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Falling oil prices on the economy and transport sector: is less always more?
By
ZUBIN POONAWALLA
Average worldtrade growthin FY14 was3.3% accordingto the CPB index.A downwardtrendof the
growthrates isvisible towardsthe endof the year,inline withdecliningglobal PurchaseManager
Indices(‘PMIs’) whichpointtoslowingeconomicgrowthoverthe lastmonthsof the year.At the
same time,the PMIs were above the 50 growthline inall regionsforall monthsalbeitata narrow
marginespeciallyinChina&the Eurozone where economicworriesare clearlyvisible.The USA
showedthe strongesteconomicperformance.IMFnow forecastsglobal GDPto grow by3.5% in
FY15 & 3.7% inFY16, reviseddownby0.3% for bothyears.For the US, the IMF has adjustedthe
forecastsignificantlyupwardsto3.6%,due to strongerprivate domesticdemand.The Eurozone
forecasthas beenreviseddownto 1.2%,while GDPgrowthin Chinahas beenmarkeddownto
below7%.Fuel & oil pricesendedthe yeardown45 – 50 %,largelydrivenbysupplyfactors.While
the impact onprivate consumption &the overall economyvariesstronglybyregion(itspositive
effectisalsopartlyoffsetbythe appreciationof the USDollar),loweroil pricesgenerallymeanlower
costs fortransport companies&thusare oftensimplyinterpretedasapositive signforthe sector.
However,significantvolatilityinoil prices(particularlythe step-changesexperiencedtowardsthe
endof the year) leadtoa pressure onfreightrates&ticketpricesas transportcustomers
(passengersorshippers)pushfora pass-throughof those veryvisiblesavings.Inaddition,margin
callson out-of-the-moneyhedgescanimpactcompanieswithweakercreditratings/balance sheets.
In shipping,lowerbunkerpriceshave ledtoquestionfastersteaming,delayeddecommissioningor
evenre-commissioningof older,lessfuel-efficientvessels,whichcouldultimatelyoffsetthe positive
effectof the oil price decline.Anoil price contagion leadstoincreasedfloatingstorage of oil in
tankers,soakingupsupplyandimprovingearnings.Inthe aviationsector,whereairlinesmaybe
expectedtobe the biggestwinnersamongall transportmodesgiventhe highratioof fuel coststo
total operatingcosts,we findthatthe impactof competitionfromcarriers(whootherwise mayhave
beenreducingunviable capacity);hedging;andcustomerexpectationsof reducedticketprices
(whetherimplicit,orexplicitvialowerfuelsurcharges) meanthatlessisnotnecessarilymore.In
addition,volatilityinthe fuel price addsafurtherdimensionof complexitytotransportcompanies
operationssuchasin capacityplanningandfleetmix,networkandroute management,modal shifts
and pricing.These factors,combinedwithremainingovercapacityinmanytransportsub-sectors,
continuedglobal economicuncertainty,andsignificantgeo-political impactsonoil prices(which
have,inrecenttimes,dominatedthe longer-termupwarddemandledtrendexperiencedoverthe
lastdecade) meanthatbusinesseswill continue torequire flexibilityintheirbusinessmodelsin
orderto adapt.
Shipping & sea freight
FacingrealitySupplygrowthagain outpaceddemandinmostshippingsegmentsinFY14 as economic
growth& worldtrade remainedcomparativelysluggish.Worldtrade growthwas3.4% inFY14 while
the containership&bulkcarrierfleetexpandedby5-6% accordingto Clarkson.ISL’sContainer
ThroughputIndex increasedbyanaverage of 4.3% Y-o-Y.On the positive side,the orderbook

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remainedratherflatforall shippingsegments&ishighestfordrybulkvessels(22%).For
containerships,the orderbookatthe endof FY14 was the lowestithadbeenin15 yearsaccording
to Alphaliner(17%of the existingcontainershipfleet).Andyet,capacityexpansionwillstill be
significantinFY15,withthe containershipfleetexpectedtoexpandbyasmuch as 7.8%, particularly
at the largerend.Freight&charter ratesagain failedtorecovertosustainable levels.Containertime
charter ratesincreasedby3.6% on historicallylow earningsforvessel ownerswhile freightrates
declinedby5%.The crude oil tankerfleetincreasedby1.4% & freightratesdeclinedby13.5%,while
the total fleetcapacityof oil producttankersdroppedby7% causingthe cleantankerratesto rise by
28%. The BalticDry Index endedup65% below the prioryear.Share pricesremaineddepressedas
well withgeneral shippingstocksending15% below the prioryear(drybulkstocks performedworst,
down44% Y-o-Y).Fallingoil pricesprovidedsome relief onthe costbase of shippingcompanies,but
couldpotentiallycause arevisionof the commonstrategyof slow steaming.Inatype of prisoner
dilemma,the firstshippingcompanytosubstantiallyincrease steamingspeedcouldeventuallycause
a broadertrendin the marketthat wouldintensifycascadingeffectsandfuel consumption.
