Last Update: July 2024
Strenghts
  • High pricing power since there are few manufacturers capable of engineering and building tailor-made transportation equipment, particularly in aviation (an oligopoly with very few well-recognized players).
  • Lot of growth potential for the transportation sector in general, especially for the rail transportation market, with governments looking to encourage green mobility.
  • In some cases, construction contracts are signed with governments (state-owned transportation companies), which gives greater reliability of repayment.
  • Construction periods for transport equipment tend to be long (several years), allowing companies to anticipate production capacity and forecast income in advance, and therefore better manage working capital.

 

Weaknesses
  • Very capital-intensive sector as it is necessary to invest both in R&D (design and engineering of state-of-the-art models) and in capex and infrastructure for the construction and assembling of the equipment to be sold.
  •  Highly leveraged sector. Given the large size of contracts and how expensive manufacturing is, companies require a high level of disposable working capital over the construction period as in most cases they will be fully paid only on delivery.
  • As steel and aluminum are the main metals used for the manufacturing of trains, airplanes and vessels, profitability is vulnerable to commodity price volatility, though sales are agreed on a fixed-price contract basis.
  • A market that demands high precision, high-quality finished products and safety. Any failure of a structural component, manufacturing defect or accident can have huge negative consequences for both the operator and the manufacturing company.
  • Cyclicality: demand tends to accelerate in economic boom periods when transportation companies can afford to enlarge their capex, while investments decrease significantly during economic slowdowns.