Air cargo’s peak season – promising or a bust?

Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist

A year that started with great uncertainty will likely end the same. As we head into the traditional peak season, the world is faced with increasing trade barriers and weakening demand for goods.

Global manufacturing activity is hovering dangerously close to contraction for many countries and for some countries, including the United States, contraction has already occurred. In fact, the September Institute for Supply Management report for the U.S. was the second consecutive month of contraction, reaching the lowest point since 2009. New export orders are also at their lowest point since 2009 and the third consecutive month in contraction.

This is highlighted in the latest Baltic Index for ocean freight, which indicates that while prices have for the most part returned to early September rates, peak season demand has been weak to-date. However, according to Eytan Buchman, CMO, Freightos, “Demand for freight seasonally increases in October and up until the middle of November, as importers stock up before Thanksgiving and Christmas sales periods. December’s looming 15% trade tariff will likely push importers to stock up more than usual. Another reason to stock up is to beat bunker charge increases when the International Maritime Organization low-sulfur regulations take effect. The regulations will also lift prices by restricting supply as some vessels are taken out of the running while they’re retrofitted with scrubbers.” In addition, a 25% tariff on some European products including cheese, whisky and woolens schedule to begin Oct. 18 and an early Chinese New Year on Jan. 25, 2020, could all result in a later peak season this year.

Could the tariffs, Chinese New Year and IMO regulation benefit airfreight demand? Perhaps, as ocean freight capacity tightens and rates increase. Through July, based on IATA figures, global airfreight volumes are down 3.5%. Through August, the Association of Asia-Pacific Airlines has reported a decline of 5.9% in volumes. Even as sourcing shifts from China to other countries such as Vietnam, Thailand and elsewhere in Southeast Asia, it will be difficult for Asia-Pacific airlines to erase such a deficit with just a little more than two months remaining in 2019 but perhaps a dent can be made.

On the other hand, while international movements remain uncertain, UPS is bullish on the U.S. domestic market, having recently announced it has ordered 50 planes to join its fleet by 2022. Citing growth in its Next Day Air service as the reason for the planes, UPS has indeed benefited from this e-commerce driven service as clients like Amazon expand next day delivery services.

Year-to-date, through second quarter 2019, UPS’ Next Day Air volumes are up 19.6 percent while Deferred volumes are up 9.6 percent.

Indeed, UPS plans to introduce at least eleven 747 and 767 planes into its fleet this year alone. According to the company, the fleet will be able to flex between U.S. and international needs to address faster delivery times. This will come in handy during peak season around the world. UPS noted on its second-quarter earnings call in July that intra-Europe volumes were positive while all trade lanes to and from Asia, except with the U.S., were also positive.

Meanwhile, while total Express volumes remain positive for FedEx – particularly for its International Economy and U.S. Deferred services – it is struggling with other express services including International Priority and U.S. Overnight. Unlike UPS, which is expanding its air capacity, FedEx will cut its Express capacity after peak season by retiring or parking multiple planes in its fleet as a result of what it sees as weak demand for air cargo. “We expect the current softness in air cargo demand to continue into calendar year 2020,” said COO Raj Subramaniam. “As such, we will take action to reduce our intercontinental flights after our peak season to better match supply to demand. We have already decreased U.S. domestic flight hours and we will be aggressively looking for additional opportunities.”

Still, despite the differences in air cargo strategy, both UPS and FedEx are anticipating another record-breaking peak season in terms of volumes. This expectation goes along with what retail analysts expect for the U.S. holiday season. At minimum, Deloitte anticipates a 4% increase in total sales, with online shopping expected to grow between 14% to 18% from last year.

The trucking market should also benefit from what appears will be a healthy domestic holiday season. Despite the swings in its index, American Trucking Associations economist Bob Costello noted that the “trend line is still up,” meaning contracted volumes remain positive for the year through August. The index is up 4.3% year-to-date compared with the same period last year.  “We don’t expect 2019’s peak will be particularly strong,” Lee Klaskow, Bloomberg Intelligence’s senior freight transportation and logistics analyst, said during a JOC.com webcast on trucking’s peak season. “lt won’t overwhelm or underwhelm, it might just whelm.”

Klaskow’s sentiments may best describe the peak season for all modes of transportation – they may “just whelm.” Other than perhaps a few short flurries of high demand, the peak season will not be one that will be impressive or concerningly low, except perhaps activity from FedEx and UPS, who as market leaders in last-mile delivery, will benefit from online shoppers.

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