2009 State of Logistics: Air Cargo Demand Stalled
Karen E. Thuermer, Contributing Editor -- Logistics Management, 7/1/2009
The figures may not initially appear good, but the fact that air freight demand has stabilized for five consecutive months in the -20 percent range may indicate that the industry has seen the worst of the economic downturn.
Still, Giovanni Bisignani, IATA director general and CEO for Montreal-based International Air Transport Association (IATA), calls these figures shockingly low. “Until inventories adjust to more normal levels, air freight volumes will likely continue to bounce along the bottom,” he says.
The current economic crisis is an obvious contributor to these woes. But in studying the problem, Arlington, Va.-based consultancy firm MergeGlobal, points out that the air freight share of intercontinental trade flows has been decreasing over the past 10 years. “The migration of traffic from air to ocean services is having the biggest impact,” says Brian Clancy, MergeGlobal’s managing director. “Apparel, toys, and machinery have led the modal shift to ocean.”
Driving this trend has been increasing fuel costs, higher ocean service reliability, and declining commodity unit values. According to Clancy, shippers make modal choices based on total distribution costs at the commodity level—a combination of transport and inventory related costs. “As fuel prices skyrocketed in recent years, air transport became too expensive for many traditional air commodities,” he adds.
Meanwhile unit values of most commodities are declining, primarily due to productivity improvements and new technologies. As a result, more managers have shifted their focus to cutting transportation costs. U.S. Department of Commerce and MergeGlobal analysis indicates that the weighted average unit value of products being shipped by air rose from $77 to $98 during the 2002-2007 period.
“This provides further evidence that the bottom end of the demand curve has diverted to sea freight,” Clancy says. “Since unit values are a key driver of inventory carrying costs, and thus total distribution costs, this trend also highlights the critical importance of the service dimension in air freight shipments.”
Several joint venture businesses have been set up by ocean liners and less-than-truckload (LTL) carriers to shorten door-to-door transit time, improve reliability, and enhance freight visibility—thus creating a viable alternative to air services for certain products. Consequently, shippers are diverting to truck within North America and container shipping for intercontinental moves.
There is a silver lining for shippers using air cargo: The prices have fallen and air carriers are improving service levels to retain business. But with 20 percent of the world’s freighter fleet grounded, resulting in significant less available belly capacity, carriers find it difficult to provide destination coverage and frequent flights. Bisignani adds that airlines remain constrained by old rules that restrict basic commercial freedoms such as access to markets and capital.
“To manage through this ongoing crisis, every player in the air transport value chain must be prepared to drive change,” Bisignani adds. MergeGlobal contends that freight forwarders must adjust to an air freight market that has become more price-sensitive and service-focused. Clancy surmises, however, that given market forces, integrated carriers are better positioned to capture traffic relative to other carrier segments in the industry.
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