The way ahead - Norton Rose

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The way ahead Transport survey – Where next? Fifth report

Contents 03 Executive summary

16 Shape of the world to come

04 Key findings

17 W hat will be the most significant change in the participants in the sector most relevant to you over the next five years?

06 Opportunities 07 Are current market conditions positive for your business or operational sector? 09 What investment opportunity would you currently consider the most advantageous to your business or operational sector? 10 W hich of the following countries/regions offer your business or operational sector the best opportunity for investment over the next two to five years?

18 What is the greatest challenge to the future efficiency of operations in your business or operational sector? 19 What do you believe will happen over the next five years in the region(s) in which you operate? 22 W hich of the following will most influence the choice of fuel used in your business or by operators in your operational sector? 23 Trends

12 Global business climate

24 Trends analysis 2009 – 2013: Aviation

13 H ave you sought or offered funding in any form over the last year?

26 Trends analysis 2009 – 2013: Shipping

14 W hich of the following could be most effective in making funding more readily available to your business or operational sector? 15 What will be the likely operational impact on your business or operational sector, of the introduction of new high-capacity or high-speed assets?

28 Trends analysis 2009 – 2013: Rail 30 Conclusions 32 Methodology 33 Reader notes 34 Contacts 37 Norton Rose Fulbright

Executive summary Global transport sector targets new assets and markets despite overcapacity and funding concerns The global aviation, rail and shipping sectors regard investment in new assets and new markets as their leading investment opportunities despite lingering concerns about overcapacity and persistent funding issues.

Regionally, China remains the most popular investment opportunity, and is expected to remain so for the next five years, but interest in investing in India, Latin America and, to some extent, Russia, has diminished.

More generally, the cost of fuel, overcapacity, and doubts about the sustainability of highcapacity, high-speed assets are key concerns for the industry. Investment in technology and new staff have also fallen to low priority status. Among predictions for the future are a rise in alliances, joint ventures and pool activity, as well as increased market share for today’s dominant operators and owners.

We had more than 850 responses from people worldwide. The results of this survey, as in our previous surveys, have been analysed to identify the significant differences and similarities between the aviation, rail and shipping sectors, by viewing the data by sector, by region and by reference to whether the respondent is a ‘participant’ or a ‘commentator’1.

Despite on-going concerns, optimism is growing, buoyed by positive views on economic indicators such as fares and freights, passenger numbers and freight volumes, and infrastructure investment in all three sectors.

The issues addressed range from finance and investment, to fuel choice and the impact of emission controls. We have sought views on where opportunities lie and what governments can do to help.

In some regions, the sectors are looking to governments to provide infrastructure, as well as to unlock funding from financial institutions by providing guarantees and soft loans. There is noticeable interest in the establishment of specialist transport funding institutions. 1 The results are sometimes broken down between responses from ‘participants’, (those whose stated occupation and business appear to be closer to where decisions are made which actually affect the business of aviation, rail and shipping directly), and ‘commentators’ (those engaged in support professions such as law, accountancy, journalism or consultancy, who may be regarded as being removed from direct decision making). This year, participants provided 65% of responses and commentators 35%.

Transport survey

Key findings Market conditions

Challenges

Current market conditions are positive (75% of respondents) and new opportunities are emerging (47%).

The dominance of today’s larger participants is expected to increase in each sector over the next five years (25%).

21% of respondents who are not positive about market conditions, cited overcapacity as the main reason.

Investment opportunities Additional assets represent the most important investment opportunity for aviation (25%) and shipping (22%), while for rail respondents, it is investment in infrastructure (29%). China is considered one of the top three regional investment opportunities over the next five years by 30% of respondents. Interest has waned in India as an investment opportunity to 12% down from 31% in 2010.

Funding 46% of respondents have sought or offered funding in 2013. For 54% of them, pricing was the most significant issue to address. These results are similar to those in 2010. A more beneficial view of assets, for risk weighting purposes, is cited as one of the three most effective steps in making funding more readily available (26%). While the introduction of high-capacity or high-speed assets is viewed as a natural and beneficial development (28%), 19% doubt whether their operation will be sustainable.

04 Norton Rose Fulbright – March 2014

The greatest challenge to operational efficiency is an imbalance in supply and demand (19%). Only 5% see emissions controls as equally challenging, but a significant 17% are worried about finding suitably qualified staff. A rise in passenger numbers/freight volumes is predicted (82%) and 66% say fares/freights will rise, while 58% say the number of routes/services offered will grow.

Fuel Fuel price/economy is by far the strongest influence on fuel selection among respondents in aviation (58%) and shipping (48%), but less clearly so in rail (37%).

75% of respondents say market conditions are positive

Trends The trend away from retrenchment and disposal of assets continues with the emphasis shifting to alliances/ joint ventures/pools, and to strategic acquisitions.

21% of non-positive respondents cited overcapacity as the main reason

Key findings

25%

predict a rise in passenger numbers/ freight volumes

30% 47% believe that new opportunities are emerging

12%

Interest has waned in India as an investment opportunity to 12% down from 31% in 2010

consider China to be one of the top three regional investment opportunities over the next five years

58% of aviation respondents say fuel price/ economy is by far the strongest influence on fuel selection

of aviation respondents say additional assets represent the most important investment opportunity

54 %

82%

of respondents who have sought or offered funding in 2013 stated pricing was the most significant issue to address

Norton Rose Fulbright – March 2014 05

Transport survey

Section 01

Opportunities In this section, we explore the high degree of optimism overall, and how the focus on opportunities differs in each sector. This year, as in 2010, we asked which geographical markets offer the best investment opportunity. The shifts in opinion are revealing.


Section 01: Opportunities

Question 1

Commentary “The aviation sector is embarking on an optimistic but careful year. Some previous uncertainty is disappearing, as new aircraft reach the market and the effects of regulatory changes are more clearly understood. Financing is readily available, fuel prices appear stable and – most importantly – world economic stability (and growth) is returning. This is encouraging some market participants to take their opportunities as they arise.” Duncan Batchelor, Partner, London, Norton Rose Fulbright LLP

Are current market conditions positive for your business or operational sector?

75+69+ 25+O 81+ 31+O 19+O Aviation

Shipping

YES

75% 25% NO

Rail

YES

69% 31% NO

YES

81% 19%

“Whilst the improved level of optimism in the shipping sector is encouraging the fact that it is less positive than other sectors is not altogether unsurprising; the markets still remain quite difficult to predict, over-capacity remains an issue and although the availability of capital has improved this still tends to remain the preserve of the better quality owners.” Simon Hartley, Partner, London, Norton Rose Fulbright LLP

NO

3:1

Overall, by a margin of 3:1, respondents see current market conditions as positive for their business or operational sector. Rail is the most optimistic by a factor of 4:1, while shipping is the least optimistic (2:1) and aviation is at 3:1. Overall, 81 per cent of respondents in rail were positive about market conditions, compared with 75 per cent in aviation, and 69 per cent in shipping. Regionally, positive sentiment is evenly spread (roughly 3:1), except in Africa, where the ratio falls to 2:1. Included in those who regarded current market conditions as positive were 75% of aviation

participants, 79% of rail participants and 69% of shipping participants. a) Why do you feel current market conditions are positive for your business or operational sector? (Please select one option) The main reason for optimism is the emergence of new opportunities (aviation 46%; rail 50%; shipping 48%). However, participants are themselves a little less positive in this respect (aviation 41%; rail 47%; shipping 44%).

The return of economic stability in key markets is the next most important factor (in aviation (22%); and shipping (20%)). For rail, the availability of funding for investment and/or growth is the second most important factor (17%). In each case, participants across each sector view these reasons more strongly than commentators with support for these reasons for optimism among participants being aviation 25%; shipping 23% and rail 20%. The least popular reason for optimism in aviation (4%) and rail (3%) is reduced competition,

and, in shipping, the impact of technological improvements (4%). Overcapacity concerns persist in all sectors, although more people in shipping (7%, but 9% of participants in this more optimistic group) believe that this issue is being resolved, with those in rail (4%) and aviation (6%) less convinced. Of the three sectors, aviation is most interested in technological developments as a positive indicator (6%), whereas rail is more interested in infrastructure improvements (13%).


