Global air cargo tonnage is increasing, but is industry off the sidelines yet?
As summer turned to fall, the International Air Transport Association had some good news. International air cargo volume was up consecutively for July and August, and outperforming 2013’s numbers throughout the year.
There was a caveat — demand has increased slower than global economic activity. This wasn’t pre-recession growth for air cargo, but the sustained uptick in worldwide freight tonnage showed a vast improvement over recent years when air freight had been sluggish or flat. The smaller levels of growth IATA and other aviation industry organizations have recorded this year appear to be the new status quo, even while predicting where the industry is heading has become more difficult.
As the air cargo industry also combats modal shift and a general move by shippers in favor of slower transit times; a still tenuous economic recovery in Europe and North America; and ballooning passenger demand, which continues to create an excess of capacity, airlines are wary that the cargo recovery isn’t quite real enough yet.
IATA Senior Economist Julie Perovic said she’s encouraged by growth in air freight so far this year, which is expected to end between 4 percent and 5 percent higher than 2013. (Through August, year-to-date growth levels for freight tons carried stood at 4.5 percent, according to IATA figures.) She noted, however, load factors haven’t risen as much as volumes because of an uptick in capacity, which means yields remain weak.
“The stronger economic growth in 2014 has not generated the expansion of international trade that it would have done in the past,” she said. “World trade is still only growing in line with domestic industrial production. Typically, world trade grows twice as fast as domestic output, and therefore air freight would also be growing at a faster rate. If this trend persists, we would see much lower rates of expansion in air cargo in the future.”
For a decade before the recession, air cargo experienced “unbridled year-over-year growth, which was pretty much de-facto guaranteed,” according to IATA’s new global head of cargo, Glyn Hughes. But the transportation industry has gone through a sea change since the recession, he said, making those large increases a thing of the past. And nobody can predict how long the growth seen this year will reverberate.
“I think we have to be realistic and say that the market visibility in terms of this growth is certainly not as long-term as we would like it to be,” he said.
Hughes later clarified there are no lingering obstacles to continued growth, just that uncertainty makes the future hard to predict.
“There’s nothing that we see in the foreseeable future which will say that next year is going to be anything other than movement in the right direction,” he said. “But I don’t think it would be appropriate for us to say… ‘that’s it, job done, we’ve now gone back on that growth cycle, and we can just sit back and watch the volumes increase year-over-year.’”
To make sure air cargo is at its healthiest, Hughes stressed the need for collaboration at all levels of the supply chain. The call for togetherness is nothing new, and IATA officials have been trumpeting the idea for years, but Hughes said the necessity of collaboration is taking hold. During the unbridled growth period, Hughes said carriers were flying mostly general cargo, so they could get away with working in a myopic fashion, not collaborating with freight forwarders or shippers. And it worked. But now that shippers have more complex demands for air shipments coming from an increase in cool-chain and high-value commodities, airlines have to operate in concert with all parties.
These requirements have helped push together a traditionally disparate industry and allowed programs like the e-air waybill — the first step in a quest to convert a bevy of paper documents used in air cargo to electronic systems — to take hold. In this new model, Hughes sees e-freight as “pivotally important,” because it will allow for more streamlined and faster communication between stakeholders. In August, IATA celebrated its fastest growth month for e-AWB penetration, with the program achieving a 2 percent growth rate, putting the target of 22 percent e-AWB penetration firmly in reach. The group also noted that 20 airlines are now operating at a 20 percent e-AWB capacity, 13 more than at the start of 2014.
“This is the first step to what we would call a total e-cargo tech revolution,” Hughes said, adding the next steps will be easier “once people see that they can derive significant and direct benefits from this first step.”
Another chance for growth in air cargo, Hughes said, might come in the guise of an omnipresent challenge. Modal shift has hit air cargo hard in the past few years, but Hughes thinks the shift of some cargo from air to ocean and trucking represents an opportunity to take back market share.
“Modal shift effectively tells us that commodities can be transported on different modes from that which they have historically been transported on,” he said, noting that since air cargo has a 1 percent share of the transportation market, the opportunity to bring more market share is almost endless.
Hughes acknowledged the majority of the goods traveling by ocean would never be transported by air because costs would be prohibitive.
