Air cargo: Flying Low
Analysts contend that once economic conditions improve the increase in freight activity will spike air freight costs. However, the extent of that recovery depends on how much shippers have permanently altered their transportation mix during troubled times.
By Karen Theurmer, Contributing Editor -- Logistics Management, 5/1/2009
Today’s global economic downturn has spared no industry, and among the hardest hit is air cargo. In fact, the International Air Transport Association (IATA) reports that in just one year international air cargo traffic fell 23 percent. Giovanni Bisignani, IATA director general and CEO, calls this drop “unprecedented and shocking.”
Even leading global carriers like Lufthansa and Emirates are bracing for the worst. Although Lufthansa posted a strong 20.9 percent increase in operating profits in 2008—the second highest of all time—Lufthansa Cargo Chairman Carsten Spohr warns 2009 will reveal a different scenario. “We will see a continued decline in yields, but will continue to invest in quality and premium security products,” Spohr says.
The downturn truly spared no one in the air. Fourth-quarter 2008 profits at Singapore Airlines fell 42.8 percent. SIA Cargo suffered a $46 million loss for the period, down from a $76 million profit a year earlier. EVA Air reported its cargo revenue fell by a third in November 2008 year-over-year as volumes plunged 25.5 percent, yields slumped 5.7 percent, and cargo load factors dropped 6.0 percent to 72.5 percent.
Middle East carrier Emirates is experiencing low traffic levels on most routes “like everyone else,” says Ram Menen, Emirates SkyCargo’s divisional senior vice president. Although not ready to release data, he adds: “This has affected the growth numbers we had forecasted last year.”
IATA figures say it all. As of March 24, IATA forecasted losses in the airline industry for 2009 to hover around $4.7 billion. “Combined with an industry debt of $170 billion, the pressure on the industry balance sheet is extreme,” says Bisignani.
IATA projects demand to fall sharply with passenger traffic expected to contract by 5.7 percent over the year, while cargo demand is expected to decline by 13. Both are significantly worse than the December forecast of a 3 percent drop in passenger demand and a 5 percent fall in cargo demand. Yields, IATA says, are expected to drop by 4.3 percent.
“The pressure on yields is very acute because of the competitive forces. I have never seen anything like this in the last 35 years,” adds Emirates’ Menen.
The shift is on
Dipping numbers aside, air cargo continues to be the fastest, safest, and most reliable way to move goods between continents, despite its high cost.
“That’s why air cargo grew faster than ocean containerized trade volumes during times of booming demand and tight inventories,” says David Hoppin, managing director of consultancy MergeGlobal. “This demand increased the frequency and value of stock-outs and off-shoring to distant lands—namely China—in pursuit of low labor costs.”
But in recent years, air cargo has grown slower—and now seems to be plummeting even faster—than ocean containerized trade. “That’s because demand has fallen off a cliff and inventories are swollen,” Hoppin adds. “There’s far less need to move goods quickly to market, and far more focus on pinching pennies.”
Escalating fuel prices certainly plagued the industry much of last year and resulted in high fuel surcharges being imposed on shippers. These costs have contracted and surcharges have been nearly eliminated. But now with the worldwide economic downturn, shippers are now shaving costs everywhere. This means finding less expensive transportation modes.
“It’s all about the economy,” comments J. R. (Reg) Kenney, executive vice president of DHL Global Customer Solutions. “Because companies are experiencing significantly less trading activity and more pressure on earnings, there is an absolute, outright drive to reduce costs today.”
There may be situations where inventory carrying costs generated by longer transit times result in shippers staying with air. But today, transit times are less important, and shippers are increasingly shifting to alternative options. “You can see the impact the shift is having in the IATA numbers,” says Matt Walker, director of International Operations at forwarder A.N. Deringer. “You don’t hear the need to team drive shipments any more. Time frames are not as important as they were before.”
Consequently, some shippers are considering transport alternatives such as sea-air. “But sea-air only makes sense in certain geographic markets such as Asia-Europe via the Middle East where there is cheaply-priced backhaul airlift to produce a viable sea-air product,” Hoppin contends. Dubai, for example, imports a great deal by air but exports almost nothing, thereby creating large amounts of backhaul airlift to Europe.
