Delayed Ascent,
the 2008-2017 Air Freight Forecast
The OAG Global 2008
Air Freight Forecast
says growth will return
OAG Analytical Services
 he global air freight industry is wrestling with the same issues as the rest of aviation - a teetering global economy, increasing security regulations, skyrocketing fuel costs, changing currency exchange rates and environmental initiatives. The only good news, it seems, has been the liberalized air rights between China and European Union countries with the United States.
The 2008 OAG Global Air Freight forecast reflects these underlying trends, with a return to an average annual growth rate of 5.6 percent by 2011 after a slowdown in the near term. Over the long term, OAG sees these underlying trends creating a growing demand for freighter aircraft.
The international air freight market is expected to continue to flourish, with average annual growth of 6.1 percent during the 10-year forecast period from 2008 to 2017. Security and green issues are expected to pull down demand for regional air freight trade to 3.9 percent average annual growth.
The Middle East has emerged as the fastest growing region, pushing China to No. 3 behind Africa in terms of growth rates. These emerging markets are posting impressive growth rates, but on a very small overall base level of air freight traffic.
Trade connecting to North America continues to dominate the global air freight and other markets are feeling the impact of the U.S. economic woes.
Slower Economy
Uncertainty is the No. 1 issue. The U.S. economy posted anemic 0.6 percent GDP growth in the fourth quarter of 2007. The diminishing role of the U.S. in the global economy is mitigating the impact on other world regions. Emerging economies, including China, Russia, and the Middle East are strong enough to continue to post impressive growth rates over the sluggish economies of the industrial countries (the U.S., EU and Japan).
Even the emerging markets are feeling the economic slowdown since the U.S. and EU are their primary customers; any drop in our imports directly impacts their exports.
China is forecast to grow by 10 percent in 2008 versus 11 percent in 2007, and India's real Gross Domestic Product is forecast to grow by 8.5 percent in 2008 versus almost 10 percent growth in 2007. Global GDP is forecast to slow to 2.7 percent growth in 2008 versus the 3.5 percent growth rate of 2007.
For the air freight industry, a weaker economy means companies will expand less, delay new investments and consumer spending drops off, resulting in fewer shipments overall.
Security, Fuel
Security is of increasing importance and could lead to additional transit times and expenses. Requirements for pure freighters are less stringent than those for passenger-carrying aircraft, resulting in greater competition for business between all-cargo and belly operators.
The U.S. Congress requires 100 percent screening of all air freight carried by passenger airlines by 2010. Because of the costs associated with this mandate (screening equipment, facilities and labor) OAG expects a concentration of investment in gateway hubs with cargo essentially locked out in secondary cities. Carriers may concentrate more on major gateways than trying to develop new markets at secondary cities.
More intensive screening processes will result in higher costs, which will be passed on to shippers as well as longer cycle times to accommodate the screening process. Higher costs and longer transit times will intensify the ongoing mode shift to surface transportation, benefiting trucking services on regional moves and even, as is increasingly reported, ocean container lines on international transport.
Traditional air freight shippers will show a distinct preference for freighter lift where security requirements are not as onerous as the requirements for passenger aircraft. This shift will generate some interesting market dynamics. All-cargo carriers will enjoy a seller's market and passenger carriers will need to offer discounts to fill empty belly space.
Despite impressive fuel efficiency gains, airlines are facing another massive increase in fuel expenses in 2008. With crude oil selling for more than $100 a barrel, air freight is being particularly hard hit. The older freighter aircraft fleet is significantly less fuel-efficient than newer aircraft. The cost of fuel is forcing the retirement of older aircraft and pushing the decision to purchase new freighter aircraft, fly more belly cargo or shift capacity to more fuel- efficient aircraft.
The high cost of fuel increases the cost differential between air versus surface operations and is putting more domestic freight on trucks and international freight on the sea.
Dollar Woes
The U.S. dollar has lost about 25 percent of its value over the last five years, according to the U.S. Federal Reserve's Trade Weighted Major Currency Dollar index.
The dollar lost nearly 10 percent against China's yuan in the past year and is at an all time low against the euro. The Canadian dollar is worth more than the U.S. dollar for the first time since the 1970s.
A decline in the value of the U.S. dollar is expected to result in a drop in imports and an increase in exports. OAG's sister company PIERS reports U.S. containerized ocean imports were down 0.5 percent in the early part of this year while U.S. exports were up 17 percent.
The weak dollar has stimulated increased investment in U.S.-based manufacturing by multinational companies. Volkswagen, for example, announced plans to open a U.S. assembly plant and is scouting locations in the Carolinas and Georgia. Many of the components will be transported as air freight as opposed to finished products, which travel by ocean.