“But it gets us thinking differently,” he said. “It gets us to say if we get the model right, if we can get the integration of data right, if we can get the internal cost structure right of moving freight through the process, then who knows what other commodities we [can shift].”
Brandon Fried, executive director of the Airforwarders Association, said slower growth is hurting air cargo volumes because when the economy is slow, shippers are able to adapt more quickly to changing demands. This allows them to trade-down shipping options, possibly forgoing air cargo altogether. This is a significant worry for the airline industry, but has helped keep rates down for shippers. The meandering economy also makes it hard to predict just where air freight might go in the future.
“While the global economy has improved, the recovery has been very gradual, allowing manufacturers to keep up with consumer demand and the opportunity to use less air cargo, opting for cheaper modes than in past recoveries,” he said. “The rate of recovery, a traditional determinant of forecasted volume, has made reading the tea leaves a more difficult task than in the past.”
On the whole, though, Fried has been happy with the air cargo market in 2014.
“While there is certainly room for improvement, increased volumes are encouraging, especially within small to medium-sized forwarders who report robust activity in many, but not all markets,” he said.
To chart air cargo, Kevin Sterling, a senior vice president at BB&T Capital Markets, doesn’t pay as much attention to overall economic measures like gross domestic product, but tends to look at industrial production and semiconductor sales. He searches for these other measures because, he said, “a lot of GDP creates little to no freight,” and is instead concerned with tax, consulting, entertainment and other money-generating factors.
According to the Semiconductor Industry Association, sales in July soared 9.9 percent compared to the same period in 2013, representing the industry’s highest monthly sales total. Sales for the first half of the year were up by 11.1 percent, year over year. The Federal Reserve measured a 4.1 percent, year-over-year jump in the industrial production index between August 2013 and August 2014 after seeing a 5 percent increase in July and a 4.3 percent hike in June. In 2014, industrial production through July showed six consecutive monthly gains until experiencing a 0.1 percent drop in August.
During July, IATA measured 5.8 percent, year-over-year growth in air-freight volumes, while Airports Council International, which tracks volume growth at airports, said cargo grew by one of the largest margins in two years at 6.7 percent.
Starting with the third quarter of 2013, “industrial production has more than doubled its growth rate. That’s what’s showing up in these air freight numbers,” Sterling said. “We’re getting pretty good air freight growth, but GDP is sluggish.”
Though Sterling said the air freight results so far this year showed the industry gaining ground, he still expressed caution. One of the reasons for a somewhat muted reading of the current trend and its likelihood to continue into 2015, he said, is the cyclical nature of air cargo.
“If we enter another recession, air cargo is going to take a dip, but if we have decent growth, particularly industrial production, I believe air cargo, particularly the trends we’re seeing now, will continue,” he said. “We’ll go through this again. As to when it will happen, I don’t have a clue. It’ll dip again; we’ll have too much capacity, and we’ll have to weed out capacity, then it will grow again. That’s the way it’s happened for many, many years.”
Martin Dixon, head of research products at London-based Drewry, said continued economic uncertainty around the world is clouding the forecast for air cargo.
“The future remains quite uncertain, as it does for the global economy, because the recovery is so very fragile and there are so many uncertainties, particularly in the developing markets,” he said. “There’s a huge amount of geopolitical risk around what’s happening in the Middle East and Eastern Europe.”
Drewry tracks air cargo rates in its East-West Air Freight Price Index, and Dixon said rates have remained strong throughout the year. Pricing has continued to stay in the carriers’ favor, even during the holiday months when more passenger demand brings in excess cargo capacity in the form of belly space. In August, the average price for a kilogram of freight came to $3.34, up 2 cents from July. The July number itself was a 2-cent rise from June’s figure. Though pricing for the year peaked in April at $3.37 per kilogram and then fell off in May, the trend seems to show that rates will increase through the end of the year. Dixon said capacity will be “quite tight” on certain lanes heading into the peak season.
At present, this means the air cargo industry is in the carriers’ favor. “Moving into next year, you’ll still see the steady rise of capacity because of the belly-hold space,” Dixon said. “It’s going to be an ongoing challenge for the industry to be able to control capacity relative to what will continue to be relatively sluggish demand compared to the levels we saw during the last decade before the financial crash.”
This article was published in the November 2014 issue of American Shipper.