Transport survey

Why do you feel current market conditions are positive for your business or operational sector? (Please select one option)

Why do you feel current market conditions are negative for your business or operational sector? (Please select one option)

New opportunities are emerging

No new opportunities emerging

Anticipated return to economic stability in key markets

Reduced activity in key markets

Overcapacity issues have been resolved

Global economic uncertainty

The impact of infrastructure improvements

Regional economic uncertainty

The impact of technological improvements

Overcapacity

Reduced competition

Global political uncertainty

Funding for investment and/ or growth is available

Regional political uncertainty Physical operational restrictions (e.g. poor infrastructure; fuel costs)

Commentary

Governmental operational restrictions (e.g. regulatory; trade barriers)

“Sentiment has changed to the positive, with charter rates and vessel values expected to improve” Chris Turton, Principal, Turton Marine Finance Limited, Shipping respondent

Lack of funding

Key: Aviation Shipping Rail

“Government over-regulation, fuel costs, airport taxes” Dr Rob Smorfitt, CEO, ITBIH, Aviation respondent

Regionally, the emergence of new opportunities is seen most strongly in Central and South America (75%) with a more modest range of support (42% – 58%) from other regions.

or the Middle East feel that overcapacity had been resolved, and the greatest benefit from infrastructure improvement is found in Asia Pacific (10%) and Africa (9%).

Economic stability is felt most keenly in North America (23%) with about 16% of respondents from Asia Pacific and the Middle East seeing opportunities coming from the availability of funding for investment and/or growth.

b) Why do you feel current market conditions are negative for your business or operational sector? (Please select one option) The reasons for a negative outlook vary across the sectors. The key factors are global economic uncertainty in aviation, (18% – participants

No respondents in Africa, Central and South America


24%); in rail, lack of funding (27% – participants 28%); and in shipping, overcapacity (40% – participants 39%). Global political uncertainty does not trouble any respondent in any sector, and in general, physical operational restrictions are of low concern (aviation 6%; rail 4% shipping 0%). There is a relatively strong view in all sectors that there is reduced activity in key markets (aviation 14%; rail 12%; shipping 20%). These views

are held in more or less equal proportions by participants and commentators except in shipping where just 16% of participants are of this view. From a regional perspective, overcapacity is the greatest concern overall (21%), principally for respondents from Africa, Asia Pacific and North America. In Europe, negative sentiment is driven by reduced activity in key markets, whereas for those in the Middle East it is regional political uncertainty.

161910+9145+252215+ 1921+86+101229+10811+


Question 2

Commentary “Safer and less costly methods to maintain our Infrastructure through technological advancements” Dermot Mills, Finance Manager, Irish Rail Limited, Rail respondent

What investment opportunity would you currently consider the most advantageous to your business or operational sector? (Please select one option) Aviation

Shipping

“In shipping, some of the best investment opportunities in 2014 are likely to be in financial (as opposed to physical) assets. All indications are that we will see more shipping loan portfolios brought to market this year and that private equity investors, pension funds, investment funds and some banks have both the necessary liquidity and appetite for the investment and trading opportunities that these portfolios can generate.” Simon Lew, Partner, London, Norton Rose Fulbright LLP

Rail

Technological improvements

Infrastructure improvements

Increased workforce numbers or skills

Development of new markets

ships/rolling stock

Additional aircraft/

Merger(s) or acquisition(s)

Joint venture(s)/ alliance(s)/pool(s)

30 per cent

“There are interesting opportunities to invest in new commercial aircraft but to me the key criteria will usually be residual value, driven foremost by which aircraft do you believe will have sufficient users to create a strong secondary market in the long run. There are also good opportunities to invest in subordinated debt positions secured by aircraft on lease to airlines that have relatively good credit.” Jim Tussing, Partner, New York, Fulbright & Jaworski LLP

Aviation and shipping respondents see investment in additional aircraft or ships as the best investment opportunity.

Aviation (25%) and shipping (22%) respondents see investment in additional aircraft or ships as the best investment opportunity, but in each case that view is held more strongly among participants (aviation 34%; shipping 28%). Rail respondents, both participants and commentators, support infrastructure improvements (29% overall). Both aviation (22%) and rail (21%) see developing new markets as the next best investment, with that option being equal second choice in shipping (19%) with

entry into a joint venture, alliance or pool.

of interest in this, while 16% of rail participants support it.

For shipping respondents (6%) and those from aviation (8%), acquiring more staff and skills is the lowest priority, whereas for rail respondents (5%) mergers and acquisitions is least important.

Investing in new assets is attractive in all regions, especially the Middle East (32%), North America (22%) and Asia Pacific (21%). Respondents from Africa (30%) and Europe (22%) are most interested in developing new markets, which also attracts those from Asia Pacific (21%). For Central and South America respondents, infrastructure is the investment priority (25%), but those respondents show

Shipping respondents (8%) are also markedly less interested in technological improvements than those in aviation (10%) and rail (11%). Aviation participants (7%) also indicate a lower level

no interest in increasing their workforce or skills, as was the case in the Middle East (4%), Europe (6%) and North America (7%). Asia Pacific respondents show noticeably lower interest (3%) in technological improvements than those from all other regions.


Transport survey

Question 3

Which of the following countries/regions offer your business or operational sector the best opportunity for investment over the next two to five years? (Please select up to three options)

118+ 73+ 89+ north america

Commentary “Opportunity is global and coming from all continents” Anthony Foster, CEO, Marine Capital Ltd, Shipping respondent

central and south america

brazil

This question was also included in our 2010 survey, which enables some comparison between the thinking at that time and now. China (30%) remains the preferred country, although it has fallen back from its 2010 popularity (43%). Western Europe is marginally more attractive (27%, compared with 26% in 2010), overtaking

India (12% compared with 31% interest 2010). South Korea (2%) and Japan (3%) are viewed as least attractive, similar to 2010, but if the results for South Korea and Japan are ignored, the country or region of least interest is Australia and New Zealand (7%) compared with 17% in 2010. Overall interest in Brazil has fallen from 22% in 2010 to 16% today.


By sector, shipping (36%, down from 58% in 2010) and aviation (33%) select China as the most important market, with South East Asia (23%) ranking second for aviation (down from 27% in 2010). North America remains the second priority for shipping (26%), just ahead of Western Europe (25%). For rail respondents, Western Europe (39%, up from 34% in 2010)

is clearly the most important region (probably reflecting the high response from European rail respondents), followed by North America (25% – up from 22% in 2010), and then the Middle East (22%). We did not differentiate between participants and commentators in 2010, but this year the overall greatest interest of participants

5135113++ 95+ 46+ 13+ 1518+ 1018++ 1+ 47+


russia

western europe

eastern europe

south korea

japan

china

mena

india

south east asia

sub-saharan africa

australia and new zealand

Key

(15% in each case) was China and Western Europe, with commentators preferring China (15%) and North America (12%). Rail respondents appear to have caused this difference of opinion since rail participants showed little interest in China (6%) and, after Western Europe (22%), selected the Middle East (12%), while for rail commentators, North

America (16%) was second in popularity. Most investment is going to mainly local markets. Australia and New Zealand draw highest interest from Asia Pacific respondents (7%), but none from Africa and low interest from Middle East (2%) and Europe respondents (3%). A low response from Asia Pacific

respondents in respect of Russia (2%) brings down the overall popularity of Russia, although it maintains its 2010 level of interest (10%) for all respondents. Africa respondents are notably low on interest in India (1%) and Eastern Europe is of significant interest only to Europe (7%) and Middle East

2013

2010

(6%) respondents. Interest from respondents in Central and South America is confined to just six of the fourteen suggested options (principally Brazil (36%) and the rest of Central and South America (36%)).


Transport survey

Section 02

Global business climate In this section, we assess the changes required to funding terms and criteria, and how the challenge of high-capacity and high-speed assets is viewed. The three sectors polled operate internationally, managing challenges which affect them in different degrees, both by sector and by region. Responses to this part of the survey are of interest for the sectoral differences and similarities unveiled.


