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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 2013

The fortunes of the transport and logistics industry are closely connected to the economic cycle. When economic activity is buoyant, demand for transport and logistics services is equally strong. Consumer and business demand for goods and services inevitably translates into higher demand for transport and logistics services. Thus, the slump in global economic growth that occurred in the second half of 2008 and during the course of 2009 caused global trade volumes to plummet, and had a severe impact on the transport and logistics industry. However, the International Air Transport Association (IATA) expects some rebound in 2013, fueled by better prospects for the global economy.

Both air travel and air cargo saw a pick-up in volume at the end of 2012. Air travel was 4.6% up in November 2012 by comparison with the same month in 2011, building on the October improvement, year on year, of 2.6%. Air freight volumes, which saw a further year-on-year drop in October 2012 of 2.6%, saw growth of 1.6% in November. While positive, these are still rather thin indicators of growth, and IATA’s director general, Tony Tyler, pointed out that the level of demand for air travel was only 2% higher at the end of 2012 than it was at the start, a much weaker level of growth than the historic average for the sector. Tyler said that it was “premature” to consider that air cargo had turned the corner, and was now set to resume normal trend growth. However, coupled with positive developments in the US economy and a general improvement in business confidence, things were looking positive for 2013. IATA’s growth forecast for the year, however, is extremely modest, at 1.4% for air cargo. Passenger volume growth is expected to be somewhat better at 4.5% worldwide.

Nevertheless, this is a real improvement on the position the sector was in after the 2008 global crash. By December 2008, cargo volumes had fallen by 22.6%, and by 23.2% year on year by January 2009, at which point the then-CEO of IATA, Giovanni Bisignani, said that the cargo industry was in crisis, with demand having “fallen off a cliff.” Bisignani called 2009 the worst year in aviation history in terms of demand, predicting that airlines would lose US$5.6 billion on a net basis in 2010, after losing US$11 billion in 2009.

According to IATA, air cargo represents about 10% of the airline industry’s revenues. As 35% of the value of goods traded internationally are transported by air, air cargo is a barometer of global economic health.

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 provides 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. By 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 virtually 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, and the problems look set to continue in 2013.

Drewry, the specialist research and advisory organization for the maritime sector, said in its January 2013 report on container shipping that, despite attempts by shippers to withdraw capacity to keep freight rates up, weaker cargo volumes had negated much of their efforts. Freight rates actually declined from around US$2,700 per feu (forty-foot equivalent units) in early March 2012 to US$2,400 by early January 2013. “While this is not a disaster for the carriers, it proves that there is a fundamental weakness in the market, compounded by low volumes on the back of a non-existent peak season in 2012,” Drewry said. Competition among carriers, particularly in the Asia-Mediterranean trade, continued to depress load factors (as carriers were introducing too much capacity in an attempt to win market share), with average load factors being in the 75-85% range for most of the second half of 2012. With another 40 ships of at least 10,000 teu (twenty-foot equivalent units) due for delivery in 2013, carriers were facing a near-impossible task in finding ways of deploying this capacity without doing further damage to the supply demand balance, Drewry said.

Logistics Industry Rebuilds after the Crash of 2008

Road and rail traffic 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.

In its commentary on the outlook for the UK logistics industry, Barclays said that while the sector had seen a rebound in 2010 and early 2011, this had been followed by slowing activity in the first half of 2012. “Fuel costs have weighed heavily on the sector in recent years, and continue to represent a major cost pressure. A brief decline in oil prices earlier in 2012 provided some limited respite for transport operators, but this has subsequently reversed,” it said.

Environmental Laws Could Hit Transport Firms

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.”

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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 said that they had reached a preliminary agreement for a merger, which completed in late 2010. In May 2010, Continental Airlines and UAL Corporation’s United Airlines merged to create the world’s largest airline. The new airline is a US$3 billion company capable of carrying 144 million passengers per year. Sector analysts generally approve of mergers as 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 had 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, while container prices tumbled on overcapacity.

Global Economic Slump Hits Logistics Specialists

Many of the major logistics firms were affected by the global economic slump, but made a reasonable recovery through to the first half of 2011. In its 2009 annual results, the CEO of the logistics giant TNT, Peter Bakker, said: “While 2008 was a year of two halves, with the second half clearly marked by the impact of the global economic crisis, 2009 has seen the impact of the economic crisis for its full duration.” The company said that its express business, with its cyclical nature, was most severely affected. “Many customers in Europe have chosen slower and cheaper forms of transport, leading to a move away from air towards road express. The result was an unprecedented drop in volumes of air express of 25% in the beginning of the year, with road volume declines also building up during the year to double digit levels.” Looking forward, TNT said that the fourth quarter of 2009 showed the return of positive growth in express volumes, compared to the dramatic lows in the final quarter of 2008. Bakker said in the Group’s 2010 Annual Report (for the year ending December 31, 2010) that 2010 had been a year of large operating challenges for logistics companies, complicated by both the volcanic ash cloud that had grounded large numbers of European flights, and by the extreme winter conditions experienced in 2010. However, the year also saw growth returning to both advanced markets and, more robustly, to emerging markets. The company’s express delivery volumes rose to pre-economic crisis levels, and the volume growth in the company’s parcels business continued.

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Further reading on the Transport and Logistics industry

Article:

Report:

  • Barclays. “UK transport and logistics: Sector outlook. Third quarter 2012.” Online at: tinyurl.com/q64rdkg

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