European transportation industries are uniquely vulnerable to political volatility

The rise of populism on the European continent presents new geopolitical risks for corporates in the transportation industry whose businesses rely on the free movement of people and goods between member countries.

Populism roils European politics

The expansion of Eurosceptic parties has been well documented: support for populists on both sides of the political divide is growing across the width and breath of the continent, from Finland to Italy and from the U.K. to Hungary.

In Italy, the Right hailed what they saw as the public’s rejection of its pro-Europe ruling party in December 4’s referendum, while Austria defied the polls to elect a Left-leaning candidate who favours remaining in the E.U. Both results further illustrated the current volatility of European politics.

Today’s Europe is showing increasing signs of fragmentation as many countries struggle to redefine their 21st-century identities. If anything, Donald Trump’s election in the U.S. is expected to give populist parties across the continent an added tailwind.

How specifically this will impact the business strategies and fortunes of transporta­tion companies remains unclear. What is clear is that uncertainty raises business risks, those risks complicate business processes and added complexity will raise costs.

Transportation uniquely vulnerable

As the movers of people and trade, the transportation industry has a uniquely intimate relationship with the global economy, market liberalisation and trade treaties.

As such, transport executives are wary when politicians move to protect their markets or disassemble existing trade deals, as Mr. Trump has signaled with the Transpacific Trade Partnership. The same fears arise when new parties act to reverse the march of globalization, as can be the populist’s want.

The transportation industry’s demand for huge capital outlays on infrastructure and networks requires long-term planning and the types of long-term commit­ments inherent in global trade deals.

Beyond the commercial opportunities they represent, trade deals are also signals of long-term political intent and stability.

Geopolitical risks

It is no wonder, then, that senior transportation executives in Europe — across land, sea and air – all rate at least one geopolitical risk among their top 10 in this year’s Willis Towers Watson’s Transportation Risk Index. Concerns include:

  • the potential for new competition laws (and other forms of government intervention evoked to protect local markets)
  • the increasing complexity of the regulatory environment
  • the unpredictability of political cycles
  • rising potential for social unrest

Brexit’s impact on Airlines

Outbound traffic accounts for more than two-thirds of total passenger volumes in the U.K. air market

In a snapshot of how geopolitical shifts can impact business fortunes in the transportation sector, the prospect of Brexit prompted the International Air Transport Association—whose airline members move about 83% of scheduled air traffic—to estimate that the U.K.’s passenger numbers would fall 3-5% by 2020.

The U.K. air market is dominated by outbound traffic, which accounts for more than two-thirds of total passenger volumes. A weaker pound – it has fallen about 16% relative to the dollar (as of Nov. 30) since the referendum – directly reduces discretionary spending on air travel, as well as any indirect spending generated by it.

Separately, Trump’s victory is also expected to have an impact on other E.U. elections in the next year. That added political uncertainty, and the current fall in equity prices on both continents, may be increasing the risks associated with slower economic growth.

Populism’s impact on supply-chains and labour

In general, populist politics tend to focus inward. For the transport provider serving net-exporting countries, supply chains tend to contract as the movement of ‘nationally strategic’ raw materials such as energy products or food staples is restricted.

New immigration policies can also shift the availability of affordable labour, or make it more difficult to source the right skillsets.

Any fragmentation of the wider E.U., its trade agreements or the institutions that support its commercial effectiveness would be likely to magnify those trends and the associated risks to business as usual.

Risk managers must look beyond the familiar

Risk managers tend to focus their resources on threats they can identify and resolve

For companies calculating their risk profiles, it presents an increasingly pressing problem: Lateral risks – the potential for external events to restrict a business’ ability to return a profit — are on the rise. But they are typically as hard to identify and assess as they are to mitigate.

As risk managers tend to focus their resources on threats they can identify and resolve, many of these business threats remain unaddressed in Europe. The region’s senior transport executives returned the lowest ratings for geopolitical risk from any of the five continents surveyed for the Index.

The intangible nature – and consequences — of geopolitical risk may also explain why there probably aren’t enough insurance-related products on the shelves to support the transfer that the transportation industry requires.

Lateral risk can be assessed, however; expert advice is available from specialists who are adept at interpreting global change. Supported by greater risk-sharing (through partnerships and/or insurance, for example), organizations can adapt to new political environments by broadening their understanding and response.

Unfortunately, for those responsible for a company’s risk management, stub­bornly clinging to traditional comfort areas and trusting the commercial health of their business to luck or a favourable change in the winds of European politics is no longer an option.

About Mark Hue-Williams

Mark Hue-Williams joined Willis in 1991 and since that time he has held a variety of roles in the Aerospace divisio…
Categories: Aerospace, Auto, Europe, Global Risks, Marine, Political Risk, Rail | Tags: , , ,

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