2623+20191812+118+4786+2473+ 563+78510

Section 02: Global business climate

Question 4

Commentary “The results are broadly in line with the level of interest we have seen in the China/Hong Kong debt markets last year although noting that there was a significant uplift in activity in the last quarter of 2013 which bodes well for the prospects for 2014. We have seen pricing in the China shipping market reach a more balanced level over the last year but are beginning to see downward pressure on margin and arrangement fees as more banks come back into the shipping finance market.” Davide Barzilai, Partner, Hong Kong, Norton Rose Fulbright Hong Kong

Have you sought or offered funding in any form over the last year? Aviation

Shipping

Rail

Yes: 44%

No: 56%

Yes: 57%

Yes: 41%

No: 43%

No: 59%

What have been the most significant issues to address? (Please select up to three options) Rail

Similar to 2012, 46% (2012: 45%) of respondents overall sought or offered funding over the previous twelve months. By sector, respondents in aviation (44%, and 55% of participants), in rail (41%, and 56% of participants) and in shipping (57%, and 74% of participants) sought or offered funding in 2013. This indicates the considerable extent of the continuing need for funding. In North America, the split between those who have sought or offered finance, and those who have not, is even, while elsewhere the balance is clearly in favour of those who have not, most markedly in Central and

South America (31% have and 69% have not). What have been the most significant issues to address? The most pressing issue across all three sectors (54% of all respondents – 2012 67%) is pricing: aviation 25% (participants 27%); rail 26% (participants 27%); shipping 23% (participants 24%)). Of second greatest concern overall in 2012 (52%) was liquidity/availability of money, and this year it remains the second greatest concern (44%), although more so for commentators than participants in aviation (participants 19%; commentators 24%) and rail (participants 18%;

“The emergence of US private equity (PE) has greatly bolstered the otherwise insufficient funding sources for the shipping sector. While PE’s pricing can be high, terms demanding and investment horizons narrow, its sophisticated familiarity with the US capital markets should provide a robust exit strategy for all involved (private owners, PE and secured lenders).” Brad Berman, Partner, New York, Fulbright & Jaworski LLP

Repayment/ prepayment triggers

Currency choices

Tenor

Leverage ratios

Creditor quality

30 per cent

Covenant package

Debtor quality

Shipping

Increased security/ guarantee requirements

Liquidity/ availability of money

Pricing

Aviation

commentators 20%). In shipping, this concern is greater among participants (20%) than commentators (15%). All other concerns are of relatively equal lower importance across all three sectors (especially for participants) although increased security/guarantee requirements are significant to 26% of respondents, but more so for commentators than participants in each sector. Regionally, pricing and liquidity/availability of money are the two greatest concerns everywhere except Central and South America, where, for 44% of respondents, increased guarantee/security requirements

is the major concern. This is also of significant concern to Middle East respondents (20%) and of third concern in all other regions. These results vary considerably from 2012, when creditor quality was the biggest concern (Middle East 14% – now 7%; North America 14% – now 8%) as well as debtor quality (Europe 20% – now 8%; Middle East 20% – now 0%). The issue of lowest concern varies across the regions from leverage ratios (Africa 0%; Central and South America 0%; Middle East 0%), to currency choices (Europe 1%; North America 2%) and repayment/prepayment triggers (Asia Pacific 4%).


152310+118195+13710+861121+ 956+71315+17162114+ Transport survey

Question 5

Commentary

Which of the following could be most effective in making funding more readily available to your business or operational sector? (Please select up to three options)

“I think what is needed is a more professional and beneficial long-term view of the industry itself and not an overly beneficial or overly negative view of the individual assets.” Robert Beegle, President, Marcon International, Inc., Shipping respondent

Aviation

Shipping

Rail

None of the above. I am satisfied with my current access to funding

The establishment of specialist transport funding institutions

Tax incentives for lenders relating to loans (including finance leases)

Tax incentives for borrowers relating to borrowings

Relaxation of stock exchange listing rules

More subsidies for investment in new technology

Increased availability of asset* value or residual asset* value products

Government supported soft loans

Government guarantees

A more beneficial view of assets* for risk weighting purposes

30 per cent

*‘Asset’ refers to aircraft, ships or other vessels (including rigs) and rolling stock vehicles (including locomotives and freight and passenger wagons).

Nearly 29% of respondents reported that they are satisfied with their current access to funding, in relatively similar proportions in each sector. Among the remaining respondents, there is a range of views, both by sector and by region. Of the options offered, overall, the most popular view (26%) is that a more beneficial view of assets for risk-weighting purposes is needed (aviation 15%; rail 10%; shipping 23%), although in rail the most popular choice is government guarantees (19%). In each sector these most popular views are held noticeably more strongly by

participants (aviation 17%; rail 23%; shipping 26%). Aviation respondents are keen to see government supported soft loans (11%), government guarantees (11%), and the establishment of specialist transport funding institutions (13%). This latter option is also popular with rail (15%) and shipping (22%) respondents, although in each sector it is more popular with commentators (aviation 13%; rail 24%; shipping 15%) than with participants (aviation 10%; rail 12%; shipping 14%). Few support a relaxation of stock exchange rules (aviation


2%; rail 1%; shipping 1%). There is little interest among rail respondents in tax incentives for lenders (5%) but this is more popular with aviation (7%) and shipping (7%) respondents. That said, it is only in rail where participants are keener on this than commentators. Regionally, satisfaction with access to funding is the most popular response in three regions, in particular, North America (21%). The responses for Central and South America are spread relatively evenly over six of the options offered, representing the broadest range of views. In all other regions there is general agreement about the most

“The billions of dollars a quarter being invested in shipping by US funds is creating a solid market for US based loans that is helping to fill the gap created when many of the traditional ship lenders scaled back their activities after the global financial crises.” Brian Devine, Partner, New York, Fulbright & Jaworski LLP “In our experience debt funding in aviation market in Asia is readily available for better credit airlines and lessors. This competition has driven down the pricing for many financiers and it is not surprising that the respondents would like to see more government supported financing to enable debt funding to a broader range of borrowers.” Leigh Borrello, Partner, Sydney, Norton Rose Fulbright Australia

effective changes. The need for a change in the view of asset values is most popular in Asia Pacific (16%) and Europe (17%), while support for specialist transport funding institutions comes mostly from Asia Pacific (14%), Europe (14%) and the Middle East (13%). The third most sought after change is for government guarantees, which is most popular in Africa (17%) and least popular in North America (9%). By far the least popular option is the need to relax stock exchange rules, with no support for this from the Middle East or Central and South America, and greatest support from Asia Pacific (only 3% of respondents).

Section 02: Global business climate

Question 6

Commentary “This will provide a positive response to the projected growth in passenger numbers and relieve pressure on existing infrastructure, while contributing to economic growth and stimulating the rail supply chain and the employment market. It all points to a buoyant rail sector, backed by Government and supported by available funding.” Tom Johnson, Partner, London, Norton Rose Fulbright LLP

What will be the likely operational impact on your business or operational sector, of the introduction of new high-capacity or highspeed assets? (Please select one option)

19+22+ 13+261131O 13+ 9+163023O 8+42631O Aviation

Shipping

19

23

31

Rail

13

22

8

31

13

9

6

11

25

30

16

42

It is not clear whether their operation will be sustainable

The operators of these assets* will be able to dominate the routes where they operate They open the way to new opportunities for all in the sector They simply create overcapacity

This is a natural and beneficial development


The responses of shipping respondents to this question, show a marked variance from those in aviation and rail. Both aviation and rail promote the positive aspects of high-capacity or high-speed assets as opening the way to opportunities for all in the sector (aviation 25%; rail 42%) and as a natural and beneficial development (aviation 31%; rail 31%). However, the third most popular selected option from both aviation and rail respondents reveals doubt about the sustainability of the operation of these assets (aviation 19%; rail 13%). Significantly, aviation participants are noticeably more

cautious in their view of the impact of these assets, compared with aviation commentators, while the most positive views come from rail participants (42% say these assets open the way to new opportunities). Shipping respondents are rather more negative in their outlook. Almost 30% (33% of participants) see these assets as simply creating overcapacity (a view shared by just 11% of aviation respondents and 6% in rail). A significant proportion of shipping respondents (22% – 19% of participants) also express doubt about the sustainability of the operation of these assets, although a similar proportion

(23% – 23% of participants) regard the impact of these assets as a natural and beneficial development. Only 16% feel that they open the way to new opportunities for all in the sector. Central and South America (38%), Europe (29%) and the Middle East (28%) are the three regions which believe most strongly that high-capacity or high-speed assets will unleash new opportunities for all in the sector. Meanwhile, Africa (36%), Asia Pacific (29%) and North America (31%) believe these assets represent a natural and beneficial development. This is also the second most popular view among Europe respondents (26%).

Few believe that the operators of these assets will dominate the routes where they operate (Africa 8%; Central and South America 0%; Europe 8%; Middle East 8%; North America 9%). Also of relatively low interest is the view that these assets simply create overcapacity, other than in Europe (18%); the Middle East (20%) and North America (15%). These views are outweighed by doubt about the sustainability of the operation of these assets (Asia Pacific 21%; Central and South America 38%; Middle East 24%; North America 22%).


Transport survey

Section 03

Shape of the world to come All three sectors predict that major changes in those engaged in their markets will be driven by existing participants and that, in response to a question that we first asked in 2010, all the business indicators we tested will rise, a view held somewhat more confidently than in 2010. The key influence affecting choice of fuel was clear for all sectors, but responses varied widely on the challenges to operational efficiency. This reflects the different factors relevant to each sector, but all were concerned about the availability of suitably qualified people in future. This raises a significant issue.


