The cargo forecast for 2012 comes against a backdrop of economic uncertainty, job stagnation and debt crises; these are telling times in the industry.
The air cargo sector is a cyclical business. What is alarming, however, is not only the severity of the peaks and troughs, but how often they are now occurring. Looking at the overall historical profit and loss account of the airline industry, not only is the overall change in profit and loss increasing, but the cycles are becoming more and more frequent.
Whether this indicates a fundamental instability in the industry, pure globalization, or a bit of increased competition, the fact remains that forecasting the future outcome is surely a test of nerve.
Last year was a record period for the industry, with more than $21.7 billion in net-profit generated. Many airlines benefited from healthy operating surpluses and successful year-end results. Yet almost on cue, the financial position of the industry took a dip in 2011.
Data from the International Air Transport Association outlined second-quarter net profits totaling $1.8 billion, which is almost a 60-percent, year-over-year, drop.
There’s no doubt air cargo plays a fundamental part in total air transport activity. With so much belly-hold freight, it’s clear that cargo and passenger activity are closely interdependent. According to Boeing, cargo revenue represents an average of 15 percent of total airline revenue, with some airlines earning more than half their revenue from this source.
Indeed, annual cargo (and passenger) activity during the past 10 years, at least, has not shown anything like the variation associated with airline profit-and-loss. Air cargo has grown steadily, rising at 5.24 percent CAGR. Passenger traffic showed a similarly steady 4.57 percent CAGR in the past decade.
The steady trend upward during the 10-year period only really faltered during the recession of 2008 and 2009, when passenger traffic was flat and air cargo dipped severely. Last year, however, both recovered strongly, with passenger traffic rising 7.7 percent and air cargo surging 17.9 percent.
In first seven months of 2011, there were contrasting fortunes. The year started with strong January traffic growth for both cargo and passenger, but there was a slowing of global traffic growth in February. Passenger traffic took dip in March, but cargo held up well; both rose in April.
Passenger demand was still buoyant in May, June and July, but negative cargo growth was recorded in that same three-month period. This general decline in air cargo in the first seven months of 2011 is confirmed when looking at the individual regions over the period. Despite some apparent recovery in April, the most important markets — North America, Europe and Asia-Pacific — have seen a general decline.
It is critical to appreciate that it’s the change in the three major markets that has the most significance in the overall trend. In terms of freight-tonnes carried, these three regions account for 86.1 percent of total air cargo market share. Therefore, activity taking place in these regions is the real barometer for air cargo.
The concentration of market activity is even more acute when the value of airborne cargo is considered. Five nations account for more than half of all airborne cargo. Any fluctuation in cargo activity in the U.S., China, Japan, Hong Kong and German markets has major implications for the world freight outlook.
Moreover, the North American economy is cause for concern. Many commentators are asking whether the announcement by President Obama’s administration that in August, for the first time since World War II, no new net jobs were created in the U.S., underlines a chronic fatigue affecting the world’s largest economy.
This news prompted the president to announce a nearly $450 billion jobs bill, which he placed before both houses of Congress.
Many other world events contributed to the general slide 2011’s cargo activity, particularly the Japanese earthquake and tsunami in March. This has reduced air-cargo shipments of automobile parts, high-end electronics, semiconductors and specialty chemicals, among other goods. Damaged equipment, loss of electrical power and disrupted infrastructure in Japan all reduced international trade.
The continued crisis in the European economies, stemming from excessive debt worries and faltering government policies, has contributed to a loss in overall consumer confidence. During the summer months, a collapse in stock markets worldwide took place, with all the major indices showing a sharp downturn.
It is estimated that in the UK, more than 13 percent of the stock market value has been eroded — an estimated loss of more than $285 billion. Banks, in particular, have taken significant hits.
Markets clearly do not function in isolation, and the crises impacting each of these major regions are linked. The downturn in the U.S. and European economies has impact upon China and other Asia-Pacific trading partners. Activity in these emerging markets, therefore, is also likely to be held back by the continued economic malaise.
Throughout the summer of 2011, jet fuel hovered around $120 per barrel. That is still 80 percent of the peak reached at the height of the economic demand cycle in July 2008 (when it peaked at $148).
