HSBC study spots a dark new twist in aviation sector by 2013

Asian LCCs at most risk of declining capacity growth.

HSBC expects full service airlines, especially those with large cargo operations, to improve the most in 2013. In contrast, off a stronger base, risks are rising for LCCs, it said.

Here's more from HSBC:

HSBC tracks capacity growth in all main transport sectors and the outlook varies considerably. Our capacity forecasts indicate that airfreight has the lowest capacity risks from a pure volume perspective.

Higher risks are in container and drybulk shipping, and narrow body aircraft capacity. [Check the graph].

Stealth additions in the air freight market.

We believe this raw data does not tell the whole story. The airfreight market is coming off a very weak 2012. In addition, the market is becoming more fragmented as the large amount of belly space available in jets such as the B777-300ER is actually adding participants to the market. For example, if a B777-300ER replaces a B747-400, assuming a standard configuration, then the seats offered will fall 12%, but the payload that can be carried in the belly of the jet will be 2-3 times greater.

Liners are in it together

We expect container vessel delivery to peak in 2013, which will add substantial capacity at a time of uncertain demand. However, high fuel costs, low steaming and a desire for scale is controlling capacity, at least on Asia-Europe routes. Very large vessels and slow steaming are forcing liners to enter alliances (for example, the No. 2 and the No. 3 liners in the world decided to enter into an alliance at the start of 2012). This is consolidating the industry and creating barriers to entry. While liners struggle to maintain discipline for any extended period, bouts of rational behaviour have had a powerful impact on rates in the short term.

LCCs risks rising

The rise in narrow body airline seat capacity in Asia is caused largely by high growth amongst Asian low-cost carriers (LCCs). This essentially
causes further fragmentation of the market and raises risks. Likewise, the tramp (i.e. non- scheduled) nature of drybulk services and disparate vessel ownership mean there is little the sector can do to mitigate high and chronic capacity risks.

Rising leverage likely in North Asia

Given the magnitude of capacity additions in much of the transport sector, plus the low equity base, further fund raising would appear to be likely. We expect the likelihood of equity fund raising to be driven by geography more than perhaps necessity.

We expect South and Southeast Asia to be markets where equity fund raising is more likely. In contrast, although gearing is high, domestic banks will probably provide an alternative source of funding in most of the North Asian markets.