Section 03: Shape of the world to come

Question 7

Commentary “The strategies are clearly that the dominant operators will create so much low capex- financed and opex-capable capacity that all other operators will be driven to the wall.” Carl Martell Wild II, Managing Director, Applecross Partners Inc., Aviation and shipping respondent

What will be the most significant change in the participants in the sector most relevant to you over the next five years? (Please select one option)

23+23+ 13+61026O 21+ 12+3227246O 8+91315233O Aviation

Shipping

Rail

3

6

6

“A clear trend that we have seen develop in the shipping industry since our first survey, is an increase in the number of participants entering in to joint ventures and alliances. These have tended to be operationally driven and made between parties in the same, or very similar, businesses. Possibly the best examples of this are the P3 Network and G6 Alliance established by the world’s major container lines. However, due to the recent economic upheaval that we have all experienced, we are seeing joint ventures between financiers/ investors and ship owners/ship operators in numbers never before witnessed. We have seen private equity providers such as Oaktree, Apollo and Blackstone openly enter in to shipping joint ventures in just about every sector of the industry. Whilst debt finance remains difficult to source this is likely to continue.” Harry Theochari, Head of Transport, London, Norton Rose Fulbright

21

23

23

23

24

26

8

12

13

7

10

6

10

3

6

8

9

3

22

15

13

Increased joint venture/alliance/pooling activity

New funding sources

More new start-ups by people new to the sector

Operators will become more specialised

ore new start-ups as subsidiaries of existing M participants in the sector

The larger participants will become more dominant

More newly privatised operators

Respondents from all three sectors agree that existing larger participants will become more dominant (aviation 26% – participants 28%; rail 23% – participants 20%; shipping 24% – participants 21%), although this view is influenced by a markedly stronger view in this respect among rail and shipping commentators than participants. The second most significant change (and the strongest view expressed by commentators overall) is expected to be increased joint venture/alliance/ pool activity (aviation 23%; rail 21%; shipping 23%). For aviation and rail respondents,

The withdrawal of established participants

these two options are distinctly more popular than all the others. For shipping respondents these two options are followed quite closely by the view that new funding sources will provide new participants (22%, participants 25%). That view is shared reasonably strongly by aviation participants (14%). On the low side, both aviation (6%) and rail (3%) feel that the withdrawal of established participants is the least likely change to occur, while shipping respondents feel that this change is more likely (6%) than the arrival of newly privatised

operators (3%) or more new start-ups as subsidiaries of existing participants in the sector (3%). The latter two options are also viewed as fairly weak possibilities among aviation respondents (6% and 6%) but slightly stronger among rail respondents (13% and 9%). Three regions (Africa 35%; Asia Pacific 28%; Central and South America 25%) see increased joint venture/alliance/pool activity as the most likely change. In Europe (27%) and North America (27%) the strongest view is that larger participants will become more dominant, whereas in the

Middle East, 32% anticipate that operations will become more specialised. There is little support for the view that established participants will withdraw (Asia Pacific 2%; Europe 5%; Middle East 0%; North America 4%) or that there will be more privatised operators (Africa 4%; North America 4%). No more than two regions agree on what the least likely option will be. No respondents in the Middle East felt there would be start-ups in their sector and none in Central and South America felt new participants would come from new funding sources.


Transport survey

Question 8

Commentary

What is the greatest challenge to the future efficiency of operations in your business or operational sector? (Please select one option)

5+6+ 27+1413491612O 1+ 10+12791336O 6+142781220O Aviation

Shipping

5

12

Rail

6

10

27

16

36

1

12

6

14

12

21

7

9

14

4

13

13

Emissions controls

7

9

27

12

8

Intermodal or logistical inefficiencies

Fuel availability and cost

Lack of funding

General regulatory controls

Lack of suitably qualified people

Inadequate infrastructure

Supply and demand imbalances (e.g. overcapacity)

In response to this question, the views of the three sectors diverge considerably, while the views within each sector are reasonably clear about the greatest and least challenges they face. Within aviation, fuel availability and cost (27%) cause the greatest concern, followed some way behind by lack of suitably qualified people (16% – although this is of more concern to commentators (17%) than participants (13%)). Of least concern is intermodal or logistical inefficiencies (4%). Aviation participants indicated a range of similarly

ranked concerns: general regulatory controls, inadequate infrastructure, lack of suitably qualified people, and supply and demand imbalances. The greatest concern for rail respondents is inadequate infrastructure (27% – participants 31%) with, again, the lack of suitably qualified people (21%) in second place, but again, this was of more concern to commentators (29%) than participants (13%). Emissions controls worry rail respondents least (1%), and fuel availability and cost (6%) is their next lowest concern.


The single biggest worry for shipping respondents is supply and demand imbalances (e.g. overcapacity) (36% – participants 44%) with no other issue coming close by way of concern. Of relatively equal low concern for shipping respondents are intermodal or logistical inefficiencies (7%), emissions controls (6%) and inadequate infrastructure (7%). The lack of suitably qualified people is, again, a significantly greater concern for commentators (17%) than participants (10%). By region, the sources of concern vary widely. The most significant

“New regulatory requirements force lenders to streamline their activities meaning more and more focus on larger corporates. SME type of customers will be squeezed and need to merge or grow to get to tier one status.” Ulf Andersson, Head of Credit Shipping, Offshore & Oil Services, Nordea, Shipping respondent “Without doubt, Africa’s greatest challenge in the Transport sector is the construction and careful maintenance of suitable infrastructure: roads, rail links, bridges, harbours and airports. Poor infrastructure translates to poor transport efficiencies.” Andrew Robinson, Director, Durban, Norton Rose Fulbright South Africa “It is interesting to note that despite widespread concern about overcapacity there has been a steep rise in interest in the construction of new vessels over the last 12 months, particularly in the dry sector. It would seem that several large players in the market are counting on an increase in demand by the time these vessels are delivered in 2015/2016.” Marie Kelly, Partner, Athens, Norton Rose Fulbright Greece

challenge is variously the lack of suitably qualified people (Asia Pacific 21%; Middle East 28%; North America 21%), inadequate infrastructure (Central and South America 50%) and general regulatory controls (Africa 22%). In Europe the greatest challenge is seen as supply and demand imbalances (22%), which is the second greatest challenge for North America respondents (20%), and of no concern to those in the Middle East (0%). Somewhat surprisingly, emissions controls are of relatively low concern (Africa 2%; Asia Pacific 3%; Central and South America 6%; Europe 5%; Middle East 4%; North America 7%).


Question 9

Commentary “In Australia over the next five years we expect a significant increase in investment in infrastructure, much of it focused on the transport sector and in particular in the passenger and freight rail sectors – many government tenders are coming online for significant rail expansion projects and significant rolling stock procurement programs are already or will be soon underway.” Adrian Ahern, Partner, Sydney, Norton Rose Fulbright Australia

What do you believe will happen over the next five years in the region(s) in which you operate? This is another question which we have asked in a previous survey, in 2010. The data is not perfectly comparable due to a change in how we have described the regions since 2010, but the discrepancies are very small, reflecting the amalgamation of results for Asia and Australasia under Asia Pacific, and the movement of North Africa countries from a Middle East and North Africa category to one for all Africa.

Fares/freights –

Rise

Aviation

61%

Shipping

66%

Rail

75%

Stay the same

“For sure, the North American rail industry is one that will be exciting to watch over the next few years: revenues have increased as new markets have emerged, in particular, the carriage of crude oil which reached volumes unforeseeable a few years ago. This new demand and the challenges it poses to the existing equipment and infrastructure, as well as the profitability it brings, should favour long term investments at a rate rarely seen before in this area.” Richard Desgagnes, Partner, Montreal, Norton Rose Fulbright Canada

Fall 26%

13% 25%

8% 20%

5%

70+67 15+w 56 +2013w 62 +2519w 58 +2810w 76 +420w +186w Africa

Asia Pacific 13

15

15

Central and South America

70

20

Europe

6

56

As in 2010, rail is the sector which most expects a rise in fares/ freights (75% – 2010 79%) with a reduced proportion (5% – 2010

7%) expecting a fall. In aviation, a smaller 61% (2010 66%) expect a rise, with a larger 13% (2010 11%) expecting a fall. In shipping, 66% expect a rise, the same as in 2010, but the proportion of those predicting a fall has reduced noticeably (8% – 2010 18%). In both aviation and rail, commentators are more expectant of a rise in fares/freights than participants, whereas the reverse is true in shipping.

