continue,” it said.

That optimism now looks as if it is being fulfilled. According to a March 2014 press release by Barclays Bank, the UK logistics industry is still finding the pressure on margins to be tight, but the UK Logistics Confidence Index showed a surge in confidence through the sector for the second half of 2013. This is a bi-annual Index, commissioned by Barclays and the accountancy firm Grant Thornton UK, and surveys over 100 senior decision makers in logistics businesses. The survey was up 25% on the previous six months, with a confidence reading of 74.9, while that reading found the group to be 43% more effective at the end of 2013 than they were at the end of 2012. For the first half of 2014, respondents listed margin pressure, customer demand, fuel costs and market volatility as the major sources of concern (link: http://www.newsroom.barclays.com/Press-releases/UK-Logistics-sector-registers-a-big-leap-in-confidence-although-the-pressure-on-margins-remains-a-ke-b37.aspx). In line with this more positive outlook, the survey found that 84% of respondents expected to increase their turnover in 2014, with 16% expecting the rise to be 10% or more.

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Market Analysis

Aviation Industry Cuts Jobs and Capacity, While Mergers Increase

The slump in global trade hit the airlines and shipping companies hard. Airlines cut capacity, routes, and jobs in 2008 and 2009. The downturn has also hurried the consolidation of the industry. In November 2009, British Airways and Spanish airline Iberia reached a preliminary agreement for a merger, which was completed in late 2010. In May 2010, Continental Airlines and UAL Corporation’s United Airlines merged to create what was then the world’s largest airline. The new airline was a US$3 billion company capable of carrying 144 million passengers per year. Then in December 2013 American and US Airways announced their $11 billion merger, creating a new heavyweight that dwarfs the Continental/UAL merger. The combined companies had to give up gate slots and takeoffs at several major US airports. There were anti-trust concerns over the merger, but the two argued that it was essential. When American Airways went into bankruptcy in 2011 it was the seventh US carrier to go bust since 2000, according to a report in The Guardian (link: http://www.theguardian.com/business/2013/dec/09/american-us-airways-merge-worlds-biggest-airlines)

Sector analysts generally approve of mergers since they allow carriers to pool costs and to raise fares on routes where they used to compete. However, this latter reason is also why regulators scrutinize potential merger deals very closely before giving their approval.

Overcapacity Plagues Shipping Industry

The shipping sector is suffering from a combination of plummeting demand and an oversupply of ships as vessels ordered during the growth years are delivered. The shipping industry enjoyed five boom years until 2007, but the global recession has sapped demand for the transportation of Asian-made goods. In 2010, many shipping companies reported that, although demand picked up, overcapacity affected both rates and their profits. In April 2009, for example, China COSCO Holdings Co., the world’s largest operator of dry-bulk ships, announced an annual loss after rates for hauling commodities fell and container prices tumbled due to overcapacity. Things have not improved very much since. According to the AlixPartners' 2014 Container Shipping Outlook the outlook for the sector for 2014 looks "bleak". "With few exceptions, the industry has struggled for the better part of the past decade. What is new is the impact that that widespread financial distress is finally having on carriers and other key stakeholders: we are now seeing a number of profound structural changes to the industry - changes that may result in broad-ranging impacts on the major market participants," the report's authors say. The major players are hurting themselves as they compete to build and deploy the largest, most efficient vessels, with the costs involved being ever more difficult to recoup as the excess tonnage drives down shipping prices. The deployment of all this new capacity has coincided with sluggish demand, forcing unprecedented consolidation on major trade lanes, the report says.

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Further reading on the Transport and Logistics industry

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