Outlook
Whilstthere will be individual segmentbrightspots&occasional peakyrate volatility,persisting
structural imbalancesinshippingsupply &demandaswell aseconomicheadwindswill make a
sustainable recoveryinFY15 unlikelyforthe sectoras a whole.Trendssuchasre- & near-shoringof
production & increasingintraregionaltrades,especiallywithinAsia,have alreadyleadtoanew
consensusestimate of future shippingdemandinthe mid-singledigitrange.The recoveryhasbeen
consistentlypostponedineachof the yearsafterthe financial crisis. Althoughthe situationonthe
supplyside hastoa certainextentimprovedinmore recentyears,there isanew realityof sluggish &
volatile demandgrowthwhichwillagaindelaythe recovery(forthisyearat least).The numbersback
thisup:  Dry bulk shippingcanbe expectedtobe negativelyaffectedbyslowingeconomicgrowthin
Chinathisyear(withChinese demandforironore beingthe biggestdriverof drybulkvolume
growth).BIMCOexpectsdemandgrowthtoslow to 4-5% inFY15. We are seeingexamplesof dry
bulkersbeingconvertedtotankers &previousordersswitchingoutof the dry bulksector.For
containerliners,growthof the containershipfleet(7-8%) isexpectedtooutpace worldtrade (3.5%)
& containerdemandgrowth(5.5%) thisyear,hence excesscapacitywill againlastthrough FY15.The
majorlinesare growingtheirmega-carriercapacity &smallertonnage cascadesfromthe main lanes
to othertrades.But there maystill be brighterspotsforinvestorsinsmallertonnage where
oversupply isnotsoprevalent. Worldoil demandisexpectedtoincrease by1.2% inFY15, leading
to a 3-4% growth intankerdemand.Combinedwithanincrease intonne miles &demandfor
floatingstorage,thiscouldoutpace supplygrowth &isalreadydrivinganincrease intankerrates.As
we write VLCCsare earningmore thanUS$ 50,000 perday for storage againstbreakevenof around
US$ 15,000.
Aviation
Unit cost & capacitydiscipline deliversresultsInthe yearof FY14 passengertraffic demand(RPKs)
increased5.9 %comparedto FY13 according to IATA numbers.All regionssaw healthydemand
growthin FY14, althoughtrafficinthe Middle East againoutpacedthe restof the world(traffic

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growthwas 13% for Middle East carries,comparedto 6% of AsiaPacific,6% of European& 3% of
NorthAmericacarriers).Global capacityrose bya slightlylower5.6%,resultinginloadfactors
climbingto79.7%. Capacityin NorthAmerica increasedby4.6%,droppingloadfactorslightlyto
81.7% (whichis, however,stillthe highestamongall regions).Middle Eastairlineswere alsoleading
capacityexpansion,increasingASKsby11.9% in FY14. This astonishinggrowthincapacitywas
actuallybelowtrafficgrowth,pushinguploadfactorsto 78.1%. Increasesinshare pricesacross all
regionswere apparentparticularlytowardsthe endof the year.Global airlinesshare prices
outperformedall othertransportsectorpeergroups&endedup41% above the prior year.On the
financial side,resultsof certainkeyglobal legacycarriersshowedthe reasonforthisoptimism, asa
bettereconomy&continuedclose attentiontocontrollableunit-costsledtosome notable results:
Qantas announcedH1 (to31 December,14) underlyingPBITof A$ 367mn, comparedtoa lossof A$
252mn inthe same periodof the prioryear,citingoverA$ 374mn of transformationprogram
benefits(drivinga4.8% improvementinCASK);IAGreportedrevenuesof EUR20.2bn forthe year,
up 8% & operatingprofitbefore exceptionalitemsof EUR1.4bn, up 81% on FY13; DeltaAirlines’
pre-tax income,excludingspecialitems,wasUS$ 4.5bn inFY14, an increase of 70% overFY13; &
ChinaSouthernAirlinesrevenueof US$ 17.7bn wasup 10% & operatingprofitof US$ 772mn was up
214% in FY14. However,setagainst this,the imperative forchange &reformof cost base meantthat
strike costsagainfeaturedheavilyinthe FY14resultsannouncements: AirFrance-KLMreported
2014 total revenuesof EUR 24.9bn, down2.4% on2013 but stable like-for-like.Activitywasaffected
by a fourteen-daypilotstrike,whichhadanestimatednegativeimpactof EUR 425mn on the
operatingresult.EBITDA wasdown14% but up 9% excludingstrikeeffects. Lufthansareporteda
netincome of EUR 55mn (down82% from FY13), whichwas impactedbyEUR 232mn due to 15 days
of strike action,andoffsetEUR385mn of fuel price gains.