18

42

28

62

76

58

25

While the majority (66% – 2010 72%) of all respondents continue to expect fares/freights to rise, a growing proportion (24% – 2010 17%) expect them to stay the same over the next five years. The proportion predicting a fall (10% – 2010 11%) remains static.

North America

10

19

67

Middle East

North America remains the region with the greatest, albeit reduced, expectation of a rise (76% – 2010 80%). The greatest shift in opinion comes from the Middle East where a larger proportion of respondents expect a rise in fares/freights (58% – 2010 45%) and no one predicts a fall, down from 32% in 2010. Africa opinion has strengthened in anticipation of a rise (70% – 2010 45%) and there is a reduction in the proportion of those expecting

a fall (14% – 2010 22%). Only in Central and South America is there an increased expectation of a fall in fares/freights (19% – 2010 17%), while the picture in Europe is of a significant strengthening of the view that fares/freights will stay the same (28% – 2010 11%).


Transport survey

Investment in infrastructure – Aviation

52%

Shipping

62%

Rail

60%

Rise

Stay the same

Fall 36%

12% 31%

7%

31%

9%

56+67 30+14w 69 +2112w 52 +1912w 83 +399w 59 +134w +356w Africa

Asia Pacific


12

14

56

30

Compared to 2010, there is noticeably greater optimism overall that more money will be found for infrastructure investment (57% – 2010 42%) and a much smaller proportion predict a fall in such investment (10% – 2010 37%).

81%

Shipping

77%

Rail

85%

69

Among the sectors, shipping is increasingly the most optimistic in predicting a rise in infrastructure investment (62% – 2010 48%), but belief in this view in rail has grown (60% – 2010 38%). Strikingly, the proportion of rail respondents predicting infrastructure investment will fall has dropped sharply (9% – 2010 44%). Aviation remains relatively uncertain in respect of infrastructure investment. This

Passenger numbers / freight volumes – Aviation

19

67

Rise

Middle East

10

12

21

As is apparent from the trends section of this survey, investment in infrastructure is seen by all sectors as the best help that governments can give these sectors.

Europe

Stay the same

North America

4

13

52

38

6

83

time it is the relative views of rail participants and commentators which are distinct from the comparative harmony of views in aviation and shipping. Rail participants (64%) are clearly more strongly of the view that spending on infrastructure will rise, than rail commentators (51%).

35

59

(83% – 2010 88%), with Central and South America second strongest in this view (69% – 2010 Asia Pacific 63%). In 2010 Central and South America was the least optimistic region, with 42% there predicting a fall in investment, and so it remained in 2013, but at a much reduced level of 12%.

Regionally, the Middle East has the greatest, albeit smaller, proportion who predict a rise in investment

Fall 16%

3%

19%

4% 14%

85+88 13+2w 88 +111w 55 +12w 92 +378 w 80 +4w +173w Africa

Asia Pacific

13

2


The view overall that passenger numbers/freight volume will increase is now held by 82% of respondents (2010 68%), with just 3% predicting a fall (2010 12%). Previously, aviation was the most confident (2010 75%, now 81%), but rail has leapt ahead, with 85% expressing optimism (shipping 77%). That numbers and volume might fall is a view held most strongly by shipping

88

87

respondents, but it is held by just 4% of them (2010 14%) with aviation at 2% and rail at 1%. Rail, in particular, is clearly gaining positive momentum since our 2009 survey found 56% of rail respondents believed that passenger numbers would fall by up to 5%.

Only in shipping is the proportion of participants predicting a rise (76%) smaller than the proportion


Middle East

37

North America 3

4 4

8

13

11

85

Europe

55

of commentators (82%) of that view.

Geographically, the Middle East remains the most optimistic region with an increased proportion predicting a rise (92% – 2010 86%), while Central and South America is most strongly predicting a fall (13% – 2010 Europe 22%). The rising confidence in the Middle East is reflected in all regions, most

17

92

80

notably Asia Pacific (85% rise; 1% fall – 2010 75% rise; 18% fall) and pessimism in Europe has now shrunk to just 2% of respondents. In North America, the shift has been mostly from predicting a fall (3% – 2010 20%) to those predicting numbers and volume will stay the same (17% – 2010 8%).


Routes/services offered – Aviation

64%

Shipping

50%

Rail

53%

Rise

Stay the same

Fall 28%

8%

43%

8% 40%

7%

50+67 41+9w 80 +276w 55 +137w 88 +378w 52 +84w +417w Africa

Asia Pacific

9


6

Europe

Middle East

8

7

8

13

North America

4

7

27

50

41

67

Overall the picture has improved since 2010, when 37% expected an increase, 39% predicted matters would stay the same and 24% expected a reduction. This year, 58% predict an increase and just 7% expect a fall in routes/services offered. Aviation remains the most optimistic sector (64% – 2010 47%) but all sectors indicate that the expectation of a fall in routes/

80

services offered is low (aviation 8%, rail 7%, shipping 8%) which compares well with the relatively high 31% of shipping respondents of this view in 2010. There is, however, less optimism in the fact that only 53% of rail respondents and 50% from shipping predict a rise in the routes/services offered. Aviation participants and commentators broadly concur in this respect, but these views

55

37

are not reflected in rail, where 49% of participants and 59% of commentators predict a rise, with a similar distinction (47%: 53%) in shipping.

The Middle East (88%) scores most strongly in this respect, regionally, as it did in 2010 (70%). In all other regions the expectation of expansion has grown, most obviously so in Central and South America (80% – 2010 45%). The

The allocation of available funds to investment rather than operating costs – Aviation

36%

Shipping

45%

Rail

38%

88

Rise

Stay the same

52

41

greater shift has been away from predictions of a fall in routes/ services offered, for which in 2010 between 13% of Middle East respondents and 45% of Central and South America respondents voted, compared with a corresponding range now of between 4% in the Middle East and 9% in Africa. The results for Europe and North America are similar (a rise is anticipated by 55% in Europe and 52% in North America).

Fall

47%

17% 43%

13%

42%

20%

25+49 55+20w 56 +3417w 36 +2519w 62 +4915w 40 +2513w +4416w Africa

Asia Pacific

20


17

25

55

34

There was little change in this indicator, compared to 2010. The proportion of those predicting a rise in redirected funds remained at 39% but those predicting a fall fell (16% – 2010 22%). In both aviation and shipping, participants and commentators more or less agreed, with participants marginally more of the view that redirection of funds will continue at the same rate or rise. In rail, there is a much

Middle East

56

North America

12

16

19

49

Europe

35

25

16

63

40

25

49

greater expectation of a rise among participants (43%) than commentators (27%).

Aviation and shipping are the sectors which have shifted the most, with those anticipating a rise in the redirection of funds increasing (aviation 36% – 2010 30%; shipping 45% – 2010 40%). The expectation of a redirection to running costs has however fallen for rail (38% – 2010 41%).

44

The regions experiencing the strongest increase in the view that funds will be redirected are Central and South America (56% – 2010 42%) and Asia Pacific (49% – 2010 37%), although the strongest overall remains the Middle East (63% – 2010 54%). Europe and North America respondents return very similar results (although North America respondents are rather more strongly of the view that there will be a redirection of funds) with the major shift for

both being from those thinking there would be no redirection of funds (Europe 16% – 2010 37%; North America 16% – 2010 44%) to those of the view that there will be no change in this respect (Europe 49% – 2010 24%; North America 44% – 2010 19%). Africa respondents have moved noticeably into the middle ground as well, but in their case this has taken a greater proportion from both ends of the range.


Transport survey

121026+526+8910+642+584837+112819+ Question 10

Which of the following will most influence the choice of fuel used in your business or by operators in your operational sector? (Please select one option) Aviation

Shipping

Rail

“It is not surprising that for shipping, regulatory controls are the second most important factor in relation to the choice of fuel. The entry into force of the new low sulphur requirements (0.1%m/m) imposed by MARPOL Annex VI in the emission control areas (ECA) will significantly increase operating costs or require significant capital expenditure for ship-owners and operators operating wholly or largely in such ECAs.” Philip Roche, Partner, London, Norton Rose Fulbright LLP Malcolm Hartwell, Director, Durban, Norton Rose Fulbright South Africa

Regulatory and environmental controls

Fuel price/economy

Fuel availability

Associated technical conversion or operational costs

Associated benefits (e.g. subsidies; access to markets)

Asset*/infrastructure constraints

60 per cent

Commentary


All three sectors agree that fuel price/economy is the strongest determining criterion for fuel choice (aviation 58%; rail 37%; shipping 48%) with general agreement that benefits associated with fuel choice (e.g. subsidies, access to markets) are of low significance (aviation 5%; rail 6%; shipping 2%). Of second importance in fuel choice, for aviation (12%) and rail (26%) respondents, are asset/ infrastructure constraints, while for shipping the second most relevant criterion in fuel choice

is regulatory and environmental controls (28%). Of low significance in all sectors is fuel availability (aviation 6%; rail 2%; shipping 4%). For aviation participants and commentators (both 58%) fuel price/economy is by far the most important criterion. For rail participants, fuel price/ economy is of equal concern to asset/infrastructure constraints (both 32%) whereas for rail commentators, the former (45%) is of much greater significance than the latter (20%). Shipping


participants and commentators agree (49% and 46%) that fuel price/economy is most important, but commentators (30%) are more concerned about regulatory and environmental controls than participants (27%). From a regional perspective, fuel price/economy is the greatest concern (between 46% and 65%) for all regions except Central and South America where the main concern (31%) is regulatory and environmental controls. Such controls also represent the second

most important criterion in Asia Pacific (14%), Europe (20%), the Middle East (32%) and North America (14%). Fuel availability is of low concern regionally except in Africa, where it is the second greatest consideration (14%). Respondents from Asia Pacific (9%) and the Middle East (12%) show a significantly higher concern over associated benefits from fuel choice than other regions.

