Air cargo forecast: Will a Phoenix Rise Above the Ash?

Air cargo rates were already on the upswing, particularly for export shipments out of Asia, when ash from the still-erupting Iceland volcano Eyjafjallajokull drifted southward, creating a no fly zone across northern Europe.

The first to feel the impact were just-in-time manufacturers who had been replenishing inventories run down during the recession since the beginning of the year. Amid an escalating backlog of freight spreading across the continent’s three key cargo hubs—Frankfurt, Paris Charles de Gaulle, and Amsterdam Schiphol—shippers were questioning if this Act of God was a sign to wait before rushing to conclusions about a recovery.

Now that the waiting is over, new questions remain. In late April the International Air Transport Association (IATA) stated from Geneva that the global airfreight upturn has largely been driven by the business inventory cycle. At the same time, however, IATA told shippers that they should expect this part of the cycle to wear out in the second half of this year when inventories reach normal levels.

From that point, said IATA, shippers can count on slower growth as airfreight will be driven by consumer spending and world trade growth.
“While the numbers are improving, the year has started with two disappointments,” says Giovanni Bisignani, IATA’s director general and CEO. “The first is in Europe. We anticipate Europe to post U.S. $2.2 billion in losses this year—the highest among the regions. The volcano episode only makes matters worse. Weak European and freight demand is in line with our forecast. It is also disappointing to see labor at European airlines engaging in strikes when the fragile industry needs to focus on improving efficiency and reducing costs.”

The second, according to Bisignani, is the failure to address ownership issues in second-stage talks on open skies between the EU and the U.S. “Last April’s agreement was not a step backwards,” he says. “The gains from the stage-one talks have not been lost. But the two sides missed an opportunity at this critical time to give airlines the much needed normal commercial freedom to access global capital markets without the limitations of outdated foreign ownership restrictions embedded in the current bilateral system.”

Finally, banking failures in Greece, Ireland, Portugal and Spain may also deliver a blow to a robust air cargo comeback here, say trade analysts. Future months will test the resilience of EU solidarity and faith in a shared commercial destiny.

Asian-Pacific perspective

On the other side of the world, however, airline association executives are seeing a different picture. According to Andrew Herdman, director general of the Association of Asia Pacific Airlines in Singapore, the global economic recovery has been led by the dynamic Asian economies, while the pickup in trade has been more broadly based.
“Both imports and exports are showing strong gains,” Herdman says. “This suggests strongly that the underlying health of both the developed and developing economies is improving, even though unemployment levels remain high in many developed economies.” He agrees with Bisignani, though, that inventory restocking will account for some of the recent increases in shipment volumes, the underlying trends in demand are also generally positive. This echoes the findings of the International Monetary Fund, which is forecasting global economic growth of 3 percent to 4 percent in 2010.

“Evidence has been accumulating that the global economy is recovering from the 2008-2009 downturn,” says Herdman. “Most notably, there has been a sharp rebound in international trade, which accelerated in the fourth quarter of 2009 and has been maintained in the first quarter of 2010. Air cargo shipments as well as marine container shipping traffic trends indicate a V-shaped recovery.”
At the same time, current volumes are already getting back towards the record levels achieved before the onset of the global recession.

Brandan Fried, president of the Air Forwarders Association in Washington, D.C., says that the Asia-Pacific will continue to dominate the global airfreight market as it accounts for more than 60 percent of the increase in the international arena over the past few months. This will not only result in increased passenger-belly demand, but will also put pressure on freighter capacity going forward, he adds.

“I look at two major indicators in determining the state of the air cargo industry,” says Fried. “First, a review of consumer spending provides a snapshot of future air freight demand. For example, recent statistics indicate that consumer spending is actually increasing despite rising interest rates and high unemployment. This consumer demand resulted in a 45 percent jump in Japan’s exports last month along with substantial export increases in most of Asia.”

As a result, says Fried, space on ocean vessels destined to the U.S. and Europe is now selling at a premium and airfreight is surging as well. While optimistic about the recovery, Fried says many of his constituents continue to question its sustainability and hope this increased activity is an actual growth indicator versus a simple restocking of shelves.

Modal shift?

Which raises another question: With ocean carriers raising rates this year, will shippers consider moving more freight by air once the volcanic dust has settled? Not necessarily, says Herdman.
“The choice of shipping mode reflects various fundamental factors,” he notes, “including the intrinsic value of the cargo, inventory carrying costs as a function of real interest rates, relative levels of cargo security, and the predictability of consumer demand.”

Herdman observes that certain types of goods, particularly high value, time-sensitive, or perishable items, are regularly shipped by airfreight. Ocean shipping may carry as much as 100 times more tonnage than air cargo, but goods shipped by air account for 35 percent by value of international trade.

“Head to head competition between the two modes is rather limited,” he says. “Some airfreight shipments are the result of unexpectedly high demand for certain types of goods. Therefore, in an economic downturn, air freight is the first to be cut, suffering quicker and sharper falls.”

Conversely, Herdman says, in an unanticipated economic upturn, air cargo demand can show a sharp rebound as businesses respond to reduced inventories and unexpected sales demand. “Economic forecasting is an inexact science,” he adds. “The logistics providers are the shock absorbers in the system, and demonstrate their value in being able to respond quickly to changing market conditions.”

Fried, too, acknowledges that airfreight cost is considerably higher than its ocean counterpart, but its speed and efficiency delivers distinct value in getting products to market quickly and feeding just-in time production lines. “Rate differences are but a small component in what goes into the airfreight decision as its value can return far greater results than its cost,” he says. “As ocean rates increase, the cost disparity between modes lessens, and in many cases makes air freight a more viable economic alternative. This will result in more goods moving by air despite their initial intention to move by ocean.”

And there’s a measure of consensus among air cargo executives that there will be sufficient capacity to meet anticipated demand in most parts of the world. During the downturn, says Herdman, airlines temporarily reduced capacity by parking surplus aircraft and reducing utilization of the fleet. Given the relatively sharp falls in air cargo demand, the number of parked freighters increased markedly during the period.

“However, since the fourth quarter of 2009 we have seen airlines restoring capacity in response to the upturn in demand,” he says. “Most Asian airlines had also taken care to preserve the workforce, even though hard decisions had to be made to reduce staff costs through reductions in pay, the loss of performance bonuses, and the introduction of unpaid leave schemes.”
Having learned from previous industry downturns, Herdman adds, the industry has performed well in quickly responding to the recent upturn. Furthermore, airlines have maintained their order books for new aircraft—albeit with some slowing of deliveries—in order to ensure that the industry is well positioned to take advantage of further growth opportunities in the years ahead.
“Prospects for future growth remain extremely positive, particularly here in the Asia Pacific region,” Herdman adds.

Friedman of the Air Forwarders Association agrees that for U.S. shippers, finding cargo space will not be an issue in 2010. Many carriers have parked aircraft in the desert during the economic downturn waiting for conditions to improve. “Most airlines have learned to make aircraft deployment decisions based on sustained upward trends and not temporary surges,” says Friedman. “We may see capacity constraints during the initial phases as carriers assess the viability of the recovery. In the long term however, airlines will be there to meet anticipated demand.”