Lower oil costs–
Surelya goodthing?Because fuel costsare the largestoperatingcostof most airlines(withindustry
averagesof aboutone third of total costs representedbyfuel),thensurelylowerpricesmustalways
be good news?IATA forecaststhe highestprofitmarginsinmore thanfive yearsforairlinesinFY15.
But thingsare not quite thatsimple.Fora start,sharp changesinoil price require airlines toreview
currenthedgingandpricingstrategiescomparedtotheircompetitors.Un-hedgedairlinesmayeither
have not hedgedoutof choice (andcan claimstellarjudgment),orbyvirtue of not beingable topost
collateral.Bothmaybe at a significantcompetitiveadvantage totheirpeers.Bothare,arguably,not
equallygood.Inaddition,investorsmustalsotryand see throughthe significantdistortionto
reported(comparedto“normalized”) results,andunderstandthe impactof increasedrestricted
cash postingstohedge counterparties.Togive asense of the scale of the impact,Deltaannounced
the followingforQ4 2014:  The impactof mark-to-marketadjustmentsonfuel hedges(oncontracts
withmaturitydatesoutside the quarter) addedUS$2bn to reportedpre-tax costs.Onan adjusted
basis,the cost pergallondecreasesby39% fromUS$ 4.70 to US$ 2.87/gallon2; ResultsforQ4
include US$ 180mn of settledhedge losses,howeverDeltastillexpectedUS$2bn of fuel price
savingsin2015 (netof hedges) atcurrentprices3;From a restrictedcashperspective,cashpostings
to hedge counterpartieshadincreasedtoUS$ 925mn (US$ nil as at 31 December2013). Disclosure
of thishighlevel of clarityisnotuniversal,andthismakescomparisonof performance challenging.
From a passengerperspective,itremainstobe seenif airlinesreduce fuel surchargesandpasson
the benefitof lowerfueltopassenger.Onthistopic:Delta’sCEOnotedinresponse toanalyst

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questionsthatthe “…firstorderof use [for a fuel windfall]isgoingtocontinue toreduce ournet
debt.Andthe secondorderof use isgoingto be highercash returnsforour owners”4;Qantas
stated5that it will restructure itsinternational tariffssothatfuel surchargesare absorbedintobase
fares,butthat “overall fareswill notchange”,notingthatwhile globalfuelpriceshave fallen,&that
international air-faresare significantlylowerthanwhensurchargeswere firstintroduced10years
ago. Overall,IATA note thattheyestimate netprofit perpassengertoincrease byUS$ 1 (to US$ 7) in
FY15 afterfactoringinfuel price benefits.Inthiscontext,itseemslikelythatairlineswill take the
chance to investinnewfleet,routes,customerexperience,andbalance sheetstrengtheninginorder
to make themselvesviable overthe longerterm, ratherthanengaginginprice cutting.However(and
somewhatperversely),lowerfuel pricesmaybe positive forairlinesthatmayotherwise have
struggledasa resultof weakerbalance sheets&/orolderfleet.Assuch,the reliefonthe costbase
causedby fallingfuelpricesmightultimatelypostpone further –inevitable –s consolidationof the
aviationindustrythroughmergers,divestments,andfailures;andallow lower-pricedcapacitythat
mightotherwise have beenwithdrawntocontinue inthe mediumterm.But,longerterm, thiswill
not sustainablyimprove the competitive positionof subscale legacycarriersespeciallywithregards
to the persistentcomparable costdisadvantagestolow costcarriers,gulf airlines,&those with
mega-carriersscale.
