2008/2009 Guide to Asia's Blue Chip Companies

Transport

Tough year for transport

High oil prices coupled with falling demand have taken a bite out of transport companies

After a rosy 2007, transport took a blow on multiple fronts this year. Sky-high oil prices over the summer put a dent in profits while the global economic crisis has taken a bite out of demand.
When oil peaked at $147 a barrel in July, even the region’s strongest airlines could not fly profitably. First half earnings at both Cathay Pacific and Singapore Airlines (SIA) dropped with Cathay losing $85 million over the period. At the same time, the region’s less sound airlines incurred considerable losses and the sector saw a few memorable bankruptcies.

Since July, oil prices have fallen but the slowdown in the world economy precipitated by the demise of Lehman Brother’s in September has proven just as hazardous to airlines’ health. In September, International Air Transport Association director general and CEO Giovanni Bisignani said, “The toxic combination of high oil prices and falling demand continues to poison the [airline] industry’s profitability.” This statement remains true today.

Adding to airlines’ woes, the much-heralded SIA-China Eastern deal was thwarted by a counterbid from Air China and opposing political forces in Beijing. After China Eastern shareholders rejected SIA’s $923 million offer for a 24% stake in the airline in January, debate raged as too whether the deal would be resurrected. In quiet finality, the deal expired in August to little fanfare and few expectations that it would be revived.

On the shipping side, freight lines fared little better. After having a phenomenal 2007 with record dry bulk freight rates, the Baltic Dry Index – a global measure of bulk dry freight rates – had fallen to near 800 points by the end of November, down from a peak of 11,793 points in May.

Overcapacity after record new ship orders plagues the shipping industry. Analysts predict that many buyers will likely walk away from orders, losing their deposits, and a lot of the new shipyards, especially in China, will close down as orders disappear.

“A new ship that six months ago was valued at $80 million is now looking at offers of about $35 million,” says Standard Chartered managing director and head of shipping finance Nigel Anton. “Six months ago the chartered rate was about $45,000 a day but now you’d be lucky to get about $15,000.”

Overcapacity on the order books aside, shipping companies should post sound earnings for the year. Most charters are negotiated for extended terms ahead of time thus guaranteeing a steady revenue stream for the region’s shipping companies. Anton believes many shipping companies will begin to face customers demanding lower bulk freight rates as contracts come up for renewal in early 2009.

Airline and shipping companies in Asia remain strong. Many have sound business models that can adapt quickly to the changing economic environment. Bright spots do remain, airlines are seeing rising revenue on routes to the Middle East while regional shipping companies are able to make up for the fall in demand to Europe and North America with increased intra-Asia traffic. Still, we are likely to see considerable revenue declines at transport companies in 2009.

Ranking by revenue
Country	Company	(million $)
HK	Cathay Pacific	9,659
SG	Singapore Airlines	9,265
ML	MISC	3,103
HK	MTR Corp	1,370

Ranking by revenue growth
Country	Company
HK	Cathay Pacific	24.0%
SG	Singapore Airlines	8.6%
ML	MISC	4.2%
HK	MTR Corp	N/A

Ranking by net profit
Country	Company
HK	Cathay Pacific	71.8%
SG	Singapore Airlines	37.6%
ML	MISC	-7.8%
HK	MTR Corp	N/A

Ranking by ROE
Country	Company
ML	MISC	15.5%
SG	Singapore Airlines	14.9%
HK	Cathay Pacific	14.6%
HK	MTR Corp	N/A

Share price
Country	Company	Share price, Nov 1, 2007	Share Price, Nov 1, 2008	Currency
HK	Cathay Pacific	23.0	9.3	HKD
ML	MISC	9.8	8.2	MYR
HK	MTR Corp	26.5	16.8	HKD
SG	Singapore Airlines	19.7	11.1	SGD