China and India identified as key markets for the transport sector

48% of respondents to the Norton Rose Fulbright The way ahead Transport survey believe Asia Pacific offers the best investment opportunities over the next five years

• 92% of rail and 77% of aviation respondents say market conditions are positive, compared with just 15% of shipping respondents
• 39% of all respondents say consolidation will form the most important part of transport businesses’ strategy over the next 12 months
• 52% say that a global recession poses the greatest threat to their industry
• 67% anticipate an increase in investment in technology over the next five years
• Infrastructure investment is viewed as the most helpful form of government support
• Bank debt will act as the sector’s principal source of funding over the next two years

The transport sector is looking to Asia Pacific as the key market for investment over the next five years, according to the seventh The way ahead Transport survey from global law firm Norton Rose Fulbright. China and India are the most popular jurisdictions for investment, followed by the US, with growth through consolidation viewed as the best investment opportunity currently. While confidence among respondents from the aviation and rail industries is high, owing to lower oil prices, the availability of funding and the impact of infrastructure improvements, the shipping industry remains the least optimistic as a result of overcapacity in many subsectors of the market.

Over half (52%) of all respondents to the Norton Rose Fulbright survey agree that a global recession poses the greatest threat to their industry. However, despite political uncertainty, most agree that the transport sector can expect to enjoy further growth over the next five years.  Rising passenger numbers and freight volumes are anticipated (by 73%) and an increase in the number of routes and services is expected (52%).

Investment in technology is expected to rise, according to 67%, with low carbon technology and predictive analytics expected to represent the most significant driver of change in the transport sector over the next five years.

Infrastructure remains a key theme for the sector. After consolidation, infrastructure improvements are viewed as the best investment opportunity currently (by 19%), and infrastructure investment is seen as the most helpful form of government support (by 25%). For the aviation, rail and road industries, inadequate infrastructure is seen as the greatest challenge to the operational efficiency of their industries.

Bank debt, capital markets and private equity will represent transport businesses’ main sources of funding over the next two years, and 74% of respondents expect the availability of funds to stay the same, or even increase, over the next five years.

Harry Theochari, global head of transport at Norton Rose Fulbright, comments:

“The transport sector is continuing to look to Asia Pacific for investment opportunities, encouraged by rising demand and China’s ambitious Belt and Road initiative, a modern day silk road which will improve China’s infrastructure links with the rest of the world.

“Sentiment is high in the aviation and rail industries, buoyed by the expectation of increased passenger numbers. However, shipping continues to feel the effects of overcapacity in many markets, and an increase in enforcement actions is widely predicted, although in the longer term respondents believe conditions will improve.

“Investment in infrastructure and technology, and consolidation through both M&A and joint ventures, will be key drivers for transforming the transport sector and assisting growth.

“The adoption of new technology in particular will help to address numerous issues the sector has been grappling with in recent years, such as low carbon technology to meet increasingly stringent environmental legislation, and predictive analytics to anticipate repairs and maintenance and better understand and forecast consumer behavior.

“While respondents are most fearful of the impact of a worldwide recession, they will be watching closely the implications of the UK’s referendum result. The transport sector is international and highly regulated and any UK exit from the EU would need to take into account a number of complex issues.”

Aviation

Market confidence
The majority (77%) of respondents from the aviation industry report that market conditions for their industry are positive, compared with 88% in 2015. Continuing optimism is largely attributed to lower oil prices. Of the respondents who view current conditions as positive, 46% cite the oil price, up from 18% who highlighted lower fuel and oil prices in 2015.

While lower oil prices are assisting the aviation industry, 23% expect fuel prices to remain at their current levels over the next five years and a mere 4% believe fuel costs will fall further. Despite the likely impact of higher fuel costs on profitability, 67% anticipate fares and freight costs will remain unchanged or will decrease over this period.  Respondents appear more confident that growth in demand will continue and 83% anticipate higher passenger numbers and 79% an increase in the number of routes and services offered.

However, aviation respondents are mindful of a change in the health of the economy and 38% believe the greatest threat to the aviation industry over the next five years is a global recession, followed by 31% who highlight an increase in terrorism.

Opportunities for investment
Almost half of respondents (48%) expect the availability of funding to remain unchanged, while 33% believe funding will become increasingly available. The capital markets are expected to provide the industry’s main source of funding over the next two years, together with operating leases, which free up capital, both selected by 25%, followed closely by bank debt, cited by 23%.

Half of respondents expect investment in technology to increase over the next five years, with fuel-efficient engine technology expected to be the most significant driver of change (by 52%), again underlining the importance of fuel costs to the industry.

Asia Pacific is viewed as the region offering the best investment opportunities over the next two to five years (44%), followed by North America (17%). By country, China (22%) is the most popular market for investment, followed by the US (19%) and India (15%).

Consolidation
Nearly a third (28%) believe that a merger or acquisition offers the best investment opportunity currently, (compared with 5% in 2015), while the proportion of respondents who favour less formal co-operation via joint ventures, alliances and pools has fallen (by 11%, down from 28%) in the past year. Consolidation is expected to form the most important part of aviation businesses’ strategies over the next 12 months, via M&A (by 23%), or via joint ventures, alliances and pools (15%). A further 19% believe that reallocating existing capacity from stagnant to growth sectors and clients will be key.

Investment in infrastructure improvements appears to be an increasingly attractive investment opportunity, by 21%, compared with 13% in 2015. To reinforce the importance of infrastructure investment, 27% say that inadequate infrastructure is the greatest challenge to the operational efficiency of the aviation industry.

Regulation
Deregulation is viewed as the most helpful form of government support (by 42%), closely followed by infrastructure investment (by 40%). A need for greater global co-operation to tackle terrorism is also highlighted (27%).