A continued downward trend for the U.S. dollar is ominous not only for air freight, but the overall U.S. economy. While it helps reduce the trade deficit by making U.S. exports cheaper relative to foreign domestic products, the falling dollar makes all imports into the U.S. more expensive, dampening the U.S. consumption of imports.
Our outlook for the U.S. dollar is to stabilize by mid-2008 and begin to recover in 2009.
Green and Open Skies
All levels of the supply chain are coming under increased pressure to reduce their carbon footprint, including air freight.
The focus of green initiatives in both the EU and the U.S. has been on reducing fuel consumption. Reducing fuel burn reduces operating costs for airlines, but increasing environmental surcharges on aviation fuel will likely negate the cost reductions.
The move to a more liberal air rights environment is expected to act as a counter-weight to the negative load of fuel and a stalled economy. The March 2008 Open Skies agreement between the U.S. and the EU permits any U.S. carrier to serve any point in the EU and vice versa. Additional access to London Heathrow Airport has opened new markets and produced joint operations, such as the new Air France/Delta Air Lines nonstop flight from Heathrow to Los Angeles International.
China continues to open its markets in stages as it authorizes additional services each year. Additional capacity in Chinese markets underlies the aggressive growth rates in the forecast.
Pain is Not Equal
Global express carriers are package-centric and fly air freight to the extent it fills space on aircraft, but air freight is not their core product.
Since they provide a unique service, they're likely to be affected the least by the negative factors and benefit more from liberalization of markets. These carriers operate hub-and-spoke systems in locations that welcome the overnight sorting operations. Increasing security regulations have a lesser impact on these carriers since they operate freighter aircraft. Fuel prices are the most significant negative factor.
General cargo freighter operators target a customer base that is primarily freight forwarders. These carriers tend to operate in more point-to-point markets. Increasing security regulations actually improves the competitive position of these carriers since they don't carry passengers and often are not operating at passenger-dominated hubs.
Their older fleets are especially hard hit by skyrocketing fuel prices. The change in the balance of trade with the U.S. impacts their business as the U.S. dollar plummets, but they benefit from liberalization as air freight operating rights are liberalized worldwide, especially in the Chinese market.
Combination passenger/freighter airlines operate both passenger and freighter aircraft and the market leaders include Cathay Pacific, Emirates, Lufthansa, Northwest Airlines and KLM Royal Dutch Airlines and Air France.
These carriers are hardest hit by new security regulations, fuel prices, and the economy, pushing many of the passenger carrying carriers out of the air freight market. Passenger carriers have the opportunity to enter new air freight markets as liberalized air rights allow them to expand their passenger networks.
Top Air Freight Markets
North America remains the top market for air freight both in terms of the domestic and the international market, accounting for 53 percent of global freight tonne kilometers. A small change in the North American market represents a large absolute number of FTKs.
The top 10 trade lanes represent almost 80 percent of all air freight traffic.
OAG forecasts an average annual growth rate of 5.6 percent for global FTKs over the next decade, with the recovery beginning in 2009 and then accelerating later in the decade.
The fastest growing regions are the Middle East and Africa, representing a shift from the past decade, when growth was largely built on China's exports.
China has dropped to third in terms of average annual growth rate because of rapid growth of the Middle East and Africa, as well as the slowdown in China's trade with North America. Japan's stagnant economy pulls down the growth rate for the rest of Asia. Europe's growth rate is 5.5 percent, driven by various countries, particularly Russia. Latin America's growth rate is comparable to Europe and is driven by the growth in the Argentinean, Mexican and Brazilian economies.
Expansion will slow in mature markets, and by 2017, China will face significant infrastructure issues in the Western part of the country, dampening domestic growth.
The fastest growing economies in the world are Russia, Africa, the Middle East and India. While these markets are very small in terms of total volume for air freight, air freight is in the infant stages. Foreign direct investment and other funds are finding opportunities to earn a solid return compared to other global investment opportunities.
Africa and the Middle East are heavily dependent on foreign direct investment from Europe and oil rich countries, which cater to the oil and gas industries. The United Arab Emirates and other Persian Gulf-region countries are seeing a dramatic spike in tourism construction, which has fueled air freight imports.
OAG anticipates a strong demand for replacement aircraft to replace aging equipment in Africa and parts of the Middle East, with the exception of Etihad Airways and Emirates, which have orders for 21 new freighters.
