New technologies, including electric and autonomous vehicles, big data, blockchain and artificial intelligence, will have significant consequences for the transport sector and beyond.
Transport has a history of revolutionising our lives. First it was ships, which signified wealth and military power through wind-powered sail, before steam and oil further drove global trade and the migration of huge swathes of people. Then came the railways, quite literally fuelling the industrial revolution. And finally, aviation and automobiles democratised travel locally and across continents.
It is somewhat surprising then that the past 50 years or so has seen little radical innovation. Yes, engines are far more fuel efficient, quieter and less harmful to the environment; while on board computer systems have transformed the way cars, ships and aircraft operate and navigate to their destinations. However, there has been no seismic metamorphosis, such as from horse to combustion engine, wind to steam or even turboprop to jet engine.
Could that be about to change? Overanalysing futuristic ideas like Elon Musk’s space ambitions or Richard Branson’s hyperloop is not our intention. Instead, we look at each of the major transport sectors – sea, air, road and rail – to seek answers on the medium-term outlook and establish the implications for investors.
The growth of EVs has taken place much faster than expected and could have a significant influence on infrastructure over the next ten years
Through technological advances in the form of electric vehicles (EVs) and self-driving vehicles, arguably the most high-profile changes are taking place on the roads.
“The growth of EVs has taken place much faster than expected and could have a significant influence on infrastructure over the next ten years,” says Darryl Murphy, head of infrastructure debt at Aviva Investors.
It took five years for EV global sales to pass one million, a goal achieved in 2017. But it took just six months to sell the next million, according to Bloomberg New Energy Finance, which forecasts sales hitting 11 million in 2025, before surging to 30 million in 2030 as EVs become cheaper to make than traditional cars.1 That landmark, as well as the expansion of charging points for EVs, will be a key tipping point for sales.
However, autonomous vehicles could have a much bigger impact. If it triggers the end of car ownership, as some predict, it will revolutionise the way we live and work. Part of the reason is that the cost of using self-driving cars could drop to close to zero if advertising dollars step in to fill the pricing gap.
“Companies would pay a lot to target individuals sitting in a car, watching TV or browsing the internet as they travel to their destination,” explains Murphy.
These types of developments are rarely linear and, like EVs, they could spread rapidly as the technology develops
Although widespread use of autonomous vehicles will probably not occur for another decade, we could start to see its impact in terms of infrastructure planning. Murphy adds a note of caution, however.
“These types of developments are rarely linear and, like EVs, they could spread rapidly as the technology develops,” he says.
Truck platoons are driving change
A massive shortage of truck drivers in the US could also speed progress toward an autonomous future. “Blame the millennials, who simply don’t want to drive trucks,” says Max Burns, senior research analyst, industrials, Aviva Investors.
He recently spoke to a US company whose drivers, on average, are in their early 50s. “The business raised pay by 15 per cent and still couldn’t hire. Millennials don’t want to spend long periods of time away from home, no matter how much they get paid,” says Burns. The pool of available drivers is being further narrowed by stricter rules on working hours and drug testing.
Truck platooning, whereby a few trucks equipped with electronic driving support systems closely follow each other, could mark the first step towards automation. Platooning offers various advantages, including traffic safety as auto-pilot trucks brake immediately. It also brings cost and environmental benefits as the trucks drive close together at a constant speed, reducing air drag friction and lowering fuel consumption and CO2 emissions.
Up in the air
Online carbon footprint surveys offer a stark reminder of the environmental impact of air travel; indeed, it is arguably the biggest challenge facing the aviation industry. Unfortunately, there are no obvious solutions on the horizon. While companies such as Airbus and Wright Electric of the US are developing – or have plans to – battery-powered aircraft, it may take decades before they become commercially viable.2
More positively, aviation has the best record of all modes of transport in achieving incremental advances.
From the outside, passenger jets today look pretty much like they did in the 1960s, but inside they are as different as night and day,
“From the outside, passenger jets today look pretty much like they did in the 1960s, but inside they are as different as night and day,” says Richard Aboulafia, vice president for analysis at Teal Group, an aerospace consultancy. He notes that every year aircraft become one or two per cent more efficient in terms of emissions, fuel burn and noise.
The reason for this sustained improvement is purely commercial. While most forms of rail and shipping involve pass-through costs, aviation is unique in providing market-driven, mass transport, where operators must make a profit. In addition, margins are narrow and fuel is the largest expense. Rail, road and shipping are not nearly as price sensitive, adds Aboulafia, who sees the trend of incremental improvement continuing over the next ten years.
We are nearing the end of the runway, pardon the pun, in terms of how much more efficiency can be squeezed out of today’s airframes and engines
What happens beyond that is less certain. “We are nearing the end of the runway, pardon the pun, in terms of how much more efficiency can be squeezed out of today’s airframes and engines,” says Aboulafia. He believes the future could involve hybrid engines, exotic airframes and ultra-bypass engines.
Robust demand for air travel will almost certainly continue as the middle classes in countries such as India and China increase in size and wealth. Despite growing demand, Aboulafia believes the era of jumbo jets such as the A380 and Boeing 747 will come to an end in the next decade.
