Macroeconomic factors to put brakes on Asia Pac’s transport sector

The financial performance of transportation companies in the Asia-Pacific region continued its gradual improvement into mid 2011 largely due to improved macroeconomic conditions. But higher fuel prices and the growing economic uncertainties of the past two months could cloud the sustainable recovery and growth that we have seen so far in the industry.

That's according to an industry report card titled " Asia-Pacific Transportation Companies: Stories Differ, But Fuel Prices And Economic Uncertainties Are Common Hurdles," that Standard & Poor's Ratings Services recently published.

According to the report, some of the sectors that the global financial crisis affected the most, especially airlines and container shipping, recovered faster amid the economic growth of the past year. Nonetheless, higher oil prices have lowered companies' profitability. Average jet fuel prices had increased 46% year-on-year as of June 30, 2011.

One-off events such as the tsunami in Japan and floods in Queensland also affected profitability in the first half of 2011. But the trend toward alliances continues with incumbent airlines and low cost carriers negotiating ventures. This should increase the competition in short- and middle-haul routes.

"The business outlook for shipping companies in Asia-Pacific remains weak because of continuing transportation supply exceeding demand. In addition to high fuel prices and economic uncertainties, other factors, mainly overcapacity, will continue to hinder the recovery of the main shipping sectors in Asia-Pacific and globally," said Standard & Poor's credit analyst Manuel Guerena.

"So, while we expect global shipping volumes to grow during the year, we believe overcapacity will result in strong pressure on prices and continuing volatility in freight rates at least until the second half of 2012."

Nevertheless, Standard & Poor's believes that industry fundamentals will improve over time, along with a potential increase in demand from fast growing economies in the Asia-Pacific region, such as China, India, Vietnam, and Indonesia.