OAG's forecast for these countries is an educated guess with more art than science when compared to markets such as North America, Europe and Asia, where so much more data is available to interpret and forecast.
World Freighter Forecast
The current freighter fleet worldwide includes 1,879 aircraft of which half are widebodies.
The OAG fleet database counts orders for an additional 286 freighters (77 A330s and a total of 209 767s, 777s and 747s. OAG forecasts the fleet will grow by an average of almost 3 percent per year over the next decade to meet projected demand, which equates to an additional 700 freighters. Taking into account retirements from the current fleet, the additions to the fleet will be one-third (414) new freighters and two-thirds (880) conversions from passenger aircraft.
OAG forecasts 588 aircraft will retire from the current fleet.
Key aircraft ripe for conversion to freighter, particularly the 777, 757 and 767, continue to operate in passenger service because airlines cannot afford to replace them. This results in a shortage of available aircraft for freighter conversion programs. Over the next decade, as the next generation aircraft enter the market, the global passenger fleet will begin to shed these older airliners.
REGIONAL OUTLOOK
The top trade lanes for air freight are Intra-North America, North America-China, North America-Asia (excluding China), Intra-Asia, North America-Europe, North America-Latin America, Intra-Europe, Europe-China, Europe -Asia (excluding China), Europe- Africa, and Europe-Middle East.
Here is how we see those markets growing in the next few years.
Intra-North America
The intra-North America market has been slowed over the past few years as security and fuel costs have virtually made air freight uneconomical.
The market continues to struggle against expanding overnight and expedited trucking networks as companies relentlessly reduce the cost of their domestic supply chains without sacrificing significant transit time.
Shippers have difficulty finding capacity since the only widebody freighters are operated by the global express carriers and passenger airlines keep downsizing to regional jets.
Overall capacity will be constrained, but niche markets such as medical supplies, banking documents and courier services, requiring same day transit, will remain a high-yield source of traffic. Air freight is forecast to grow annually by an average of 1.4 percent in the North American market by selectively selling commodities that require air freight selection over ground transport.
Canada does not face the same issues. The Canadian economy is much stronger than the U.S. economy this year, but the overall volume of air freight is dwarfed by the U.S.
North America-China
Although no longer the fastest growing trade lane, the North America China market remains the largest global market for air freight. Despite these impressive statistics, air rights between the U.S. and China to provide air freight services did not open up until 2001. Air freight represents only 1 percent of all trade between the two regions in terms of weight, an indication of room for growth.
As more capacity is added to the market, demand can be expected to respond.
Air transport has a major advantage of getting the goods to the source, such as interior markets that cannot be served by water. New ventures between air and ocean companies have been forged to take advantage of the emerging markets. For example, China Cargo Airlines, a joint venture between China Eastern Airlines and China Ocean Shipping Company, recently announced leases for six 777 freighters from GE Commercial Aviation Services, bringing the freighter fleet to 17.
U.S. exports to China are benefiting from the erosion of the U.S. dollar as U.S. exports are more affordable to the growing Chinese middle class. U.S. imports have been impacted due to the weak U.S. economy, devaluation of the dollar and recent scares related to the quality of Chinese goods.
OAG forecasts an eastbound growth rate of 10.1 percent and a westbound growth rate of 8.5 percent, for an overall market growth for the next decade of 9.8 percent per year.
North America-Asia (Excluding China)
Japan remains the largest economy in Asia (excluding China) but continues to produce disappointing economic results. Emerging markets, such as India and Vietnam are driving growth in the region, but not enough to overcome the negative impacts of the stagnant Japanese market.
The devalued U.S. dollar exacerbates the trade imbalance, as exports from the U.S. are more affordable versus Asian domestic goods in countries such as Korea, Japan, Taiwan, and Singapore.
OAG maintains the same growth rates for this year as last in the North America-Asia market, 4 percent annually over the next decade, excluding China, and finds the balance to be almost equal between eastbound and westbound traffic.
Intra-Asia
Expansion of Chinese consumer consumption capabilities with the emerging middle class, coupled by growing Intra-Asia trade with China, will fuel the Intra-Asian market.
Raw materials and intermediate goods flow into China with new manufacturing countries experiencing continued growth on smaller bases as global companies continue to seek lower costs, economies of scale, and more efficient ways to build a global supply chain.
OAG is forecasting strong trade within Asia at an average annual growth rate of 7.5 percent.
North America-Europe
Exchange rates impact the directionality of North Atlantic air freight. Fueled by the strong euro and the British pound, European consumers are demanding more U.S. goods.
The new open skies agreement between the U.S. and the EU will add capacity to the market.