Section 04

Trends Our annual way ahead transport surveys going back to 2009 have each contained similar questions on three key areas – funding sources, strategy and government support. This has enabled us to identify some emerging trends. The questions we have asked on these topics have evolved over the years but, where possible, we draw direct year-on-year comparisons. The global sector figures which follow are not broken down into regions. As throughout this report, the data relied on here are indicative of the relative weightings given by respondents to specific issues, based on selecting up to three answers for certain questions. Therefore, percentages, where given or indicated, do not all add up to 100%. However they do give an indication of the comparative importance respondents have allocated to the various issues raised, and we have endeavoured to

present the trends graphically in a way which makes the trends, rather than specific levels of response, most readily understandable. Research for each of our surveys has generally taken place at the end of each year, with the report itself then being published early the following year. Years mentioned in this section refer to the time of the research, rather than to the year of actual publication. For example, data from this most recent survey are termed in this section as 2013 results.


Transport survey

Trends analysis 2009 – 2013: Aviation Funding – Which of the following will be the primary sources of funding for your sector over the next two years? (Please select up to three options)

2013 2012 2011 2010 2009

Shareholders/equity

Off balance sheet finance

In aviation, export credit has fallen sharply in popularity from the third most popular source of funding in 2012 to fifth in 2013. Shareholders/ equity remains the most popular source of funding, and greater interest is now being shown in capital markets/bonds and, in particular, government support. Bank debt has fallen in popularity. The use of retained earnings as a funding source continues to decline and all other suggested sources remain static in their appeal.

Islamic finance

Government support

Private equity

H edge funds

Export credit

Capital markets/bonds

R etained earnings

Bank debt

Funding

Sovereign wealth funds

Strategy – Will any of the following activities form part of your strategy over the next 12 months? (Please select up to three options)

2013 2012 2011 2010 2009

Takeover or merger

Raising equity and/or debt

Strategic acquisitions

Strategic disposal of non-core assets*

Strategic alliances/joint ventures/pools

Retrenchment



Strategy The aviation industry continues to move away from retrenchment and the strategic disposal of non-core assets, and interest in alliances/ joint ventures/pools remains strong. Raising equity and strategic acquisitions are rising in popularity, but takeovers or mergers show a surge in interest.

Section 04: Trends

27+30+25+36+40 24+22+20+12+22 24+22+13+17+26 21+3+5+5+8

2013

2012

2011

Government – Which of the following do you feel is the most helpful form of government support for your industry? (Please select up to three options)

2010

There is no significant change to report in the relative appeal of the four tested aspects of government support for aviation. Infrastructure investment remains the favoured form of support, followed by deregulation, ahead of fiscal incentives by an increasing margin. State aid remains of low interest.

2009

Government

40 per cent

Infrastructure investment

40 per cent

Commentary “Hedge funds are critical in business selling world-wide in different currencies.” David Bradley, Programme Manager wing A400M – Retired, Airbus UK, Aviation respondent “The amount of investment will require additional investors as partners.” Aviation respondent, Europe “With growing importance of the enforcement of the EU State Aid rules, it is not surprising that direct state aid measures are of low interest in the different areas of transport. The most recent guidance of the EU Commission as regards (state) infrastructure investments in airports is, however, an excellent instrument to structure this form of government support in a legal and efficient way. The guidelines have not only a strong influence on the finance of airports infrastructure, but also on other transport modes.” Michael Jürgen Werner, Partner, Brussels, Norton Rose Fulbright LLP

Fiscal incentives

40 per cent

Deregulation

40 per cent

State aid


Transport survey

Trends analysis 2009 – 2013: Shipping Funding – Which of the following will be the primary sources of funding for your sector over the next two years? (Please select up to three options)

2013 2012 2011 2010 2009

Shareholders/equity


The pattern of funding sources for shipping shows noticeable changes year to year. The most popular sources remain shareholders/equity and bank debt, but the third most popular source, private equity, is gaining popularity. Capital markets/ bonds are also more popular among shipping respondents, but interest in export credits has dropped considerably. All other suggested sources of funding remain at relatively low levels of interest.

Islamic finance

Government support

Private equity

H edge funds

Export credit


R etained earnings

Bank debt

Funding



2013 2012 2011 2010 2009

Takeover or merger





Retrenchment



Strategy The continuing focus on raising equity and/or debt, and forming strategic alliances/joint ventures/pools is clear again in this year’s results. Also evident is a growing interest in strategic acquisitions, with the next most popular strategy being strategic disposals of non-core assets. Interest in takeovers or mergers remains static.

Section 04: Trends


2013

2012

2011

41+34+24+34+40 24+19+20+19+24 11+21+17+19+28 19+3+6+4+4 2010

Investment by government in infrastructure continues to be strongly supported, while the continuing trend for deregulation has become more popular than fiscal incentives, after government support. State aid remains the least popular form of support, with its only significant support in the shipping community being in the dark days of 2009.

2009

Government

41 per cent


41 per cent

Fiscal incentives

Commentary “For an export driven country like Germany, an excellent infrastructure is key, it is the backbone of the economy. The new German government will have to make substantial investments into infrastructure projects to keep Germany and the German maritime industry competitive. Significant problems with the Kiel Canal locks not working or bridges over the canal or in the Hamburg harbour having to be closed or undergo heavy maintenance have shown that action at this end must be taken rather sooner than later. For the German shipping industry, which has suffered hard during the past years, this is of significant importance.” Timo Noftz, Partner, Hamburg, Norton Rose Fulbright (Germany) LLP

41 per cent

Deregulation

41 per cent

State aid


Transport survey

Trends analysis 2009 – 2013: Rail Funding – Which of the following will be the primary sources of funding for your sector over the next two years? (Please select up to three options)

2013 2012 2011 2010 2009

Shareholders/equity


Islamic finance

Government support

Private equity

H edge funds

Export credit


R etained earnings

Bank debt

Funding Rail funding patterns appear to have settled in recent years, after a very mixed picture in 2009. Government support remains the leading source of funding, with shareholders/ equity, bank debt and capital markets/bonds retaining their relative positions behind that favoured source. All other sources of funding lag some way behind these four, but hedge funds have emerged strongly into fifth place, seemingly drawing some interest away from private equity. The use of retained earnings has dropped significantly.



2013 2012 2011 2010 2009

Takeover or merger





Retrenchment



Strategy As in other sectors, the shift from retrenchment and the disposal of non-core assets continues, with the emphasis on strategic alliances/ joint ventures/pools and a significantly increased interest in strategic acquisitions. There also appears to be more interest in raising equity and/or debt and in takeover or mergers.

Section 04: Trends


2013

2012

2011

62+587+10+71+4+48+3+53+16 11+1216+8+7 14 + 18 + +5+8+10 2010

Predictably, infrastructure investment is the most popular form of government support for rail respondents. This has been clearly the case since 2009. Perhaps of more note is the growing interest in deregulation and fiscal incentives and the static appeal of state aid.

2009

Government

71 per cent


18 per cent

Fiscal incentives

18 per cent

Deregulation

18 per cent

State aid


Transport survey

Section 05

Conclusions Drawing conclusions from views submitted by participants and commentators, unequally represented, across three similar but different sectors and six geographical regions is always an exercise undertaken with care and a degree of trepidation. To avoid drawing misleading conclusions, the results must be understood for what they are: a barometer of current thinking among those who responded to the survey. Nevertheless, it is our view that the conclusions which can be drawn from the data we have collected can be generally substantiated by what is happening in the aviation, rail and shipping sectors. For that reason, we present the data in this report and hope that it will provide some guidance on the direction these sectors take next.


