RegionsAfricaOvercapacity and Competition to Impact on EMEA Transport in 2014

Overcapacity and Competition to Impact on EMEA Transport in 2014

Persistent overcapacity, pressure on volumes and rates, and intensifying competition will be key challenges across the Europe, Middle East and Africa (EMEA) shipping, airlines and rail sectors in 2014, according to Fitch Ratings.

In its report, entitled
‘2014 Outlook: EMEA Airlines, Shipping and Rail’
, the credit ratings agency (CRA) says that these factors drive its negative sector outlooks for shipping and airlines, with shipping likely to be the hardest hit of the two. Fitch expect a more muted impact on rail, while greater confidence in the UK franchising process should make earnings more predictable, resulting in a stable outlook for the sector.

Fitch expects shipping companies to focus on measures to combat overcapacity and volatile freight rates in 2014. These are likely to include idling and scrapping ships and operating vessels at well below their maximum speed to reduce fuel costs. Container and crude tanker markets are likely to face the biggest challenge, particularly as the container vessel fleet is likely to continue growing faster than underlying demand. Liquefied natural gas (LNG) and offshore shipping will be more insulated by their use of long-term contracts and their relatively stable cash flows.

Shipping companies whose operations are diversified into more profitable and stable segments, such as Sovcomflot in LNG and offshore, or which operate in other higher margin or stable industries, such as AP Moeller-Maersk, are better placed to generate solid earnings before interest, tax, depreciation and amortisation (EBITDA) and cash flow. Companies that concentrate on one poorly performing segment, such as Hapag-Lloyd in container shipping, will find it challenging to achieve sound cash flows.

Fitch notes that for EMEA airlines, some signs of stabilisation are starting to emerge and improving economic growth should lead to a moderate rise in air travel demand in 2014. Competition, however, will intensify. European legacy airlines still adjusting to competition from low cost carriers will also have to cope with Gulf carriers that are aggressively expanding their fleet and adding to overcapacity. Airlines with less diversified networks, weaker positions on core routes and less flexible cost structures, such as Alitalia and Iberia, are more exposed to the impact of these changes.

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