By Cathy Roberson, senior analyst at Transport Intelligence
The airfreight market has been limping along for the past couple of years due to slowing global trade and the shift of some commodities to sea transport. Based on International Air Transport Association figures, the airfreight market contracted 1.5 percent in 2012 and 0.7 percent in 2011. Although airfreight capacity was reduced throughout 2012, the decline in volume was greater, which led to a slight decline in load factors for the year.
However, not all was gloomy in 2012. Middle Eastern and African airlines noted cargo growth of 14.7 percent and 7.1 percent, respectively. This growth was attributed to shifting trade lanes favoring Africa and Asia, particularly China, which was in search for alternative trade partners as its largest partners, Europe and the U.S., were experiencing sluggish economic growth.
Bright spots are now appearing as the European and the U.S. economies strengthen. Recent IATA data shows that global freight tonne kilometers (FTKs) have slowly been increasing since the beginning of the second quarter of 2013. Surprisingly, it is not the Asia-Pacific airlines that are leading this improvement. Instead, it is European and Middle Eastern airlines that have been carrying the majority of the increase in air cargo volumes.
Still, Europe’s largest cargo airline, Cargolux, reported a 3.5 percent decline in tonnage for the first half of 2013, but its cargo load factor improved from 69.1 percent for the first half of 2012 to 70 percent for the same period in 2013. To manage its capacity better, it is retiring two of its 18 MD-11 freighters and took delivery of its first Boeing 777F in October and its second one in November. It is also expanding its network with new routes to the U.S., Mexico, South America and China.
Meanwhile, Abu Dhabi’s Etihad Cargo noted a 23-percent increase in tonnage for the first half of the year as well as record months in July and September with tonnage increases of 37 percent and 42 percent, respectively. Strong demand from Hong Kong, China, India and Germany were noted.
Still, IATA cautions that a sustainable global recovery depends on the improvement of Asia-Pacific airlines, which make up about 38 percent of the global airfreight market. So far this year, this group of airlines have reported an almost 2-percent contraction in tonnage. The Association of Asia Pacific Airlines’ director general Andrew Herdman says the decline in airfreight demand this year is a result of “lackluster trade growth and relatively weak markets for electronic products and other high value goods normally shipped by air.” Still, Herdman notes there are signs that the slump in airfreight may be bottoming out, at least in volume terms, “but surplus cargo capacity will continue to exert downward pressure on rates.”
Asian airlines are cutting capacity, routes and diversifying commodities in attempts to return to profitability. For example, in 2012, Cathay Pacific carried 5.3 percent less cargo than it did in 2011 and as a result, total revenue declined 7.3 percent. The Asia-Europe market has particularly hurt Cathay Pacific. As of early 2013, the airline has cut freighter frequencies to Europe by 63 percent to 11 flights per week from 30 flights per week in 2008. It also plans to target high-value goods, perishables and pharmaceuticals to improve revenue and margins.
Meanwhile, U.S.-based FedEx announced plans to restructure its Express division. Like many other airfreight providers, FedEx Express has seen a shift from its premium products to its economy products. Comparing average daily volumes for each of the international express service offerings, it appears International Economy has steadily increased each quarter since the beginning of fiscal year 2012, with a slight dip in the third quarter. International Priority has remained fairly steady for the same comparable time period. International Domestic, on the other hand, has increased greatly since first quarter of fiscal year 2012, but a sharp drop in average daily volumes was noticeable on a quarter–to–quarter comparison from second quarter to third quarter of the present fiscal year. This drop may be due to declining demand within the domestic European market.
FedEx also has removed aircraft from its fleet, including A310s and MD10s. It is also accelerating the retirement of 66 further MD10 and A310s, although it has not given a timeline for this process.
Although this represents a substantial proportion of FedEx’s 368 large jet aircraft fleet, the move is, in part, a restructuring of the fleet renewal program that will see the older aircraft replaced with newer Boeing 757 and 767s. These models are, according to FedEx, are either larger or 30 percent more fuel efficient than the aircraft types they replace.
The state of the global airfreight market has also had a negative effect on freight forwarders. Even though the 2012 total freight-forwarding market increased 3.1 percent, the growth was solely due to the increase in seafreight forwarding, which grew at 11.5 percent. On the other hand, the global airfreight forwarding market declined 4.2 percent.
As a result of this shifting mode preference, new service offerings were developed. For example, to attract airfreight, temperature-controlled services targeting the perishables and pharmaceutical industries are on the rise whereas for more cost conscience shippers, less-than-container loads for oceanfreight or a combination of modes such as air and sea are also being introduced.
Prior to the 2009 recession, airfreight demand remained strong for freight forwarders. However, since the recession, volumes have declined. Meanwhile, revenue (expressed in euros) has increased thanks in part to fuel surcharges and rate hikes. Rationalization of service offerings and efforts to improve gross margins are underway for many forwarders.