Section 05: Conclusions

Optimism and opportunity

Operational challenges

Funding

Driving this year’s theme – “Where next?” – was a sense of growing optimism in the sectors surveyed, which we had discerned from last year’s survey and is evident more strongly in this year’s results. Opportunities are seen to be emerging amid market conditions which are fairly uniformly positive across all regions and at a level of between 69% and 81% of respondents in all three sectors.

Amid the general sense of optimism, the results reveal some interesting developments in operational thinking: there is relatively low interest in investment in technological improvements, which is significant, particularly in shipping, where the need to conform with emissions controls would appear to make it essential. On the other hand, interest in investing in new assets is high, despite lingering concerns about overcapacity along with significant doubt about the positive potential of high-capacity and high-speed assets, except in the rail sector where support is strong. Of longer term significance, potentially, is concern about a shortage of suitably qualified people to run these sectors in future. That said, few are looking to invest in workforce numbers or skills.

Appropriate funding is essential to realising the benefits of decisions based on optimistic thinking, and the issue of funding in all three sectors has been a central theme in all our surveys. This year’s survey reveals that a substantial 46% of respondents sought or offered funding during 2013, and that a large minority of respondents (29%) are satisfied with their access to funding and are not looking for new financing models or incentives to improve the availability of funding. Of those looking for an improvement in the availability of funding, perhaps with a view to their investment goal of acquiring new assets, achieving a more beneficial view of assets for risk weighting purposes is viewed as a priority.

There are also some discernible shifts in opinion about where the opportunities lie: our results show that China has the strongest appeal of all countries and regions, but at a somewhat reduced level compared to 2010. Western Europe and North America have maintained their level of appeal and interest in Brazil and India has fallen since 2010 while interest in Russia remains static.

The role of government The actions of governments were seen as crucial to resolving problems faced by everyone in the heat of the financial crisis. Yet, every year, some respondents say they do not want government intervention in their business or sector. Overall, however, as in previous years, this year’s results reveal the role of government to be essential, particularly in the provision of infrastructure although the strength of that view seems to be weakening, and few respondents cited poor infrastructure as a reason for their negative view of current market conditions. Calls are now growing for governments to push deregulation, and to increase support for funding and financing by providing guarantees and soft loans in order to improve the availability of funding.

Strategic alliances There is strong interest in strategic alliances, joint ventures and pools, which could be seen as a way to bridge the skills gap. Such cooperation is favoured in all three sectors (although for shipping, no more so than raising debt and/or equity) and is seen as the cause of the second most likely change in the identity of participants in each sector over the next five years. Certainly, these developments are reflected in recent movements in the aviation industry, particularly by Middle Eastern carriers. An imbalance between supply and demand (e.g. overcapacity), and fuel availability and cost are seen as the greatest challenges to operational efficiency. Fuel price/economy is particularly an issue in aviation because it is the key determining factor in fuel choice, while regulatory, environmental and emissions controls rank fairly low in the list of perceived challenges to efficiency in each sector and rank as only moderate concerns as determinants in fuel choice (although more significant in shipping).

In addition, there is strong support for government help in the form of guarantees or soft loans, and for specialist funding institutions to be set up for the transport sector. Marginally more interesting as an investment goal in these sectors is the development of new markets, which may be driving the bid for financial support from government. That said, our annual survey of trends in the primary sources of funding in aviation, rail and shipping indicates a relative weakening of interest in export credits as opposed to other forms of government support. It is no surprise that shareholders/equity, bank debt and capital market/bonds remain the three most popular sources of funding, but there is growing interest in private equity and, in shipping, noticeable interest in hedge funds.


Transport survey

Methodology The survey was sent to people engaged in aviation, rail and shipping activities and was open for responses during the period from December 2013 to January 2014. The survey was distributed using our own contacts, together with the subscription lists of Marine Money, Railway Gazette International and Flight Global. Respondents include owner/operators, builders and manufacturers, financial institutions, professional services advisers, journalists, analysts and academics. Responses came from individuals based in Africa, Asia Pacific, Central and South America, Europe, the Middle East, and North America.

We have analysed the data by industry sector (aviation, rail and shipping) and by region, as listed above. Where useful, we have broken down the sector responses between ‘participants’, (usually those involved in business decision making) and ‘commentators’, (those who provide services or support (e.g. legal, accountancy, journalism, consultancy, academic) to businesses in these sectors). We recognise that we could take other approaches to presenting the data.

45+7 30+25K +17253318K Breakdown of sectors Aviation

Shipping

Breakdown of regions

Rail

Africa Europe

Asia Pacific Middle East

Central and South America North America

7

18

25

17

3

2

45

30

53


Reader notes Readers are invited to bear in mind that the results reported here can never represent more than an empirical analysis of the subjective comments of those who chose to respond to the survey. This year we received over 850 responses, broken down into aviation: 381; rail: 215; and shipping: 261. This is a smaller response than last year but still provides useful data and, we would suggest, some reasonable indications of the thinking of those currently engaged in the sectors covered. Over 65% of the responses came from participants and, significantly, we maintained the level of 120 responses from owner/operators. The number of responses from financiers rose to more than 80, but there were fewer from builders and manufacturers (around 60, from around 70 last year). This is significant because these groups represent the key participants in aviation, rail and shipping and give the survey results a substantial foundation. In every region, the response from participants was greater than that from commentators, while on the commentators’ side over 70% of respondents classified themselves as professional service providers. By region, at least half the responses from owner/operators, financiers and builders and manufacturers came from respondents in Europe. The countries best represented in each region were South Africa, Australia (narrowly ahead of China), Brazil, the UK, the UAE and the US. Just as the size of response differs from sector to sector, the size of the response from each geographical region varies considerably, and responses come from individuals in a range of occupations, with varying degrees of decision making authority. Against that background, we take the view that we should report the data empirically, but with a manageable amount of breakdown. Therefore, results are normally reported to show the global response representing the totality of

results, either for all sectors together, or for a particular industry sector. Unless otherwise clear from the content, regional data are always presented as a global result for all three sectors together to indicate the overall sentiment of a particular region. We have done this both because we feel the sector breakdowns offer a clear enough indication of views in the three sectors, but also because the disparity in regional samples, by sector, will produce unreliable impressions. As in previous reports, in addition to the analysis of this year’s survey results, we have included a trends section at the end of the report which provides a snapshot of certain year-on-year data which we have collected since we began these reports in 2009. This helps to identify any longer term trends. Whilst the questions that we have asked have not remained identical, there is a sufficient degree of commonality between them to make a comparison possible and meaningful. Not all respondents have answered all questions. For questions where respondents were asked to select a number of optional responses, the global percentage shown for each option reflects the number of responses selecting that option out of the total number of respondents. The data for those questions will, therefore, show overall totals in excess of 100%, and it is the relative values of the responses which are of significance. We have also chosen to ignore the relatively small percentage of responses which selected an ‘other’ option in one or two questions, and grossed up the responses to the given options, by a corresponding percentage. The views expressed in this document by named individuals are personal and are not necessarily those of their employer. Norton Rose Fulbright – March 2014 33

Transport survey

Contacts For further information, please contact: Harry Theochari Head of Transport Norton Rose Fulbright LLP, London Tel +44 20 7444 3648

[email protected]

Asia Pacific

Europe

Ernest van Buuren Partner, Brisbane Norton Rose Fulbright Australia Tel +61 7 3414 2276

Gervais Green Partner, Singapore Norton Rose Fulbright (Asia) LLP Tel +65 6309 5326

Duncan Batchelor Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 2650

Adrian Ahern Partner, Sydney Norton Rose Fulbright Australia Tel +61 2 9330 8216

Jim James Partner, Hong Kong Norton Rose Fulbright Hong Kong Tel +852 3405 2438

Giles Brand Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 3471

Davide Barzilai Partner, Hong Kong Norton Rose Fulbright Hong Kong Tel +852 3405 2543

Ben Rose Partner, Singapore Norton Rose Fulbright (Asia) LLP Tel +65 6309 5324

Chris Brown Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 3822

Leigh Borrello Partner, Sydney Norton Rose Fulbright Australia Tel +61 2 9330 8408

Keith Sandilands Partner, Singapore Norton Rose Fulbright (Asia) LLP Tel +65 6309 5371

Yianni Cheilas Partner, Athens Norton Rose Fulbright Greece* Tel +30 210 94 75 345

Nino Di Bartolomeo Partner, Sydney Norton Rose Fulbright Australia Tel +61 2 9330 8234