Fuel prices and port congestion providing tailwind for air freight volumes
AirfreightmarketscontinuedtorecoverinFY14, withaircargo trafficdemand(FTKs) up4.5%
comparedto FY13. Growthwas noticeable in all regionsexceptLatinAmericabutstrongestinthe
Middle East(11%) & ASPAC(5.4%).Overall,the ASPAC&Middle Eastregionscontributedto46% &
29% of the expansioninaircargo traffic.NorthAmericanairlinesincreasedcargotrafficby2.4%
while Europe still recordedaplusof 2% on the back of a slow & fragile marketrecovery.Issueswith
port congestionatUS containerportsprovidedsome tailwindforthe growthof airfreightvolumes
at the endof FY4 & the marketis expectedtoreturntosolid growthratesinthe nearfuture.Global
air freightdemandisexpectedtogrowby4.5% inFY15 & by a CAGR of 4.1% overthe nextfive years
accordingto IATA.The latestStiefel LogisticsConfidence Index(February2015) reportsdecelerating,
but still positive growthinairfreightmarketsandafavourable six-monthoutlookforall lanes.Yet,
overall yieldsremaindepressed.The average growthof Drewry’sairfreightprice indexinthe twelve
monthsof FY14 was 2.8% but diddecline by2% in the lastmonthof the year,clearlyshowingthat
the marketrecoveryisstill shaky& imbalancesondemandandcapacitiesremain.Inaddition,the
decline injet-fuel priceswill eventuallybe passedoninthe formof lowerfuel surchargesfrom
airlines.New alliances &jointventuresmayevolve asanew trendfor aircargo carriersto capture
global opportunitiesinachallengingmarket.Inthisregard,GermanLufthansaCargo(LHC) & Japan-
basedANA Cargo announcedthe firstworldwidecargojointventure inDecember2014 to deepen
bilateral relationship.
Express logistics
Record peak season in online shopping brings joy and pain for global
express logistics
As ever-growinge-commerce iscausingrecordpeakseasonsforexpresslogisticscompaniesoverthe
Christmasperiodinalmostall major(western) markets,the taskof deliveringall those packages

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becomesmore challenging.Infact,the lastquarterof FY14 hasshownthat the peakseasonisnot
onlygettinghigher,itisalsogettingshorter &the problemsitcausesforlogisticscompaniesis
gettingevenbigger.Justafewrecordnumberstohighlightthistrend:
Record numbers during the last Christmas peak season
For its members,International PostCorporation’smonitoringsystemsshow anincrease involumes
of 15% for the monthof Decemberascomparedto the prioryear; Germanonline salesgrew by15%
Y-o-Yoverthe FY14 Christmasseasontoreachrevenuesof EUR 10bn; The Frenche-commerce
marketgrewby 13% overthe Christmasperiod,withe-commerce revenuesreachingoverEUR11
billion;E-retail deliveryvolumesinthe UKshoweda year-on-yeargrowthof 11.6% growthin
DecemberFY14; In the UnitedStates,USPSexceededitsholidaydeliveryprojectionsthisseason,
delivering18% more packagesthan in FY13. UPS delivered1.3bnpackagesduringthe fourth
quarter,an increase of 8.1% overthe same periodlastyear;In Singapore,SingPosthasseenrevenue
& profitsgrowingbymore than 7% inits latestquarter.The companysaidthe 'steady'growth was
drivenbyits logisticsoperations &e-commerce-relatedbusinesses,whichoffsetthe decline in
traditional mail revenue.Andyet,these recordnumbersare notpure joyfor everybody.Infact,a
numberof logisticscompaniesare strugglingtocope withthe peakvolumes. Initslatestquarterly
results,UPS’US domesticbusiness,operatingprofitfell by5.3% Y-o-Y,driven-downbyhighercosts
'primarilydue tohigherthananticipatedpeakrelatedcosts'.Thisclearlyshowsthatlogistics
companiescontinue tostruggle to balance fixed &variable capacity &have to relyon additional
workers & subcontractedtransportproviderstocope withpeakChristmasdemand,whichof course
iscostly.Transport Intelligence statesthat'these sortsof resultsreflectsthe factthat logisticscosts
ine-commerce home deliveryare high &that a marketwhichisfrequentlybasedonthe conceptof
“free delivery”isprobablynotsustainable inthe longrun.
