Europe-Latin America

Air freight from Europe to Latin America generated 937 tonnes per day in 2002, representing 1.1 percent of world air freight tonnes, or 2.8 percent of intercontinental air freight tonnes.

The Europe-Latin America air freight market is dominated by industrial traffic, with more than 40 percent of eastbound air freight tonnes consisting of capital equipment and intermediate products, and high tech goods accounting for another fifth.

Historically, Latin America has been a front-haul market in which freighter operators expect to make enough to defray a significant portion of the cost of returning aircraft back to Europe. However, economic problems in Brazil and Argentina have depressed westbound rates, making eastbound traffic more important to roundtrip freighter profitability.

Latin American economic growth - the primary driver of import demand - depends largely on government policy, world commodity prices, and North American economic growth. It is no secret that Latin America as a whole has not realized its economic potential since the end of World War II. In general, Latin American governments exercised sufficient spending discipline in the 1990s to achieve much greater monetary stability than experienced in prior decades.

Since the mid-1990s, more Latin American governments, especially Brazil, have reduced the state's role in their respective economies, both by privatizing state-owned firms and lowering trade barriers. The resulting flows of foreign goods and capital into Latin America have had a dramatic impact on inbound air freight demand.

Latin American demand for air imports depends primarily on world commodity prices, including those of grain, copper, cut flowers and seafood, which account for a major share of total Latin American exports. World market prices for these commodities have a major impact on the economic growth and hard-currency reserves of many Latin American countries which, in turn, drives their appetite for imports, including air imports from Europe. As with commodity prices, export demand has a "feedback effect" on Latin American import demand.

We expect Europe-Latin America air freight tonnage to grow dramatically - averaging 8.4 percent per year in the 2003-2007 period - as Brazil and Argentina shake off their economic malaise and resume sustained growth.

Latin America-Europe

Air freight from Latin America to Europe averaged 811 tonnes per day in 2002, representing 1 percent of world air freight tonnes, or 2.4 percent of intercontinental air freight tonnes.

The Latin America-Europe air freight market is dominated by perishables, reflecting the strength of Latin America's flower industry and the relative weakness of its export manufacturing industry, especially outside of Brazil. European countries, especially Spain and Portugal, have strong cultural, investment and trading links with Latin America.

The Latin America-Europe air freight market is highly concentrated in terms of commodity mix, with "food and flowers" accounting for more than 70 percent of westbound tonnage. Ecuador is the largest air exporter to Europe, reflecting its well-developed flower industry and effective penetration of the European market.

This situation has become slightly more balanced with the heavy investment by European automobile manufacturers in Latin American plants, especially in Brazil. Labor-intensive but lower-value parts are manufactured throughout Latin America and are forwarded to Brazil for assembly with higher value, less labor intensive, parts shipped from Europe.

Demand is stimulated by the general availability of inexpensive backhaul capacity. Also, the long depreciation of most Latin American currencies, with the notable exception, until recently, of the Argentine peso, against major European currencies effectively makes Latin American perishables less expensive for European consumers.

European direct investment in Latin America is a second demand driver. As European firms set up or expand plants in places like Brazil, a small but growing amount of the resulting output finds its way back to Europe.

MergeGlobal's forecast calls for the market to average 6.2 percent growth per year in the 2003-2007 period.

Latin America-North America

North America is by far Latin America's largest trade partner, accounting for 43 percent of total export value. Air freight from Latin America to North America averaged 2,206 tonnes per day in 2002, representing 2.7 percent of world air freight tonnes, or 6.5 percent of intercontinental air freight tonnes.

The Latin America-North America air freight market is dominated by perishables, including large volumes of cut flowers from Colombia and Ecuador. Apparel, classified under Consumer, is another major component of northbound traffic.

The primary driver of northbound air freight is North American consumer demand for Latin American perishables, including fruits, vegetables and cut flowers. Northbound demand is stimulated by the general availability of inexpensive backhaul capacity and the long-running depreciation of most Latin American currencies against North American currencies.

The Latin America-North America market averaged only 0.8 percent growth in the 1997-2002 period. The main cause seems to be that the North American perishables market is becoming saturated. Latin American producers are aware of the problem, and are spending more on promotion as well as new products such as exotic fruits in an effort to capture a larger "share of wallet."

Partly reflecting these efforts, and accelerating economic growth in North America, Latin America-North America air freight tonnage growth is expected to average 4.6 percent growth in the 2003-2007 period.

North America-Latin America

Air freight from North America to Latin America averaged 1,299 tonnes per day in 2002, representing 1.6 percent of world air freight tonnes, or 3.8 percent of intercontinental air freight tonnes.

The North America-Latin America air freight market has a diversified commodity mix consisting of both industrial- and consumer-related traffic, from cell phones to production process machinery.

Historically, North America-Latin America has been a front-haul market in which freighter operators expect to make enough to defray a significant portion of the cost of returning aircraft north. Northbound cost typically exceeds northbound revenue due to lower-yielding back-haul traffic, primarily perishables. However, Latin America's economic problems have depressed southbound demand and rates to the point where many freighter operators look to northbound traffic to cover roundtrip cost.

Latin American demand for air imports depends primarily on world commodity prices, including those of grain, copper, cut flowers, and seafood, which account for a major share of total Latin American exports. World market prices for these commodities have a major impact on the economic growth and hard-currency reserves of many Latin American countries, which, in turn, drives their appetite for imports. As with commodity prices, export demand has a "feedback effect" on Latin American import demand.

MergeGlobal's forecast calls for North America-Latin America air freight tonnage to average 5.7 percent growth in the 2003-2007 period.