Tom Young Partner, Brisbane Norton Rose Fulbright Australia Tel +61 7 3414 2845

Christine Ezcutari Partner, Paris Norton Rose Fulbright LLP Tel +33 1 56 59 5260

Robert Driver Partner, Singapore Norton Rose Fulbright (Asia) LLP Tel +65 6309 5308

Canada

Emma Giddings Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 3746

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Jeremy Gibb Partner, Tokyo Norton Rose Fulbright Gaikokuho Jimu Bengoshi Jimusho– Norton Rose Fulbright (Asia) LLP Tel +813 5218 6828 [email protected]

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Richard L. Desgagnés Partner, Montréal Norton Rose Fulbright Canada LLP Tel +1 514 847 4431

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Paul Raymond Partner, Montréal Norton Rose Fulbright Canada LLP Tel +1 514 847 4479

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Marc Hamilton Partner, Paris Norton Rose Fulbright LLP Tel +33 1 56 59 5277

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Europe Simon Hartley Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 3436

Umberto Mauro Partner, Rome Norton Rose Fulbright Studio Legale Tel +39 06 684109 1

Dimitri Sofianopoulos Partner, Athens Norton Rose Fulbright Greece* Tel +30 210 94 75 357

Wouter Hertzberger Partner, Amsterdam Norton Rose Fulbright LLP Tel +31 20 462 9427

Gennaro Mazzuoccolo Partner, Milan Norton Rose Fulbright Studio Legale Tel +39 02 8635 941

Ralf Springer Partner, Munich Norton Rose Fulbright LLP Tel +49 89 212148 203

Roger Heward Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 2568

Martin McCann Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 3573

James Stonebridge Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 3449

Tom Johnson Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 3592

Timo Noftz Partner, Hamburg Norton Rose Fulbright (Germany) LLP Tel +49 40 970799 190

Dirk Trautmann Partner, Munich Norton Rose Fulbright LLP Tel +49 89 212148 203

Marie Kelly Partner, Athens Norton Rose Fulbright Greece* Tel +30 210 94 75 340

George Paterson Partner, Paris Norton Rose Fulbright LLP Tel +33 1 56 59 5315

Michael Jürgen Werner Parner, Brussels Norton Rose Fulbright LLP Tel +32 2 237 6150

Simon Lew Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 2799

Philip Roche Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 2609

Gijs van Leeuwen Partner, Amsterdam Norton Rose Fulbright LLP Tel + 31 20 462 9430

Mark Lloyd Williams Partner, London Norton Rose Fulbright LLP Tel +44 20 7444 3507

Remco Smorenburg Partner, Amsterdam Norton Rose Fulbright LLP Tel +31 20 462 9416

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* Norton Rose Fulbright Greece is the trading name of Norton Rose Fulbright, Sofianopoulos, Tsohou, Cheilas, Kelly, Koroxenidis, Assimakis, Liberopoulos and Partners Law Firm


Transport survey

Middle East

United States

Mohammed Paracha Partner, Dubai Norton Rose Fulbright (Middle East) LLP Tel +971 4 369 6311

James Tussing Partner, New York Fulbright & Jaworski LLP Tel +1 212 318 3024

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South Africa Andrew Robinson Director, Durban Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) Tel +27 31 582 5630

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Brad Berman Partner, New York Fulbright & Jaworski LLP Tel +1 212 318 3095

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Sean Corrigan Partner, New York Fulbright & Jaworski LLP Tel +1 212 318 3096

Stephen Boikanyo Director, Johannesburg Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) Tel +27 11 685 8674

Brian Devine Partner, New York Fulbright & Jaworski LLP Tel +1 212 318 3137

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Malcolm Hartwell Director, Durban Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) Tel +27 31 582 5622

Marc Latman Partner, New York Fulbright & Jaworski LLP Tel +1 212 318 3108

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Heather Manson Director, Johannesburg Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) Tel +27 11 685 8901

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Louis Strubeck Partner, New York Fulbright & Jaworski LLP Tel +1 214 855 8040

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Transport market leaders Our transport lawyers have long been deeply engaged in advising participants in the aviation, rail and shipping sectors across the full spectrum of legal matters: financing; flotations; M&A; capital markets; regulatory; environmental; planning; health & safety; logistics; infrastructure; IP & technology; dispute resolution. With some 350 transport lawyers worldwide, we pride ourselves on being one of the world’s leading transport practices and are regarded as market leaders in this area by Chambers and Partners and Legal 500.

Top tier rankings Asset Finance Asset Finance: Aviation Finance Asset Finance: Rail Finance Asset Finance: Shipping Finance Chambers UK 2014 Banking & Finance: Asset Finance & Leasing: Aviation: Germany Shipping Finance (International firms): Greece Transportation: Aviation: Finance: France Transportation: Shipping: Finance: France Chambers Europe 2013

Transport: Australia Asia Pacific Legal 500 2013 Asset Finance Banking & Finance: Asset Finance & Leasing: Aviation: Germany Shipping: Finance Shipping Finance (International firms): Greece Shipping: Finance: Asia Pacific Chambers Global 2013

Shipping: International Firms: Finance: Singapore Shipping: Finance Chambers Asia 2013

Awards Shipping Law Firm of the Year Global Transport Finance Awards 2013 Legal House of the Year Global Transport Finance Awards 2012 Aviation Law Firm of the Year Aviation 100 2012 Law Firm of the Year Airline Economics 2012 Editor’s Deal of the Year Award African Deal of the Year Award Latin American Deal of the Year Award AirFinance Journal Awards 2012

Legal House of the Year Jane’s Transport Finance Awards 2010 and 2011 Asset Finance Legal Provider of the Year Leasing Life Awards 2011 Africa Transport Deal of the Year Project Finance International Awards 2010 France: Aviation Law Firm of the Year Spain: Aviation Law Firm of the Year UK: Aviation Law Firm of the Year ACQ Law Awards 2010 Transport Law Firm of the Year Bahrain Corporate International Legal Awards 2010

Rankings, awards and accolades included in this publication pre-date the combination of Norton Rose and Fulbright and Jaworski LLP on June 3, 2013.


Transport survey

Global resources

Our office locations

People worldwide

7500

Legal staff worldwide

3800 Offices

Europe

Canada

Australia

Amsterdam

Moscow

Calgary

Brisbane

Athens

Munich

Montréal

Canberra

Brussels

Paris

Ottawa

Melbourne

Frankfurt

Piraeus

Québec

Perth

Hamburg

Prague

Toronto

Sydney

London

Rome

Milan

Warsaw

Latin America

Africa

Bogotá

Cape Town

Caracas

Casablanca

Rio de Janeiro (by June 2014)

Dar es Salaam

50+

United States

Key industry strengths

Houston

Financial institutions

Los Angeles

Energy

Minneapolis

Austin

New York

Dallas

PittsburghSouthpointe

Denver

St Louis

Asia

San Antonio

Bangkok

Washington DC

Beijing

Infrastructure, mining and commodities

Hong Kong

Transport

Shanghai

Technology and innovation

Singapore

Life sciences and healthcare


Jakarta*

*Susandarini & Partners in Association with Norton Rose Fulbright Australia **Mohammed Al-Ghamdi Law Firm in Association with Fulbright & Jaworski LLP

Tokyo

Durban Johannesburg Middle East Abu Dhabi Bahrain Dubai Riyadh** Central Asia Almaty

Norton Rose Fulbright Norton Rose Fulbright is a global legal practice. We provide the world’s pre-eminent corporations and fi nancial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia. Recognized for our industry focus, we are strong across all the key industry sectors: fi nancial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare. Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offi ces and to maintain that level of quality at every point of contact. Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members (‘the Norton Rose Fulbright members’) of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

References to ‘Norton Rose Fulbright’, ‘the law fi rm’, and ‘legal practice’ are to one or more of the Norton Rose Fulbright members or to one of their respective affi liates (together ‘Norton Rose Fulbright entity/entities’). No individual who is a member, partner, shareholder, director, employee or consultant of, in or to any Norton Rose Fulbright entity (whether or not such individual is described as a ‘partner’) accepts or assumes responsibility, or has any liability, to any person in respect of this communication. Any reference to a partner or director is to a member, employee or consultant with equivalent standing and qualifi cations of the relevant Norton Rose Fulbright entity. The purpose of this communication is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of any Norton Rose Fulbright entity on the points of law discussed. You must take specifi c legal advice on any particular matter which concerns you. If you require any advice or further information, please speak to your usual contact at Norton Rose Fulbright. © Norton Rose Fulbright LLP NRF17283 03/14 (UK) Extracts may be copied provided their source is acknowledged.

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