At the same time,a cleartrendon howto deal logisticallywiththe recordpackage volumesina
profitable,sustainable &customerpleasingwayisstill missing.UPSwentaheadannouncingitwill
impose peakseasonsurcharges&tightenuponcosts inthe USA thisyearafterits excessive
spendingonadditionalcapacity.While othersmayfollow thisexample,itwill notsolve the much
biggerunderlyingproblem:
Record volume of packages means record volume of data – but what to do
with it?
One mainissue withthe peaksinparcel deliveriesisitscurrentunpredictability.Asidefrom
Christmas& BlackFriday,e-retailersare nowadaysable tocreate a peakwithin24 hourswhich
makescapacityplanningimpossible forlogisticscompanies.While latercut-offs, pick-up&
multichannelservicesare firstsolutions,theyare equallyincreasingthe operatingmodel’s
complexityforlogisticscompanies.There isstill anoverarchingrequirementtoincrease current
capacityutilizationinexpresslogisticsona dayto day basis,while meetinghigher &shorterpeak
demand.There isone mainassetthat expresslogisticsare currentlynotyetexploitingtoitsfull
potential &thisisthe amount of data that comeswithall those recordvolumesof packages.While
methodologiesindata&analyticsare progressingona fast track, logisticscompanieshave notyet
figuredoutwhatto do withthe data theyare collecting.Inaddition,data&analytictoolsare
currentlypredominantlyusedto analyse historicpatterns,butthere isnobestpractice yettouse

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the data for predictive shipping &capacityplanning.Besidesgettingmore sophisticatedwithdata &
tools,there iscurrentlylittle stakeholdercollaborationindatasharing &understandingof value &
incorporatingitinto pricing& negotiationsbetweenretailers &logisticscompanies.Nexttodata&
analytics,furthercollaboration(withinthe transportsectoraswell asbetweendifferentsectors)will
be a wayto betterdeal withunexpectedpeakseasons &capacityconstraintsinthe future.There isa
clearneedforlogisticscompaniestoshake off the sectorfocusedview &collaborate notonlywith
subcontractedtransportcompaniesbutalsowithe-retailers,ITcompaniesandtelecommunication
service providersinorderto optimize route &capacityplanning.
Crowdsourcing in logistics showcases solutions on a micro level
While establishedlogisticscompaniesare still tryingtofigure outthe bestwayto establish
collaborationamongtheirpeers &e-retailerstoensure properlastmile deliverysolutions,ITstart-
upsare leadingthe exampleonhowthiscan be done ona micro-level viacrowdsourcing.Uber,
whichisseenas havingdisruptedtaxi businessesaroundthe world,isnow eyeingthe deliverysector
witha newUberCargoservice inHong Kong.The new service isusingprivate personsasdriversin
the same way as withitsexistingtaxi servicesforthe deliveryof packetsandparcels.
M&A review
M&A activitiestoremainhighwithchangingpatternsclearlyvisible General Overview Total deal
valuesof transport& logisticstransactionsinFY14 amountedtoUS$ 58.9bn, an increase of 6% to
FY14. At the same time,the total numbersof transactionsdeclinedto900 whichpointstoa growing
average size of transactionsinFY14. In fact, thistrendof risingvalues&decliningvolumesisnow
visible forthree straightyearsalready&showsanincreasingnumberof strategictransactionsin
contrast to the large amountof distressedM&A whatwe have witnessedinthe past.FY14 was the
yearwiththe highesttransactionvaluessince FY08,if the US$ 34bn acquisitionof Burlington
NorthernRailroadbyBerkshire HathawayinFY10 is excludedasone–off large transaction.North
Americawasmost active intermsof deal valuesinFY14, withtransactionsamountingtoUS$ 17.1bn
afterUS$ 8.9bn in FY13. ASPACwasthe secondlargestregionfortransport& logisticsM&A inFY14
withtotal deal valuesof US$ 16.7bn. In EMA, total transactionsvaluesdeclinedfromUS$26.5bn in
FY13 to 13.5bn in FY14, partlydue to a smallernumberof large scale transactionsinthe
infrastructure subsector.Atthe same time,deal valuesinLatinAmericaacceleratedsharply,
reachingUS$ 11.6bn in FY14, whichis 10bn more than the year before.Thisrise wastoa great
extendcausedbysome large transactionsinthe infrastructure subsectorinBrazil,asinvestorsare
increasinglylookingtothe emergingmarketsfortransportinfrastructure investments,giventhe
great needof those countriestokeeptheirinfrastructure uptoGDP growthrates.More than the
half of deal valuesinthisregioncanbe attributedtothe transactionof AeroportoInternacional Tom
Jobim(US$ 4.3bn) & MMX PortoSudeste Ltda(US$ 2.3bn) to investorgroups.