Europe-Middle East

Air freight from Europe to countries bordering the eastern Mediterranean and Persian Gulf, ranging from Egypt and Turkey to Iran, averaged 1,250 tonnes per day, representing 1.5 percent of world air freight tonnes, or 3.7 percent of intercontinental air freight tonnes.

With a large population, small manufacturing base and unevenly distributed petrodollars, the Middle East historically has imported all manner of consumer products, including foodstuffs, as well as various industrial goods to support the oil industry and government-sponsored development and diversification programs. Consequently there is no dominant air freight commodity. Indeed, the commodity mix is one of the most evenly distributed of the major air freight markets analyzed in this document.

Reflecting the strong inbound demand, Europe-Middle East is a "front-haul" market in which carriers expect to make enough money to pay for the return trip.

The market is geographically concentrated, with the four leading European exporters accounting for almost two-thirds of air freight tonnage to the Middle East. Tonnage is less concentrated on the import side.

Although the recent attention has been on the war in Iraq and the subsequent reconstruction, over the longer term world oil prices are the single most important driver of Europe-Middle East air freight demand. When oil prices rise, Saudi Arabia and the other oil producing states enjoy faster economic growth and growing hard-currency reserves, and vice-versa.

The Asia-Middle East market was depressed along with oil prices in the late 1990s, but grew significantly as oil prices recovered beginning in 2000. Needless to say, oil prices spiked in the run-up to and launch of the war in Iraq. From mid-2003, we assume that the price of oil will stabilize at $25 per barrel, and that global demand will respond to the anticipated economic recovery in 2003.

Growth will disproportionately benefit the capital equipment and intermediate goods sectors, reflecting the reconstruction of Iraq as well as a recovery in oil-drilling activity. The Europe-Middle East market is expected to grow a respectable 4.4 percent yearly average for the 2003-2007 period.

Middle East-Europe

Air freight in the Middle East-Europe averaged 449 tonnes per day in 2002, representing 0.5 percent of world air freight tonnes, or 1.3 percent of intercontinental air freight tonnes.

Middle East-Europe is a small market in which perishables traffic accounts for almost half of air freight tonnage. Textiles and apparel, classified under Intermediate and Consumer, respectively, are also major components of westbound traffic flows to Europe.

The market is geographically concentrated. On the export side, the three largest countries account for fully three-quarters of air freight tonnage to Europe. On the import side, the three largest countries receive almost two-thirds of Middle East imports.

The primary driver of westbound air freight is European consumer demand for perishables, including fruits, vegetables, and cut flowers (mostly from Israel). Demand is stimulated by the general availability of inexpensive backhaul capacity. Exports to the U.K. have been further stimulated by the long-running depreciation of most Middle Eastern currencies against the pound sterling.

MergeGlobal forecasts that the Middle East-Europe market will average 4 percent growth in the 2003-2007 period as European consumer demand resumes steady growth.

Africa-Europe

Air freight from Africa to Europe averaged 1,124 tonnes per day in 2002, representing 1.4 percent of world air freight tonnes, or 3.3 percent of intercontinental air freight tonnes.

Europe is by far Africa's largest trading partner, accounting for almost 80 percent of total export value. More than four-fifths of northbound traffic consists of food and agriculture, including tropical fruits and contra-seasonal vegetables as well as cut flowers year-round. Air trade tends to be concentrated between various European countries and their former African colonies. For example, Kenya trades primarily with the U.K., and the French-speaking countries in West Africa trade mostly with France.

The exception is the Netherlands, which ranks as the second-largest air importer from Africa because most cut flowers are sent to Aalsmeer for auction and distribution across Europe and overseas. Kenya's successful development of its cut flower industry also makes Kenya the single largest air exporter to Europe, accounting for almost one-third of northbound air freight tonnes.

On a country-pair basis, the Africa-Europe market is fragmented, with the five leading country-pair markets representing just over one-third of the northbound market. However, exports are concentrated in Kenya and the Francophone countries, which account for more than half of northbound air freight tonnes. By the same token, almost 58 percent of air imports from Africa are destined for France, the Netherlands, or the U.K.

Outside of South Africa, Africa has little manufacturing base to speak of. Consequently, most African countries are forced to import many industrial goods and consumer products, primarily from Europe and typically from the European countries with which they had a colonial relationship. Consequently Europe-Africa air freight flows are well-diversified in terms of commodity mix, but many African countries' trade is concentrated with a particular European country. South Africa is the exception due to the relative size and sophistication of its economy.

Europe-Africa is a front-haul market in which carriers expect to make enough money to help defray the cost of returning aircraft to Europe, which typically exceeds the northbound revenue generated by lower-yielding back-haul traffic, primarily perishables.

African economic growth drives demand for imports from Europe. In turn, world commodity prices - for oil, minerals, and perishables, depending on the part of Africa - are the primary determinants of African economic growth.

In recent years, a number of European firms have moved apparel production to low-cost North African countries, typically resulting in a bi-directional flow in which textiles move southbound for assembly into finished apparel that is shipped back to European consumers.

Air freight demand is stimulated by the unfortunate fact that it's often the only way to deliver goods in many African countries. Much has been said and written about Africa's vast but untapped potential. We do not see a fundamental improvement in the continent's economic situation over the next five years. MergeGlobal forecasts that Europe-Africa market will average 3.7 percent annual growth in the 2003-2007 period.

Brian Clancy and David Hoppin are principals of MergeGlobal Inc., a research and consulting firm based in Arlington, Va. WWW.mergeglobal.com.

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