The findings of this survey range from the unexpected to confirmation of an anticipated response. In broad terms, they reflect a different outlook and level of concern in each of the three surveyed sectors of rail, shipping and aviation, although at times there are some interesting but possibly coincidental, similarities and parallels.
In rail, there is perhaps the greatest sense of equanimity with considerable concern about freight activity, balanced by reasonable optimism that passenger numbers will hold up and a general acceptance that the rail sector is the sector least adversely affected by the recession. On the shipping side there is a sense that there will be an improvement in the next twelve months with a rise in asset values and an expectation that bank debt and stock market investment will soon return to the shipping sector. This is tempered by considerable gloom in relation to container and bulk shipping and a high level of expectation of major mortgage enforcement action. In aviation, the picture is considerably gloomier with an overall sense of contraction in the industry reflected in an expected reduction in the number of carriers, cancellations and deferrals of new orders and a real prospect of widespread retrenchment. In terms of parallels, about 60 per cent of respondents in each sector expect their business will be recovering within the next 12 months and all sectors regard investment in infrastructure as the best way that governments can assist their recovery. Similarly, all sectors agree that, by region, South East Asia (including China) will be the quickest to recover from the recession with the Middle East and India following strongly.
In terms of the narrower focus on the primary responses to the recession which the survey was motivated to test, the responses from the three sectors were equally varied.
With regard to sources of finance the rail sector is clearly of the view that state funding is the primary source of financial support. This is unsurprising given the high level of state ownership of rail operations which, even when privatised or franchised in some way, generally need state support. In the shipping sector, bank debt was seen as the primary source of funding (even if not at past levels of funding) with third party investment another hoped for source of funds. The reliance on bank debt in the shipping sector reflects that this has been and continues to be the traditional source of finance for shipping but respondents recognise that banks’, lending capacity is limited and see export credit agency support as an important feature of future loans. The hope that third party investment might be found may reflect the bold optimism of the shipping market which has raised money in the capital markets with some success in the recent past. In the aviation sector, shareholder funds and equity are seen as the primary source of cash, perhaps reflecting the difficulty of persuading banks to lend to the industry. There is no clear view as to the role of other funding sources, with opinions fairly evenly divided as to the nature of debt aviation companies can raise.
Another recession beating strategy which this survey sought to test was co-operation with others in joint ventures, alliances or pools. This seemed most popular in aviation where alliances have long played a role in achieving some form of effective consolidation of the market and respondents seem to view this approach as still offering benefits. Respondents from the rail industry indicated that they would like to be able to set up joint ventures but there was a considerable body of opinion to the effect that the rail market is insufficiently competitive as it is and that joint ventures would be against the interest of the consumer. Rail is probably the least fragmented of the three sectors with relatively few operators overall and a high proportion of those being under state of control in some way. In such a market, joint ventures might be seen as difficult to construct but strategically valuable if they could be achieved. For shipping, cooperation arrangements did not emerge as the primary business strategy to beat the recession. Shipping has a long history of 96 The way ahead for transport Norton Rose Group September 2009 companies working through some form of collective operation, such as a pool or conference, but now that many such structures are challenged by competition laws the responses to the survey may reflect a more cautious view being adopted in relation to such combined operations.
In any recession there will be winners and losers and for the winners there are fresh opportunities which arise due to distressed asset sales and reduced asset values. In such an environment, consolidations through mergers and acquisitions become real possibilities for those with the available cash and the survey sought to test the appetite for such activity. Shipping respondents clearly expect there to be consolidation which is hardly surprising in what is probably the most fragmented of the three sectors surveyed. Shipping offers many relatively small sized operations with assets of currently relatively low market value and owners who may be in poor financial straits. Respondents expect private equity and other investment funds to emerge to buy shipping assets and companies. Rail respondents did not expect much consolidation, probably reflecting again the relatively larger state ownership of rail operations and the less fragmented nature of the industry. However, there are likely to be opportunities for investment and consolidation in the freight sector where there are probably more private companies participating either as operators or as providers of rolling stock, particularly given that freight is anticipated to be the most affected segment of the rail industry. In aviation, a reduction in the number of operators is anticipated and this may be by way of operators going out of business but it may also be by way of consolidation by merger and acquisition. The focus of such activities is thought to be Western Europe and North America which are relatively congested markets where the competition may be seen to be more intense, thus generating a greater likelihood of investment targets.
Among the other findings of the survey, perhaps those most worthy of note are the lack of preparedness across the industries in relation to matters such as emissions control, the impact of European Union law and regulation and, primarily among aviation respondents, proposed changes to accounting rules. We were struck particularly by the sense that European Union law was not thought to have a great impact on transport industries despite the fact there have been a number of relatively high profile investigations into particularly the aviation and shipping sectors. A lack of focus on emissions issues and changes to accounting rules may to some extent be excused by there being a greater focus on day to day survival but the fact remains that emissions control and accounting standards are matters which the industry must prepare for and tackle.
Overall, the survey reveals three transport industries with differing outlooks and prospects. Where the three produced similar results the fundamental reasoning in each case is likely to have been similar. That rail is generally regarded as the sector least affected by the recession, was not a great surprise nor was the finding that South East Asia (including China) is seen as the region most likely to recover quickest from the recession but this latter view may have been tinged to some extent by a degree of hope that this will be the case given the strong showing of that region in recent years. The desire for state investment in infrastructure across all three sectors highlights the importance of such investment for growth and efficiency and thus profit. But how each sector will live to survive the recession is possibly more telling in terms of the way ahead for transport. In aviation, retrenchment and disposal of non-core assets seem to be high on the agenda while in shipping, consolidation is the primary strategy with hoped for new investors expected to arrive very soon. From the relative comfort of the rail industry, where state support is seen as a cushion against the ravages of recession, it is the freight sector which needs to be the most resourceful, but there is generally anticipated to be a real opportunity to attract new money to the rail industry where relatively stable long term returns should be available.
It remains to be seen how the way ahead emerges for each transport sector with the prospect of a prolonged recession causing significant structural change to the shipping and aviation industries in particular.