OAG forecasts a modest increase in this trade lane over the next decade with an average annual growth rate of 1.3 percent eastbound and 2.1 percent westbound for an overall annual growth rate of 1.8 percent.
North America-Latin America
The Latin American economies led by Argentina, Brazil and Mexico are beginning to exhibit sustainable growth.
Despite a short-term slowdown, growth between bordering economies will maintain at a steady pace through the next ten years as Latin American countries continue to benefit from rebounding economies, strong perishable exports and high-tech imports, and intermediate goods traded as multi-national stage production facilities in Latin America.
OAG forecasts a healthy increase in this trade lane over the next decade with an average annual growth rate of 5.7 southbound and 5.2 percent northbound for an overall annual growth rate of 5.3 percent.
Intra-Europe
The European air freight market consists primarily of time-definite and oversized goods shipments because Intra-Europe has a sophisticated trucking network that offers competitive pricing and transit times.
Over 8,000 weekly air-truck frequencies connect to almost 900 city pairs throughout Europe.
OAG predicts an average annual growth rate of 6.2 percent, driven by emerging European economies, especially Russia.
Europe-China
An interesting driver of this market will be the strength of the Chinese yuan related to the British pound and the euro and the overall trade freedom of the government as China continues to evolve its World Trade Organization status.
The euro and pound are expected to maintain strong to support continued growth in imports. Russia and other emerging countries have the potential to grow into both an import consumer and export producer for air freight, and as a trader with China.
OAG forecasts continued strong growth in this trade lane over the next decade with an average annual growth rate of 9.4 percent from China to Europe and 9.0 percent between Europe and China, for an overall annual growth rate of 9.3 percent.
Europe-Asia (excluding China)
While Japan's investment in Europe has bolstered overall trade, many of the traditional Asian countries are finding economic growth difficult as their economies mature, industries shift to lower production, and domestic economic issues stymie ability to maintain high GDP growth displayed by China.
Unless production shifts completely out of Asia, which we think is extremely unlikely over the next decade, into lower production areas, this trade lane will continue to be a vital part of the air freight global network.
OAG forecasts strong growth in this trade lane over the next decade with an average annual growth rate of 9.4 percent from Asia to Europe and 7.4 percent between Europe and Asia, for an overall annual growth rate of 8.5 percent.
Europe-Middle East
Europe is the primary trading partner for the Middle East. Countries in the Middle East are experiencing rapid economic growth with significant FDI, especially the Gulf Cooperation Council countries, which includes the United Arab Emirates, Bahrain, Saudi Arabia, Oman, Qatar and Kuwait.
The airlines in the Middle East are rapidly adding capacity, especially air freight friendly widebodies, to support the growing demand.
While the ongoing war(s) in the Middle East, as well as the continuing political turmoil, offers some uncertain risk in the forecast, the long-term growth of this market is aggressive, and based on the rising economies in the region.
OAG forecasts strong growth in this trade lane over the next decade with an average annual growth rate of 7.3 percent from Europe to the Middle East and 9.2 percent between the Middle East and Europe, for an overall annual growth rate of 7.8 percent.
Europe-Africa
Air freight between Europe and Africa is posting impressive growth rates, but a very small overall base of FTKs.
Good growth in air freight between Europe and Africa is simply a function of a few economies building expertise in specific air freight commodity categories coupled by the strong currencies and consumption rates of Europe. OAG forecasts an average annual growth rate of 7 percent from Europe to the Africa and a whopping 13.2 percent between the Africa and Europe, for an overall annual growth rate of 8.4 percent.
Summary
The economic climate in U.S. and the top global air freight markets over the next five years are facing uncertainty. The rising cost of operations will force the industry to make tough decisions that will impact air freight capacity on the global level.
As a result, FTK's may grow slower than forecast if the U.S. recession materializes or exceeds forecasted levels. Meaning, FTKs may not return to the recent growth trajectory until after 2011-2012.
As the U.S. economy rebounds, long-term prospects remain positive. Overall global economic expansion coupled with developing countries becoming sources of both manufacturing capacity as well as consumer wealth, and the implementation of efficiency measures by companies will help to make air freight an important component of the global supply chain.
Overall, the OAG 2008-2017 forecast is aggressive. High single-digit to low double-digit growth is forecast as globalization continues, China matures and businesses explore better ways to manufacturer products.
Air freight will continue to grow as businesses exploit economies of scale and cost rationalization in their supply chains, while also seeking to expand their consumer base.
For more information, contact OAG Analytical Services at www.oag.com or call 202-355-1166.
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