“The great paradox of airline travel is that as volumes increase, the size of airliners stays the same or shrinks,” he says. Indeed, Airbus recently announced it would end production of the A380 in 2021, as dwindling orders meant producing the aircraft was no longer economically viable.3
Smaller alternatives, such as the A350, now have similar range and fuel efficiency per passenger. At the same time, passengers increasingly fly direct to secondary airports rather than via the major hubs jumbos were designed to serve.
The International Air Transport Association (IATA) expects passenger volumes to reach 7.2 billion by 2036, almost double the 3.8 billion recorded in 2016. The forecast is based on an expected 3.6 per cent average compound annual growth rate (CAGR) over the period. Asia Pacific is predicted to be the source of more than half the new passengers.
However, there is uncertainty surrounding this projection. IATA cautions its forecast could vary significantly depending on whether the globe turns protectionist. If trade protectionism and travel restrictions appear, CAGR could slow to 2.7 per cent, resulting in 1.1 billion fewer passenger journeys annually in 2036. Conversely, if liberalisation gathers pace annual growth could be more than two percentage points faster, leading to a tripling in passengers.4
New technologies such as facial recognition and security systems, which mean passengers won’t have to remove belts and shoes or laptops and liquids from their luggage, will allow them to pass though airports much more quickly,
IATA also warns increasing demand will bring a significant infrastructure challenge, with runways, terminals and ground access to airports under increasing strain. However, innovative solutions to these challenges, as well as to the baggage and security processes, cargo handling and other activities, are already in place in several airports and could become widespread within the next decade.
“New technologies such as facial recognition and security systems, which mean passengers won’t have to remove belts and shoes or laptops and liquids from their luggage, will allow them to pass though airports much more quickly,” says Kjell Kloosterziel, director at NACO, Netherlands Airport Consultants.
Staying on track?
Meanwhile, investment in the rail industry has enjoyed a renaissance globally, a development driven to a large extent by its low-carbon characteristics. Additionally, increasing congestion and charges for using cars in some cities appear to be encouraging people to move away from cars to rail. The number of passengers on the UK rail network, for example, has increased by nearly 20 per cent over the past five years.5
Similar trends can be seen elsewhere. Rail passenger traffic in the US more than doubled between 2010 and 2017.6 In India, increasing incomes and urbanisation have driven passenger numbers higher, while economic growth is also driving a sharp rise in freight traffic. These trends are expected to continue, with Indian Railways, India’s national rail system, targeting an increase in freight traffic to 3.3 billion tonnes by 2030, up from 1.1 billion tonnes in 2017.7
Across the globe, however, there are significant differences between infrastructure investment at the local and national levels.
“Cities are increasingly focused on how they increase their economic value and are investing in local transport that efficiently links housing to workplaces. Boosting productivity with railways plays a key role,” says Murphy.
The development of railways at the national level is more problematic. High-speed railways can compete against air and road travel, but these lines often require financial support given the huge investment involved. The broader economic benefits can, however, make them worthwhile. The UK’s High Speed 2 line – which when completed will directly connect London, Birmingham, the East Midlands, Leeds and Manchester – will not just cut journey times, but also increase capacity and productivity.
The line will help move people away from London, which dominates the UK economy, and drive growth in the Midlands and the north of England,
“The line will help move people away from London, which dominates the UK economy, and drive growth in the Midlands and the north of England,” adds Murphy.
Similar high-speed rail projects could develop in other countries. In the US, construction of a high-speed railway linking San Francisco to the Los Angeles basin in under three hours has already begun. There are also plans to develop high speed lines in Texas and Florida, as well as one linking cities in the state of Washington to Vancouver in Canada. High speed rail links could also be developed in India, Australia and Southeast Asia. China also looks set to continue its network expansion.
However, Murphy believes infrastructure investment in boosting the efficiency of urban and commuter networks, while less glamourous, is equally vital.
“Rail networks in countries such as the UK are large, complex and expensive to invest in, but railways provide a more environmentally friendly way of moving large numbers of people than other forms of transport,” he says.
Meanwhile, the rise of autonomous vehicles in the trucking industry presents both a threat and an opportunity to the freight business of railways, according to McKinsey. It estimates full autonomation could lead to a 45 per cent decline in operating costs in the US; this would save the US the ‘forhire’ trucking industry between $85 billion and $125 billion.
Rail operators transporting intermodal goods – those carried in a container – could lose business as the cost of trucking declines. But if rail companies can seamlessly integrate with autonomous trucks, McKinsey argues rail “could dramatically increase speed and throughput as well as secure a critical and growing role in the overall ecosystem”.8
A sea change for shipping
Protectionism, technological development, excessive capacity, consolidation, mega-alliances and environmental scrutiny are all factors likely to shape the shipping industry in future.
Surprisingly, sail has already made a comeback and its use to improve the environmental impact of shipping is likely to grow. However, these are not the sails used by the tea clippers of the nineteenth century. Modern ships use large vertical rotors, known as rotor sails. The shipping line Maersk is already testing these sails, 30 metres tall and five metres in diameter.
