2011 State of Logistics: Air Freight
July 01, 2011 - LM Editorial
When the Council of Supply Chain Management Professionals (CSCMP) released its State of Logistics Report for 2011 in Washington, DC on June 15, its message was not as upbeat across the transportation modes as was originally thought. For air cargo, the report found that despite the fact that air freight revenues rose 11.2 percent in 2010, the sector hit the wall by the end of the year.
Most of that growth was in first half 2010, but by mid-year it retracted as retailers, facing disappointing sales projections, turned largely to moving shipments by ocean.
In its own data, the International Air Transport Association (IATA) refers to last year’s results as “the best year of the decade” whereby air freight saw an $18 billion profit, but realized a “pathetic” 3.2 percent profit margin.
CSCMP reports that air carriers continued to see business dwindle during the first half of 2011 as customers, facing higher transportation costs due to rising oil prices, continued to go with cheaper options whenever possible. During his State of the Industry speech on June 6, departing IATA Director General Giovanni Bisignani revealed IATA expects the profit margin for 2011 to be a very disappointing 0.7 percent with overall profits coming in at $4 billion, down a hefty 78 percent from 2010.
Visit the 2011 Quest for Quatlity Winners
Events affecting the air cargo industry this year seem almost biblical: tornados, earthquakes, tsunamis, terrorism, wars, revolutions, volcanoes, as well as failing economies and continued sky rocketing oil prices. Already in the first half of 2011, the industry is being hit by more disasters, say nothing of oil spiking above $110 per barrel.
Nevertheless, it’s worth noting that the airline industry still shows remarkable resilience. “A decade ago, we needed oil below $25 just to break even,” says Bisignani. “It’s a tribute to every airline that we expect a $4 billion profit at today’s oil prices.”
The Japanese earthquake and subsequent tsunami alone knocked 1 percent off global traffic and depressed an important market that generates 10 percent of the industry’s $600 billion in revenues, reports IATA. The political unrest in the Middle East and North Africa has slowed growth in both regions and resulted in oil prices skyrocketing.
Last year, with oil at $79.4 per barrel, the fuel bill was slated at $139 billion. This year the forecast is for oil to average $110 a barrel with that total fuel bill hitting $176 billion. Consequently, IATA predicts cargo growth to fall from 18.3 percent in 2010 to 5.5 percent in 2011 with yield growth at 4 percent.
In fact, yields remain an issue on several major trade lanes, particularly North America and Asia as well as Europe and Asia where countries have trade imbalances with China. Consequently, carriers flying westbound from North America and eastbound from Europe to Asia are unable to operate to capacity.
“This puts pressure on yields,” says Joe Lawrence, president of Airline Services International, Inc. “For airlines to gain revenue they need to raise prices.” But with more cargo moving to steamship lines, air carriers are lowering rates to try and attract business.
Still there are markets where yields remain high. IATA reports that with China today representing 26 percent of all global air traffic, China is air cargo’s largest market. IATA expects that by 2014 China will represent 30 percent of all global traffic, a fact that will continue to have an impact on rates and yields. In fact, both China and India are growing by double digits.
And, South America, Australia, and South Africa are seeing increased cargo demands. In Brazil, demand for goods outstrips supply. Many manufacturers in China, particularly in the high tech sector, ship goods there by air.
Despite today’s challenges, today’s air carriers are positioning themselves for these markets by acquiring more modern and fuel efficient fleets. Carriers are also integrating with other airlines to gain capacity. Lufthansa, for example, integrated with Austrian Airlines, re-integrated its grounded MD-11 fleet, and increased the fleet of AeroLogic to eight aircraft.
“This year we have announced the order for five Boeing 777 freighters that will be delivered between 2013 and 2015,” reports Michael Goentgens, Lufthansa Cargo spokesman.
Subscribe to Logistics Management magazine
entire logistics operation. Start your FREE subscription today!