Riding the rollercoaster

Riding the rollercoaster International air freight 2009-2014

Executive Summary

      Last year, U.S. air cargo was hit hard by the biggest recession in recent history. It also surged back at a pace no one dared to think possible at the depths of the downturn.
      It seems the recession, caused by a global financial crisis, is fading and cargo volumes are almost reaching pre-crash levels. Will the rollercoaster ride of 2009 continue climbing upward in 2010 and beyond, or will air freight take a surprise turn?
      Uncertainty still reigns, though. Macroeconomic figures are positive, but the biggest factor in U.S. air trade ' the consumer ' still hasn't fully recovered from the recession. Furthermore, financial market jitters, geopolitical issues and inherently unpredictable events such as volcano eruptions are risk factors in the cargo business.
      2009 saw U.S. import and export volumes plummet 15 percent compared to 2008. The short-term outlook is positive: U.S. air trade will rebound in 2010 with 8 percent growth. 2010 to 2014 will see an average annual growth of 4.2 percent inbound and 4.3 percent outbound. Nevertheless, the all-time high levels of 2007 are not to be reached by exports until 2013. Imports are not expected to reach their historic highs in the foreseeable future.
      Mode shift, the phenomenon where cargo gets diverted from air to sea because high-tech products become less valuable over time, has taken a turn to the benefit of air freight in 2009. At least 35 percent of this positive shift is attributable to U.S.-bound flows.
      Transpacific and transatlantic routes, both accounting for more than 70 percent of total U.S. air trade, are on the mend. After a rebound in 2010, westbound transpacific is set to grow 5.7 percent annually, while eastbound growth will be slightly lower at 4.4 percent a year for 2010-2014. Chinese exports to the United States, after growing at 15.3 percent compound annual growth rate from 2000 to 2007, will reduce to 8.3 percent CAGR after expanding 13 percent year-on-year in 2010.
      Transatlantic flows are coming back as well, albeit from great depths. U.S. imports were down 19 percent in 2009 while exports declined 20 percent. Growth in 2010 is far from enough to compensate, at 7 percent on exports and 8 percent on imports. After that, transatlantic eastbound freight is set to grow at 3.1 percent CAGR while westbound trade will be on the back burner at a 1.7 percent average growth. Bright lights are Central Europe and Russia, significantly outperforming the region's matured markets.
      Currency fluctuations influence trade lanes. As the euro appreciated in value against the U.S. dollar over the past decade, U.S. imports into the European Union declined steadily compared to exports to the EU, from a 1.36 ratio down to parity. Facing heavy headwinds in 2010, the cheap euro makes exports from the EU lucrative once more, possibly upsetting the transatlantic air trade balance. Moreover, the currency is not only declining against the U.S. dollar (and the dollar-pegged Chinese yuan) but also against the Japanese yen. To this effect, westbound transatlantic freight could steal away volume from eastbound transpacific flows as well.
      Niche markets remain a source of growth, with Middle East and South Asia (MESA) coming out on top. U.S. inbound air trade will grow of 8 percent from MESA and 4 percent from Africa this year. Further out, growth will average 5.9 percent on the MESA-to-U.S. flow and 4.4 percent on imports from Africa. The U.S. outbound picture looks slightly better, with overall air trade from the U.S. to MESA/Africa significantly higher than pre-crisis levels.
      Climate-controlled and perishable goods, representing the majority of U.S. air trade inbound from Latin America, are doing fine, being among the freight flows least affected by the global downturn. However, this flow is mature, with CAGR not exceeding 1.3 percent from 2010 to 2014 with a surprise growth role for non-perishable foods. Outbound, overall expansion is less modest at a reasonable annual average of 3.6 percent.
      Taking the short-term outlook for U.S. freight markets into perspective, growth rates are encouraging, although they could instill a false sense of euphoria, as the depths of early 2009 were equally low. Chinese imports are shining brightly; first-quarter volumes are up 43 percent over the same period in 2008.
      The main reason for this turnaround can be found on the supply side. U.S. domestic sales have already firmly picked up whereas inventories are still lingering around last year's lows. As the inventory-to-sales ratio has touched pre-crisis levels again, any further increase in sales will almost inevitably cause a pickup in inventories, which is already being heavily felt on inbound air flows.
      The Composite Leading Indicator index, engineered to spot turnarounds in economic growth patterns and showing excellent correlation with U.S. air trade, also indicates that growth has not yet topped out ' at least not on the short run.