Respondents are divided about what type of regulation has had the greatest impact on aviation over the past decade, citing fragmented global regulation (28%), the regulation of competition and barriers to entry (28%) and, to a lesser extent, trade and financial sanctions (15%) and increased environmental regulation (13%).

Rail

The majority (92%) of respondents from the rail industry report that market conditions are currently positive. This confidence is associated with the impact of infrastructure improvements (26%), the availability of funding for investment (22%), improved economic conditions in key markets (13%) and an increasingly liberalised rail market (13%).

Confidence is also fuelled by the expectation by 88% of respondents that passenger numbers and freight volumes will continue to rise. Not a single respondent believes that passenger numbers and freight volumes are likely to decrease, nor that infrastructure investment will be cut.

Investment opportunities
Asia Pacific is thought to offer the best investment opportunities over the next two to five years (by 40%), followed by Europe (by 34%) - the most popular market for investment in 2015. When measured by country, the UK (16%) leads, followed by the US (14%) and China (10%).

Infrastructure improvements are thought to offer the optimal investment opportunity for the rail industry currently (by 44%), while 20% favour investment in additional rolling stock.

Most respondents (80%) anticipate that investment in technology will increase over the next five years. During this period predictive analytics (40%) and the use of autonomous technology (36%) are expected to be the most significant drivers of change.

Government support
Infrastructure remains firmly on the rail industry’s agenda. While 26% report that the impact of infrastructure improvements is creating positive market conditions for the rail industry, 48% believe that inadequate infrastructure presents the greatest challenge to the operational efficiency of their industry. Infrastructure investment would be the most helpful form of government support for the industry, according to 80%.

Almost a third of respondents (31%) expect governments to represent the rail industry’s primary source of funding over the next two years, followed by bank debt (17%).

Competition laws and barriers to entry are highlighted as the regulatory developments that have affected the rail industry the most over the past decade (40%), followed by increased environmental regulation (24%).

Respondents hold widely divergent views when asked what they see as the greatest threat to the rail industry over the next five years, pointing to continued political and economic uncertainty within the Eurozone (28%), an increase in funding costs (28%) and a global recession (20%).

While just 4% view joint ventures, alliances and pools as the optimal investment opportunities for the rail industry currently, 35% consider that these forms of co-operation will form the most important part of rail businesses’ strategy over the next 12 months. This is followed by the ordering of new rolling stock (23%) as the industry seeks to meet the expected increase in demand for rail transport.

Shipping

Shipping is the least optimistic industry within the transport sector, by a significant margin. Only 15% believe that current market conditions are positive, down from 33% in 2015 and 69% in 2014.

Overcapacity is the principal reason given for this lack of optimism (66%), followed, to a lesser extent, by economic uncertainty in key markets (27%).

Respondents are more optimistic when asked to consider the outlook for shipping over the next five years. Fares and freight costs will increase according to 67% and the same proportion anticipate an upturn in passenger numbers and freight volumes. The number of routes and services offered is also expected to rise, according to 35%. However, just 22% believe that funding will become more readily available and 64% think that the number of enforcement actions will increase as lenders seek to protect their positions and recover losses. Most (68%) expect fuel costs to rise.

Investment opportunities
Much of the shipping industry (58%) continues to favour Asia Pacific for investment opportunities over the next two to five years, followed, to a far lesser extent, by Europe (16%). China (17%) and India (16%) remain the most popular markets for investment.

A merger or acquisition is seen as the optimal investment opportunity (by 34%, up from 29% in 2015), while 13% favour joint ventures, alliances and pools (down from 28% in 2015). Respondents expect consolidation to be at the centre of shipping businesses’ strategies over the next 12 months, either in the form of M&A (22%) or joint ventures (19%), while 22% expect a focus on the disposal of non-core assets.

Almost three-quarters (72%) expect investment in technology to increase over the next five years, with low carbon technology expected to have the most significant impact on the industry during this period (by 33%), followed by predictive analytics (by 24%).

Regulation
Almost half (42%) believe that greater transparency in the application and enforcement of existing and proposed regulations would be the most helpful form of government support for the shipping industry, more so than fiscal incentives (32%) or investment in infrastructure (29%).

Environmental regulation is seen as the regulation that has had the greatest impact on shipping over the past decade (by 49%), followed by trade and financial sanctions (by 25%).

Supply and demand imbalances are seen as the greatest challenge to the operational efficiency of the industry (by 47%), followed by a lack of qualified people (12%) and emission controls (9%). A global recession is seen as the greatest threat to the health of shipping over the next five years (by 68%). To a lesser extent, respondents are also concerned about the impact of enforcement by creditors on debt obligations (12%) and continued political and economic uncertainty in the Eurozone (8%).

Bank debt is once again expected to act as shipping’s primary source of funding over the next two years (22%), followed by shareholder support (18%) and private equity (16%). Despite the problem of overcapacity in many sub-sectors of the industry, fuelled by new build vessels coming on to the market, 11% think that ECA funding will be the industry’s main source of finance.

About this survey

The survey, entitled “The Way Ahead” is the seventh transport survey report released by Norton Rose Fulbright. It details 200 responses from a range of companies involved in aviation, rail and shipping globally including financiers, owner/operators, manufacturers, government entities and professional services firms, during April 2016.

The full survey report is available at: www.nortonrosefulbright.com/thewayahead

For further information please contact:

Jane Lougher, Global head of business development - Transport
Tel +44 20 7444 2063; Mob: +44 7595 886 200
jane.lougher@nortonrosefulbright.com

Heledd Phelps Brown, Head of PR
Tel +44 20 7444 2890; Mob: +44 77 0297 1352
heledd.phelps-brown@nortonrosefulbright.com

Notes for editors:

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