Transport 2017: Trends
The transport sector has experienced some turbulent times this year. Both the aviation and shipping markets are facing significant challenges, causing serious problems for companies operating within them. As a result, the legal market offering services to these two branches of transport law is reflecting this environment, and adapting too; the trend for the increasing establishment of boutique firms has continued well into 2016 and is likely to be seen next year too. Yet despite such pressures, the legal market in the area is still experiencing a lot of activity from clients and practitioners, who are positive about its future.
One of the biggest challenges affecting the aviation sector this year has resulted from recent developments involving the major export credit agencies. The chief source of financing for aircraft has traditionally been through export financing. However, one of the world’s largest export credit agencies, the US Exim Bank, has been “effectively closed” over the last few months. The forthcoming change of government in the US essentially caused the Exim Bank to close due to congressional Republicans having failed to reauthorise the agency in June 2015. Even though it was reauthorised in December 2015, the lack of a quorum among its board of directors has meant that the bank has been unable to authorise new loans or provide loan guarantees to any foreign companies providing American products and services, including aviation companies. Equally American companies have been unable to renew their export-credit insurance policies. Consequently, airlines have had to turning elsewhere to obtain the necessary financing to do business.
In addition to the logjam affecting Exim Bank, the aviation finance market was dealt a major setback after three of the largest European export credit agencies (ECAs) suspended financing for Airbus Group’s aircraft in April of this year. This followed the UK Serious Fraud Office’s opening of a criminal investigation into allegations of fraud, bribery and corruption in relation to Airbus’ commercial airline arm. The UK’s ECA and its counterparts in France and Germany all halted financing after the disclosure that the company had failed to notify the authorities regarding third-party agents in deals for which it asked the UK government to provide guarantees.
As a result of these two significant funding hiatuses, aviation companies have had to look at more creative ways to raise financing for aircraft. Law firms who act for European ECAs are “now finding that their work has dried up somewhat”. Yet “for other players out there, the market is very active” with lawyers being “under increasing demand to find alternative ways around the problem of financing”. One lawyer described how attempts were being made to “fill in the gaps through using complicated capital markets transactions”. However, this is “incredibly complex and requires a certain amount of expertise and man power” for a law firm. Sources further commented that “not all firms are able to do this”, due to their size or spread of practitioners. However larger firms or specialised boutiques that can offer such services will find themselves well placed to tailor their expertise to aviation companies under pressure to procure finance, and take advantage of this demand for specialist expertise until the ECAs return to offering credit.
It was also reported that there is “a lot more money coming out of Asia” for financing. Banks based in China and Singapore are increasingly looking to invest outside of Asia due to the current low levels of interest rates in these jurisdictions and the aviation industry is increasingly looking to exploit this. As a result, law firms looking to expand the global reach of their transport practice may find Asia a particularly lucrative location to establish a presence in, as firms here experience an uptick in work from clients look to source finance from this jurisdiction or indeed invest abroad.
A further major development in the aviation sector was the controversial decision by the UK government in October 2016 to approve a third runway at London Heathrow airport. The decision was heralded by supporters as a means of connecting the UK to long-haul destinations in growing markets such as Asia and South America, and thereby boost trade and creating jobs in the transport sector. Currently Heathrow handles more freight by value than all the rest of the UK airports put together, accounting for 31 per cent of the UK’s non-EU trade. Therefore, its expansion will create even more opportunities for UK businesses to access new markets, which will likely be particularly beneficial to the UK following Brexit. The proposals include plans to increase the number of domestic routes to 14, and thereby spread the economic benefits right across the country. Such benefits to passengers and the wider economy will be worth up to £61 billion, according to the government. This announcement provides an opportunity for UK firms to exploit the expected uptick in demand for aviation and transport-related legal services in the coming months and years. Indeed, law firms around the world may experience a boost in demand for their services as international airlines look to take advantage of the increased capacity at Heathrow.
The final parliamentary vote on the third runway is likely to happen in the winter between 2017 and 2018. Yet as one source put it, “There’s still a long way to go.” Critics highlight two main obstacles to the expansion. Under the government’s current projections, the area around Heathrow is set to be in breach of legal air pollution limits until 2025, which will then only be further exacerbated by the 260,000 new flights the runway is expected to facilitate each year. Commentators also point out that this will make meeting the 2050 carbon emissions target much more challenging. In addition, an environmental law non-profit, ClientEarth, is still engaging in legal action against the UK government for failing to act on the current illegal levels of air pollution in the UK. ClientEarth has instigated a host of clean-air cases around Europe over the past year including in the Czech Republic and Belgium, having already won cases in Poland and Germany. Such cases could have a significant impact on the aviation industry across Europe, as this sector is a major contributor to levels of air pollution. Sources commented to us that while “air traffic is not about to decrease”, companies will be under “increased pressure to find cleaner ways of fuelling such travel”, and reducing air pollution from the associated infrastructure and transport links. As a consequence, law firms may well see an uptick in demand for regulatory and compliance advice from clients in the following years. Some sources even predicted that the sector will see “an increasing amalgamation between transport and environmental legal advice” as the law responds to contemporary environmental pressures. Therefore, firms looking to expand the range of their transport legal practice may do well to consider increasing their expertise of environmental law affecting the transport sector.