DHL recorded strong growth through 2010, according to the tonnage chart. However, the company has yet to return to the levels it had enjoyed prior to the economic upheaval. For 2012, revenue declined 1 percent year-over-year due to a 5.3-percent decrease in volumes. The volume decrease was attributable to the decline in demand from the technology sector.
Kuehne + Nagel appears to have taken market share from rivals as its volumes have surpassed pre-recession and have grown further. However, for 2012, the company has not been able to use its leverage to drive down prices from airlines faster than its customers looked for lower costs. As a result, revenue grew below the market while EBITDA declined more than 9 percent as a result of a European Union anti-trust fine.
Panalpina has struggled with declining volumes as well as revenue. For 2012, airfreight volume, net revenue and gross margin declined – a concern for the company since this is the largest reporting segment.
The outlook for the global airfreight market hinges on continued global economic improvements. However, growth will likely be slow much like what many economies are experiencing.
The EU emerged from its recession during second quarter of 2013, but its economy remains fragile. The U.S. has experienced a slow but steady improvement in its economy. However, the effects of the government shutdown and a resolution to its debt ceiling issue will likely result in a further slowdown, if not a complete halt, to any economic improvements over the next few quarters.
Meanwhile, Asia has had to look elsewhere for trade partners and is focusing on emerging markets such as those within Asia, Africa, the Middle East and South America.
The volatility of oil prices has been a challenge to airline profitability. Boeing says fuel costs have surpassed labor as the largest segment of airline operating cost at 34 percent today compared to 13 percent in 2002. Unfortunately, oil prices will likely continue to fluctuate with each political or natural conflict. But rising shale oil production in the U.S. is moderating projections. As a result, oil prices are anticipated to fall to an average of US$105 (77.82 euros) per barrel on lower geopolitical risk and the U.S. energy outlook.
Because of the unevenness of regional economic improvement, IATA’s outlook for 2014 may be a bit optimistic. The organization anticipates global airfreight tonnes to increase 3.5 percent over 2013. IATA cites improvements in consumer and business confidence being the predecessor for improvements in industrial production, which is an important driver for airfreight growth.
For Airbus and Boeing, the outlook is promising. Boeing expects a long-term demand for 35,280 airplanes. Forty-one percent of this total is anticipated to replace older, less efficient airplanes. For this same period, nearly half of the world’s air traffic growth will be driven by Asia-Pacific. Boeing expects the air cargo market to grow 5 percent annually for the 20-year period. The growth in the global air cargo market will be led by Asia-Pacific, where the company anticipates air cargo to outpace the global rate, growing 5.8 percent per year for the same period.
Boeing’s freighter market is expected to increase by half from 2012 to 2032. Most of the demand will be for passenger airplane conversions followed by about 850 new airplanes.
Airbus forecasts worldwide airfreight to grow 4.8 percent per year from 2012 to 2032. For the forecasted period, the manufacturer anticipates a demand for 1,859 converted aircraft and 871 new aircraft for the freighter market. Its biggest market for freighter aircraft will be North America, with Asia-Pacific to grow its fleet three times in the forecast period.
Transport Intelligence forecasts the total freight-forwarding market to grow 6.8 percent CAGR from 2012 to 2016. The growth will be led by ocean at 7.5 percent, but air demand is expected to improve, growing 6 percent for the period.
Emerging economies are expected to play a growing role in global trade due to rising middle classes and investments in infrastructure. The Middle East has improved upon its infrastructure by expanding free trade zones to entice foreign companies to expand to the region. Africa is also experiencing growth as regions such as Asia and South America look to this region to improve and expand trade relations.
The airfreight market will likely remain in an uneven growth pattern for some time to come. Modal shifts, oil prices and uncertain economic conditions will continue to affect the market. “2014 will likely be another turbulent year for airfreight,” Robert Van de Weg, senior vice president of sales and marketing for Cargolux, says. “High fuel prices will continue to impact airfreight demand. However, increased consumer confidence may have some positive impact. Belly capacity will continue to grow, but freighter capacity will likely reduce further. In short, the overall supply/demand situation may develop somewhat more favorably in 2014 than it did so far in 2013.”
“At the moment, there is still a lot of uncertainty,” James Woodrow, director of cargo for Cathay Pacific Airways, says. “What is certain is that we need some decent GDP growth for the markets to get back on the right track. Until that happens, our strategy will be to match capacity with demand. We need to make sure that Cathay Pacific is in a good position to benefit from any recovery – and we believe we are. We have made good investments in fuel-efficient freighter aircraft, expanded our network to where the demand is, including Latin America, and we can take good advantage of our comprehensive passenger network to carry cargo in aircraft bellies, which is particularly beneficial for intra-Asian traffic. We also recently opened our own cargo terminal at Hong Kong International Airport, which will significantly boost the services we provide to our cargo customers.”
While there is some optimism in regards to the air cargo outlook, it is still with much caution as uncertainty still reigns over the global economy.