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Airfreight faces a new normal

By Hpanchal on May 7, 2013

By John McCurry

The airfreight industry is going through a series of changes, which is resulting in a “new normal” for the sector rather than just a cyclical change. That was the observation offered by Michael L. Ducker, COO and president, International for FedEx Express, during his opening keynote Monday at the CNS Partnership Conference.

“We believe this is a pivotal period for the air cargo industry, and as our chairman Fred Smith has pointed out, we are at a critical inflection point,” Ducker says. “He thinks it is comparable in some respects to the industry’s days when DC3s and Conestogas roamed the skies.”

Ducker says the industry has been on a four-year roller coaster ride powered by a downturn in industrial production, which is a result of a lack of investments. Piling on the lack of investment has been a series of major international events such as the Japan earthquake, the global debt crisis, presidential elections in the U.S. and elsewhere, sequestration and the Arab Spring.

“All of it adds up to a heck of a lot of uncertainty,” Ducker says. “Weak investment generally means weak trade levels. As a result, air cargo has certainly taken its lumps.”

The industry experienced a “false spring” in 2009 when it took advantage of the inevitable inventory restocking following the global recession. Many in the industry confused this cyclical growth spurt with a sustainable recovery, Ducker says.

He says the first characteristic of the new normal is high fuel prices, which he says is the leading cause of downward pressure on the shipping decisions of airfreight customers.

“High fuel costs affect the bottom line of everything, and the impact on our industry cannot be overstated,” Ducker says.

Another new normal is the strong economic headwinds produced by the persistent sluggish global economy. Ducker says FedEx projects continued tepid growth in the highly developed consumer economies of the U.S. and Europe. He says the one bright spot is the growth seen in emerging markets, which includes China, India, Brazil, Mexico, Poland, Colombia, Thailand and Vietnam.

“Those are the lands of opportunity for global airfreight demand, and we think they will be for decades to come,” Ducker says.

Another new normal is the “proliferation of fully optimized, super-sophisticated” global supply chains. New technologies are producing efficiencies that give shippers more options.  Customers are now armed with more information. One result is that some cargoes that once traveled by air are now shipped via ocean.

“Ocean freight is an increasingly important part of a shipper’s overall equation,” Ducker says.

Also part of the new normal is increased security requirements and regulatory changes that grow more stringent. In addition, new long-range wide-body aircraft coming online figure to increase the excess capacity that already exists in the marketplace. This will put continued downward pressure on yields. Right now, just 44 percent of available freight capacity is being used on freighters and passenger jets, Ducker says.

“The bigger picture is that the air cargo industry has structurally changed, and it must adjust and move to the beat of some very new business trends,” Ducker says.

Ducker says traditional air cargo products are giving up market share to both international express and ocean cargo. He says that trend will continue unless there is a substantial reversal in energy costs.

“We are seeing a fundamental shift in transportation modes with some traditional air cargo products being shifted to oceanfreight,” Ducker says. “Ships have gotten more efficient. A large cargo ship can carry 15,000 tonnes compared to a 777, which can haul 112. Ocean services have become a lot more dependable, and tracking options are better than ever.”

Ducker believes the future of air cargo is inseparably tied to oceanfreight. However, he says the wider use of oceanfreight is not for everyone. Airfreight can still be a cheaper or better value than maritime, but it has to relate to the value of the cargo, he says.

He says the competitive landscape is changing and there are opportunities for the industry to collaborate.

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