Elsewhere sources reported that the legal market is experiencing a lot of movement. In such an environment, specialised boutique aviation firms are increasingly being set up as spin-offs from the larger global firms, with further consolidation expected as middle-tier firms become more stretched. Equally, while events such as Brexit may result in recruitment and salary freezes for larger firms, it instead brings “a huge opportunity” for smaller aviation firms, who can “scoop up the talent now available” ahead of larger firms. Though investment in the UK is expected to slow as aviation companies pause to see what Brexit will mean for them, the majority of practitioners consider that Brexit will have less of an effect on the transport legal sector then on other areas of law, as most transport clients operate on a global scale. As one lawyer put it, “Aircraft are still being produced and manufactured, therefore work will still need to done for financing and leasing. Although the client base may move from London, they will still come to firms here as a centre of legal expertise.”
Shipping lawyers repeatedly told us that there has been “a shipping crisis” during 2016, which “looks set to continue next year”. The collapse of the Korean shipping line, Hanjin Shipping, is “one of the most serious and significant events to affect the shipping industry in 2016”, and illustrative of the pressured economic environment currently facing the sector. The company’s entry into bankruptcy has affected ports and retailers around the world, with giant container ships holding hundreds of tonnes of goods left stranded following the announcement. Ships have been refused permission to offload or take on containers due to fears that port owners, tugboat pilots and stevedores would not be paid. Hanjin is the seventh-largest container shipper in the world and therefore it “is likely that a further 40 or 50 companies are now experiencing severe difficulties”. Indeed, Hanjin represents almost 8 per cent of the volume of trans-Pacific trade for the US market, and so commentators say that the bankruptcy could affect the entire global trade supply chain. Yet firms say in the short term that such events will lead to an uptick in work for them, as “most of the leading shipping firms will be advising a creditor who is involved in this bankruptcy in some way”.
With hindsight, the collapse of Hanjin should not come as a great surprise. The shipping market as a whole has been suffering turbulent times since the 2008 recession caused a slump in global trade, yet shipping lines continued to build vessels which were devised at a time of higher freight costs. As a result, ongoing returns on the initial construction costs are lower and such ships are therefore less cost-effective than when they were built. In addition, the shipping industry in South Korea has been one of the hardest-hit by the prolonged downturn in global trade, and Hanjin was reportedly unprofitable for four out of the last five years. The company’s collapse has led to a surge in freight cargo rates. According to the South Korea-based freight forwarder Pantos Logistics, shipping a 40-foot container from Busan to Los Angeles now costs 55 per cent more than before the Hanjin bankruptcy, rising from $1,100 to around $1,700. Prices have similarly jumped on the routes between South Korea and the US east coast via Panama – they are up about 50 per cent to $2,400. All this is causing serious problems for companies operating in this space, with one source saying “there is a sense that people are treading water” and more such bankruptcies are expected over the next 18 months.
However, such an environment “generates a lot of work for lawyers, particularly in the short term”. Restructuring and insolvency work is experiencing a significant uptick, as a result of clients experiencing such problems around the world. Sources say that the firms which are successful are those which “benefit from having a top brand” marking them out from the competition. With many excellent lawyers practising in the market, “it comes down to who really knows and understands the industry”. When the market conditions are good “companies are less willing to pay for the highest quality services”. However, “right now clients know and recognise that they need top quality” advice and representation.
Combined with increasing cost pressures on clients, this has all fed into the continuing trend for fragmentation in the shipping legal market, seen most particularly in London. A trend observed since 2015 has been an increase in the number of smaller boutique firms set up by former partners of larger firms. The significance of individual relationships in this specialised market is increasing: speaking to TradeWinds in September 2016, prominent shipping lawyer Matt Hannaford of Hannaford Turner highlighted that “getting good shipping law advice is about finding the right lawyers, not the right law firm”. The problems facing shipping clients have aided this process, as larger firms have looked to diversify their practices into areas where higher fees could be charged, such as insurance. This has led to shipping lawyers remaining in firms where, either the shipping practice is no longer a main concern, or there is a requirement to generate increasing revenue from a market experiencing serious financial stress. Such cost-consciousness from clients creates an environment better-suited to niche firms, which can adapt to suit this challenged shipping industry more easily then perhaps the larger firms and take advantage of the demand for legal services at a reduced cost.
Both the aviation and shipping sectors are currently ripe environments for specialist boutique legal firms to thrive and prosper, reflected in their present increase in numbers. Despite the problems facing the transport industry, it is predicted that the market will potentially experience a general boom in the next year or two “if and when the war in the Middle East ends”. Firms are generally optimistic about the future demand for transport legal services, as the end of this war will necessitate the rebuilding of all major infrastructure in the countries affected. This will create a demand for substantial investment to re-establish major transport links, for which “all materials required will need to be shipped”. As one source put it, “The sector desperately needs this boom, but it is just a question of when it will happen.”