In International Shipping News 14/12/2016
Airline profitability will weaken slightly in the year ahead, Moody’s Investors Service says in its 2017 outlook for the global transportation industry. Aircraft lessors’ margins will weaken amid stiff competition, while shipping companies will continue to be challenged by an oversupply of vessels. North American railroad operators will see prices rise as freight volumes stabilize.
Moody’s outlook for the global airline industry is stable. Operating margin is expected to come in at around 9.5%, while operating profit will decline by about 11%. US airlines will see a 20% contraction in operating profit due mainly to increased labor costs, while Latin American carriers will see an 80% expansion on the back of improving economic activity and capacity discipline. Passenger demand will grow about 5.2%, trailing capacity expansion by about half a percentage point.
“Growth in passenger demand will remain slow overall, due to lackluster global economic growth, geopolitical uncertainties and the threat of terrorism,” said Moody’s analyst Jonathan Root. “But increasing demand in developing markets, supported by rising disposable incomes and loosening regulations, will act as an offset.”
Developing markets will also continue to lead capacity expansion, spurred by the still-low cost of fuel, the rising number of low-cost carriers and deliveries of new aircraft that need to be placed in service.
And with growth in global passenger demand slowing to about 5% over the long term, aircraft leasing companies run the risk of excess capacity in certain models of aircraft, Moody’s says. Meanwhile, leasers’ net finance margins will weaken moderately as a result of strong competition from new entrants. Market liquidity is, however, adequate for funding aircraft acquisitions, used aircraft sales and debt refinancing.
Moody’s outlook for the global shipping industry in 2017 is negative, reflecting continued oversupply and a 7%-10% decline in EBITDA. Dry bulk freight rates will remain low due to subdued demand, though deferred vessel deliveries, cancellations and scrapping will help curb net capacity growth.
Meanwhile, Moody’s 2017 outlook for North American Railroads is stable, with revenue expected to grow between 0% and 2.5%. And after a steep decline this year, freight volumes should stabilize near current levels, with core pricing rising between 2% and 2.5% as a result. Coal shipments will bounce back from the recent plunge, though natural gas prices and the weather pose risks. Grain shipments should continue to show strong growth, while robust consumer spending could spur growth in intermodal.
Railroad operators have demonstrated the ability to adapt to changing demand conditions, Moody’s says. Operating margins remained largely intact when freight demand deteriorated, while in the coming year shareholder returns will demonstrate companies’ willingness to manage elevated leverage.
Source: Moody’s