The use of wind propulsion technology onboard a product tanker vessel could take us to a new playing field
“While the industry has gone through decades of technological development, the use of wind propulsion technology onboard a product tanker vessel could take us to a new playing field,” says Tommy Thomassen, chief technical officer, Maersk Tankers.12
Just as autonomous vehicles could transform roads and urban infrastructure, autonomous ships could have significant implications for shipping. In 2020, Norwegian shipbuilder VARD is set to deliver the world’s first autonomous electric container vessel and ports such as Rotterdam are already preparing for their arrival.13
The implications for ports could be significant. Many ports, such as Melbourne, Australia, already use automated technology to haul containers from the dock to the yard, according to McKinsey, and will be able to remain active around he clock. Additionally, advances in this technology could allow a port’s activities to extend deep into the country it serves. Indeed, the port’s boundary might be defined by the delivery range of an autonomous truck that can seamlessly enter the road system rather than by a property line.14
Utilising blockchain would allow shippers, shipping lines, freight forwarders, port and terminal operators and inland transport and customs authorities to interact more efficiently through real-time access to shipping data and shipping documents
Further port efficiencies could be achieved by incorporating blockchain into the customs process. Currently, a single shipment can require hundreds of pages of documents that must be physically delivered to dozens of agencies, banks and customs bureaus. In 2014, Maersk, the world’s biggest container line, tracked a shipment of avocados from Mombasa to Rotterdam and found it involved 30 parties, 100 people and 200 information exchanges. The shipment took 34 days to get from the farm to the retailers, including ten days waiting for documents to be processed.10
Utilising blockchain would allow shippers, shipping lines, freight forwarders, port and terminal operators and inland transport and customs authorities to interact more efficiently through real-time access to shipping data and shipping documents. The cost savings could be visible in the companies’ financial statements in about two years, according to Rahul Kapoor, an analyst at Bloomberg Intelligence in Singapore.11
Key shipping trends
The United Nations Conference on Trade and Development (UNCTAD) has identified various key trends likely to shape the shipping industry in the coming years9:
Like IATA, UNCTAD fears protectionism could have a negative impact on maritime trade.
Technological developments such as blockchain, cargo and vessel tracking, autonomous ships and the Internet of Things present opportunities for the shipping industry. However, there is uncertainty regarding safety, security and cybersecurity, as well as concern about the negative effects on the jobs of seafarers, most of whom come from developing countries.
Excess capacity: as optimistic carriers competing for market share order excessive new capacity, this could upset the supply and demand balance and have repercussions on freight-rate levels, costs and earnings.
Consolidation has risen in recent years due to lower demand and oversupplied capacity dominated by mega container ships. UNCTAD believes this trend will continue, potentially leading to lower supply and service quality, and higher prices.
Increases in the size of vessels and the rise of mega-alliances are placing pressure on ports to adapt.
Shipping companies will remain under pressure to curb their carbon footprint and improve environmental performance.
Engines for growth
It is clear disruptive forces are at their strongest on the roads. Self-driving trucks and cars could free up time and negate the need for car parks in cities as well as airports, ports and railway stations. They could even herald the death of car ownership. The arrival of self-driving EVs that pick people up from their homes and drive them to work or leisure activities could even encourage a switch away from rail for shorter routes.
But questions remain on how the energy to meet an expected surge will be generated. Will they be charged at people’s homes or service stations, or even both? Or, if car ownership dwindles, will companies that operate cars invest in huge charging parks for their fleets? Nobody knows for sure, which suggests investors, not just in the infrastructure itself but in the operators and companies that use them, face high risks. But if fortune does indeed favour the brave, a first-mover advantage may lead to sizeable rewards.
Ports, railway stations and airports should be able to process ever larger quantities of passengers and cargoes, but their essential role should remain unchanged. However, greater efficiencies will be a welcome development and should help spur trade and growth if the current urge for protectionism can be resisted.
- ‘EV sales growth’ Bloomberg New Energy Finance, May 2018
- ‘Plans for electric planes’, BBC News Online, May 2017
- ‘Airbus scraps A380’, BBC News Online, February 2019
- ‘Air travel forecasts’ IATA, October 2017
- ‘Rapid growth in UK rail, travel’, Office of Rail and Road, December 2018
- ‘US rail passenger growth’, Statista, January 2019
- ‘India rail freight forecasts’, India Brand Equity Foundation, December 2018
- ‘Self-driving autos and the rail sector’ McKinsey, December 2018
- ‘Trends shaping shipping’, UNCTAD December 2018
- ‘Blockchain and shipping’, Royal Gazette, Bermuda, April 2018
- ‘Blockchain and shipping’ Royal Gazette, Bermuda, April 2018
- ‘Sails return’ Maersk Tankers, August 2018
- ‘Preparing for auto ships’, ‘Seafarers Times’, April 2018
- ‘Ports and autonomous vehicles’, McKinsey, December 2018