Commentary: Air cargo turnaround on the horizon?

Jon Ross, a former American Shipper editor who is an expert on the air cargo industry, pointed out how various market fundamentals, along with UPS’ Boeing order, echo the general consensus that the air cargo market is about to pick back up.    The global airfreight market will soon be on the upswing once again, but a return to “trend growth” is still more than a year out, according to Boeing’s latest World Air Cargo Forecast.
   Issued at the end of October, the forecast projects future demand for freighters and combi aircraft, as well as the company’s general feeling for how the needle is moving. Boeing said the number of freighters worldwide will need to increase by 70 percent over the next two decades to meet a doubling of air cargo traffic.
   By 2035, Boeing predicts there will be 3,010 freighters ready to meet air cargo demand, up from a current fleet total of 1,770. Of these freighters, roughly 1,100 will replace retired aircraft, leaving more than 1,200 to meet expanded demand. While many of these will be conversions from passenger aircraft, Boeing projects a need for 930 new freighters at a cost of $270 billion.
   Putting the blame for a sluggish post-2011 air cargo market squarely at the feet of tepid global trade growth and an underwhelming economic performance, the Boeing team said in the report that “fundamental growth patterns, such as productivity increases via technology diffusion, economic reform, and available production capacity, remain in place.” Boeing projected global gross domestic product (GDP) growth over the next 20 years at a 2.9 percent annual rate.
   Of course, a turnaround is no sure thing.
   “Beyond the current trade slowdown, some longer-lasting factors, such as a shift toward services trade, shortening of supply chains, and the threat of protectionism, pose risks to global trade,” the report found.
   The latest numbers from the International Air Transport Association put freight demand in September up 6.1 percent compared with the same period in 2015. Capacity was up 4.7 percent  year-over-year during the same period. Officials noted that the increase is the largest monthly bump the industry has seen since the West Coast port shutdown in February 2015 that led shippers to divert some high-value cargoes from ocean to airfreight. In a press release, an IATA spokesman pointed to short-term factors, like Samsung’s scramble to get new Galaxy Note7 phones to consumers, to explain the uptick.
   Alexandre de Juniac, IATA’s director general and CEO, said that world trade is still sluggish, so air cargo is by no means flying easy. He did say that the recently signed EU-Canada Free Trade Agreement could help boost air cargo traffic.
   “Growth is the way to overcome the world’s current economic challenges,” Juniac said in a statement. “The EU-Canada agreement is a welcome respite from the current protectionist rhetoric and positive results should soon be evident. Governments everywhere should take note and move in the same direction.”
   Boeing’s Randy Tinseth emphasized the aviation industry’s importance to global trade, noting that as trade increases, so too will the need for cargo capacity. This demand will help the airfreight market emerge from what he called “several years” of lower-than-expected growth.
   “The air cargo market has faced several years of below trend growth,” Tinseth said in a statement. “As trade continues to recover, we’re confident the air cargo market will see growth over the long-term.”
   In its World Air Cargo Forecast, Boeing highlighted the importance of e-commerce to air cargo’s growth. Domestic e-commerce sales, the manufacturer said, have averaged 15 percent annual growth for the past 15 years, leading to the creation of an industry that was valued at an estimated $342 billion in 2015. Taking into account the entire world, Boeing projects that the $1.7 trillion industry will balloon to more than $3.5 trillion in the next five years.
   Boeing also sees freighters continuing to play an outsized role in air cargo, despite the introduction of larger and larger passenger planes with increased cargo capacity.
   “Freighters will continue to carry more than half of the world’s air cargo for the next 20 years, as the majority of players in the industry continue to rely on and augment their cargo operations by flying freighters,” the report said.
   At the end of October, UPS signaled an increased appetite for cargo aircraft, submitting an order to Boeing for 14 747-8 freighters, with the option to purchase an additional 14 over the next three years. UPS officials said the purchases will let the integrator upgrade offerings on current routes, but they also left the door open to using the extra capacity in new markets.
   “UPS is making several strategic capital investments for increased global operating capacity,” said UPS Chairman and CEO David Abney.
   The Seattle Times viewed the news as a “lifeline” for a “struggling” Boeing freighter program. The paper pointed out that sales of the manufacturer’s large freighter, as well as Airbus’ comparable aircraft, have been light.
   UPS also released its third-quarter results in late October, showing a resilience in domestic air cargo, with deferred air products up 10 percent year-over-year and next-day air shipments up nearly 6 percent compared with third quarter 2015. These market fundamentals, along with UPS’ Boeing order, echo the general consensus that the air cargo market is about to turn around.