Rising M&A activity in logistics & shipping
The transport & logisticssubsectorshowsthe highestshare of total transactionvalues(US$25.2bn
or 43%) in FY14. This inan increase of 135% intermsof transactionvaluesascomparedto the prior
year& clearlyshowsarenewedinterestof strategic&financialsinvestorsinthissubsector - last

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year’sM&A activitiesdominantlyfocusedoninfrastructureinvestments.The twolargestdealsinthis
subsectorin FY14 were the transactionof IowaChinaOffshore HoldingswithUS$2.4bn & the
aerospace businessline of logisticscompanyKLXIncwithUS$ 2.2bn.
Shippingwasalsoa veryactive subsectorinFY14 withdeal valuesrisingtoUS$ 13.4bn from US$
4.9bn in FY13. There were three transactionswithavalue aroundUS$ 3.0bn includingthe
acquisitionof PrestigeCruisesInternationalbyNorwegianCruise,the investmentof JaccarHoldings
intoBourbonSA andthe transactionof stakesinEagle BulkShippingtocreditors.Asan effectof a
slowlyprogressingconsolidationwithinthiscrisisplaguedindustry,overall M&A activitycanbe
expectedtopickupas linercompaniesare finallystartingtomerge onequitybasisasopposedto
the looserformsof collaborations&allianceswe have seeninthe past.One prominentexampleis
the acquisitionof CSAV byHapag-Lloydthathasbeenannounced&confirmedinFY14. At the same
time,Private Equityhousesthatinvestedheavilyintoshippingafterthe financialcrisishave been
facinghard timeswithtimelyandprofitable exitsfromthe sectorinFY14. Asthe marketrecovery
has againbeenpostponedforone year,sohasthe prospectusof manyPE investorsinexitingthe
marketthisyear.In FY14 alone,EV/EBITDA valuationmultiplesof listedshippingcompanieshave
declinedbyanother12%,while the average valuationlevelof all companiesinthe transportsector
has remainedbroadlystagnantoverFY14.Anotherfeature hasbeenthe sustainedexitof major
Europeanlendersfromthe sectorthrougha mixture of inhouse restructuring,bilateral&portfolio
loansales,mostnotablybyLloyds& Commerzbank.
Transport infrastructure transactions(ports,airports,roadoperations) amountedtoa total
value of US$ 15.1bn inFY14, whichisonlyhalf of the prior yearvaluesbutstill the secondhighest
value of the past sevenyears.Transactionsof airlinesaccountedforonly9% of total deal valuesin
the sector inFY14. Inthe absence of largertransactionsinFY14, some activitywasvisible inEurope
aroundEtihad’snewstrategyof acquiringstakesinEuropeanairlinestobuilduparegional network
to feeditsgrowingaviationhubinthe Middle East.Inlate JanuaryFY15, Qatar Airwaysacquired
around10% of InternationalAirlinesGroup(IAG),the ownerof BritishAirways,makingitthe group's
leadingshareholder.Inaircargo, Japan’sAll NipponAirways(ANA)&LufthansaCargoAG have
launchedanair cargo jointventure onJapan-Europe routes.
Transaction multiples rising
Valuationmultiplesof listedtransportcompaniesremainedratherflatoverFY14.The average
increase of tradingmultiplesforall subsectorswasjust2%,whichwas in large part negatively
affectedbythe decliningvaluationlevelsof listedshippingcompanies(multiplesforshipping
companiesdeclinedby12%overFY14). Atthe end of the year,shippingcompanieswerestilltrading
withthe highestaverage EV/EBITDA multipleof all subsectors,followedbytransportinfrastructure.