Shippers concerned primarily about price are now focusing more of ocean, which offers the cheapest, although slowest, mode for continent-to-continent moves. “Importers are closely monitoring and looking for changes, improvements, and reductions in costs to their supply chain,” states Panalpina USA Managing Director Lucas Kuehner. “They want to find new ways to adjust such as working with increased transit times by air or even switching to the ocean mode on a portion of their transport volume.”
In fact, through 3PL subsidiaries, steamship lines now offer airfreight and ocean freight forwarding services, arrange ground transportation, and provide warehousing, distribution, and supply chain management services. For example, APL Logistics, the logistics arm of Neptune Orient Lines, and Con-way Freight offer OceanGuaranteed, a port-to-door, day-definite transportation service that combines premium ocean less-than-container-load (LCL) service with high-performance less-than-truckload (LTL) transportation. Corporate executives with both companies say it offers a level of on-time delivery and in-transit visibility not available before.
Shippers are considering different options for domestic air shipments as well. “Even within the U.S. domestic market, companies are choosing to significantly reduce their use of express air services in favor of ground,” observes Kenney. “What used to be moved on a priority basis is now being moved on a preferred basis.”
Fleet reductions
Given the severe drop off in air cargo volumes, air carriers find it necessary to right-size their networks by using fewer widebody aircraft into strategic primary hubs and feeder aircraft to places previously serviced by the larger jets. This is especially the case for integrated carriers.
“Given the weakness in the market for both passenger and cargo, these capacity reductions are necessary,” says Neel Shah, Delta Airlines’ vice president of air cargo. “Traditionally this industry has not been smart about making sure capacity matches demand.”
But Shah points out, for every capacity reduction made, air carriers find ways to route cargo a timely and efficient manner. “We have not gotten feedback that a certain specific capacity reduction has impacted a customer,” he says.
The slow down in the industry, however, has resulted in a dramatic grounding of aircraft. “Today all-cargo carriers from Asia have no qualms about canceling a midweek flight if capacity or revenue has not met some internal target,” says Joseph Hoban, director of air services, AIT Worldwide.
Figures from Ascend, consultants to the global aerospace industry, reveal that a record total of almost 2,300 jet airliners, more than 11 percent of the global aircraft fleet of 20,293, are now parked. Of that total, 1,167 were grounded last year. North American carriers have announced fleet reductions totaling almost 800 aircraft since mid-2008. European carriers have parked over 450 aircraft and Asia/Pacific airlines at least 230.
In December, Cathay Pacific announced plans to ground two B747-400BCFs for 12 months in the California desert and delay several new freighter aircraft deliveries. The airline is reducing cargo capacity to Australia, North America, and Europe. Cathay has also delayed construction of its Hong Kong cargo terminal, which had been scheduled to commence operations in 2011.
“With new deliveries still likely to be around 1,000 this year, subject to financing, airlines also have to park older aircraft to avoid even more surplus capacity,” says Chris Seymour, head of market development for Ascend.
The Middle East has not been affected to the same degree as other regions of the world. Emirates has not grounded any airplanes at this time, but has phased out its three A310-300F fleet and is currently operating with a freighter fleet of seven—four B747-400Fs and three B747-400ERFs. “This is on top of the 123 wide-body passenger fleet,” says Menen. “Our strength is our distribution network and we continue to capitalize on this.”
What’s ahead?
So what does this mean to shippers as a whole? Observers maintain that when economic conditions finally improve and consumers begin spending again, the increase in freight activity will spike air freight costs.
But a wild card remains: To what extent companies will have permanently altered how they manage their supply chain will indicate the level at which air cargo fits into their transportation mix.
New transportation products available that include multiple modes of transportation, and changes in sourcing patterns that include nearsourcing will all factor in. “Going forward, air cargo’s role will depend on how each shipper’s sourcing strategy evolves,” maintains Hoppin.
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