In contrast,transactionmultiplesdidincrease ascomparedtothe prioryear.The average
transactionEV/EBITDA multiple forall transportcompaniesinFY14 increasedto11.9% inFY14, after
9.0% in FY13. Thisshowsa growinglackof available acquisitiontargetswhichispushinguppricesfor
target companiesinthe transportsector,predominatelyinthe subsectorsof transport&logistics,
shipping&transportinfrastructure.
Outlook: Technology and IT driven M&A patterns in logistics increasingly
visible

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In FY15 & the near future,we expectM&A activityinthe sectorto remainona highlevel,
comparable orhigherto the level we have seeninFY14.The firstquarter of FY15 has alreadyseen
completedglobal transactionsworthUS$10.0bn, & furtheracquisitionsvaluedatUS$ 13.6bn have
alreadybeenannounced.There are several reasonsforthisexpectedtrend,partlycontinuing
historical patternsbutalsopartlycausedbynew emergingtrendsdue tooverall marketdynamics:
1. Consolidation,geographical expansion&vertical specializationremainthe predominantreasons
for transactionsinthe transportsector.At the beginningof FY15 there have beentwolandmark
transactionsinlogistics already,the firstone beingthe sale of NeptuneOrientLines’(NOL) logistics
businessAPLtoJapan'sKintetsuWorldExpress(KWE) forUS$ 1.2bn. This transactionwill strengthen
the financial positionof the NOLGroup,includingrepayingitsborrowings, whileKWEwill
substantiallyincrease itsgeographicreachincontract logistics,especiallyinthe US.The second
transformative deal tookplace inthe ASPACregionaswell,where JapanPostannouncedaUS$
5.1bn takeoverbidforAustralia'sToll.Thistransactionwill transformJapanPostbusinessmodel
towardsa global logisticsintegrator&will place itina similarpositionasDeutsche Postafterthe
acquisitionof DHL,aheadof the envisionedIPOlaterthisyear.Asanexample of vertical
specializationthroughacquisitions,UPSannouncedthe acquisitionof PolishfirmPoltraf,aprovider
of healthcare logisticsservicesinEurope tostrengthenitspositioninthe vertical healthcare logistics
market.
2. The needforinvestmentsintotransportinfrastructureremainshigh,bothinemerging&mature
markets.Thisiscausedby a lack of publicfundingfortransportation&furthergrowingworldtrade,
outpacingcapacitiesof the transportinfrastructure.Asthe infrastructure needstokeepupwiththe
level of risingtraffic,Governmentswillneedtoopenupnational infrastructure toprivate investors
whoare at the same time lookingforstable investmentopportunitiesandsteadycash-flows.
3. A newtrendof M&A strategiesintransport& logisticshasemergedoverthe pastyears,partly
causedby the effectof risinge-commerce &the digitalizationof logisticsbusinessprocesses.Asan
effect,we are witnessingagrowingnumberof IT& technologydriventransactions.New market
participantslike techstart-ups&mobile-appbasedsoftware solutionsare increasinglychallenging
the positionof expresslogisticsfirms&global integratorsasretailers&shoppersgodirectlytothe
deliverydriverforlastmile solutions.Tostayin the game,manylogistics companiesare inturn
investingstronglybyacquiringnewdeliverysolutionsormergingwithe-commerce start-ups.For
instance,FedEx hasjustannounceditsacquisitionof BongoInternational,aproviderof cross-border
e-commerce ITsolutions,onlyaday after itagreedto buylogisticsproviderGenco,whichspecializes
inprocessingreturneditems.UPStoo,announcedinOctoberlastyearits acquisitionof i-Parcel to
consolidate itsstrengthinthe fast-growingglobale-commerce market.InEurope,DeutschePost
DHL acquiredStreetScooter,aformerstart-upthatis committedtothe missionof developing
affordable electricvehicles.Thistrendisnow evenvisible inthe more traditional subsectorslike
shipping:justrecently,CMA CGMincreaseditsinvestmentinstartupTRAXENS,whichdevelops
containersmonitoring,geolocation&multimodal coordinationsystemsthroughbigdataanalysis.
We expectall three trendsoutlinedabove tocontinue overthe nextyears,thuscausingM&A
activitiesinthe transport toremainontop of the agenda.The beginningof FY15 hasalreadyseena
numberof large transactionswhichwill be arecurringtheme overthe course of thisyear.