The political unrest associated with the Arab Spring, the constraining influence of the situation in Libya, and other factors, seem to have created a supply-side uncertainty, which has maintained high prices despite the gloomy economic outlook. But as of early October, prices at the pump in the U.S. have started to ease a bit.
The growing lack of consumer confidence could impact regenerative items, such as mobile phones, laptops and other air-cargo-prone commodities; company decision-makers may postpone short-term renewals until the first or second quarters of 2012. This is reflected in slowdowns in traffic flows at Frankfurt Airport, which after a 0.3 percent, year-over-year growth in July, has reported a 6.8-percent drop for August.
It is unclear how the addition of a new runway at the end of October, combined with the loss of nighttime flight allowances, will affect the airport’s fourth-quarter numbers. Hong Kong International Airport had already seen a 6.1-percent drop in July, and Amsterdam Schiphol saw a Frankfurt-like 0.3-percent rise in July.
Let us hope the major re-building measures of the Obama administration begin to change things, and stability radiates from the U.S. It is likely that despite the healthy optimism of the early half of 2011, the air cargo industry had better batten down the hatches for the stormy months ahead.
While taking due regard for the current gloomy mood, there is no doubt that air cargo is growing over the medium-term; despite continual setbacks, airfreight offers specific advantages compared to other modes of transport. Its speed, reliability, security and ability to integrate within just-in-time supply chains provides a robust answer to modern global logistics requirements.
As inventory management becomes more intuitive and responsive, and innovative ideas come to the marketplace both for the consumer and within the industry itself, so too will air cargo play a more important role.
How long, though, will the current downbeat picture remain? The trend has been flat for the year, and there are few upbeat sentiments to report.
It is widely hoped that some version of Obama’s job bill will generate stronger economic growth in the U.S. However, many commentators believe it will be the small-to-medium enterprises, not government, that will provide the real punch to turn around the economies both in North America and Europe.
At the time of this writing, most agencies are frantically slashing their forecast for year-end 2011. In the U.S., for example, the National Association for Business Economics’ latest survey showed that firms had cut growth forecasts for 2011 from 2.8 percent to 1.7 percent.
Even HIS-Global Insight is in the process of reviewing its July forecasts. It, therefore, follows that the 2011 GDP outlook will be, by consensus view, rather grim, and 2012 will be slow to rise. As a result, air cargo will also be subdued in the next couple of years.
With a few of the agencies yet to provide revised global GDP forecasts, there is some overall uncertainty attached to the forecast of cargo. At this point, forecasts for 2012 must be read with more than the usual care. By the same token, it is imperative to not get lost in short-term thinking or to be blinded by the economic oscillations of recent months.
Throughout the analysis, it is the underlying competitive advantage that air cargo offers to shippers that provides the better medium-term picture. Modern, more fuel-efficient fleets, the forced retirement of older aircraft, and innovative responses to the needs of the supply chain will be critical factors shaping the industry in the years to come.
The air cargo trend for the first seven months of 2011 has been so generally downward that the year-end figure is expected to only represent a growth over 2010’s numbers of about 0.19 percent. However, 2012 will benefit from a more realistic growth pattern of 5.21 percent, and this growth is expected to continue until 2013.
There is a slight increase in the overall rate of growth in 2014 to 6.71 percent, and this then continues slowly rising to the long-term rate of 6.86 percent by 2021.
Overall, the total market for air cargo in 2010 was just more than 200 billion FTK. Year-end 2011 numbers will show this has hardly changed. As the forecast market evolves, it is expected to reach around 255 billion FTKs in 2015 and 271 billion FTKs by 2021.
The generally strong upward trend of the long-term growth rates coincides with the increased use of larger aircraft, such as the Airbus A380 and Boeing 777ER, and the emergence of the fuel-efficient Boeing 787 and Airbus A350 types.
The immediate downbeat picture for air cargo development in North America is confirmed by FedEx, the world’s largest freight carrier. In the first quarter of fiscal-year 2012, the company reported that operating income was down 19 percent and the firm’s margin had fallen by 4 percent.
Package volume declines accelerated during the quarter due to slowing global economic growth. Lags are likely in any U.S. stimulus measures, and the outlook for the year must continue from a gloomier perspective.
Perhaps it is because 2010 was such a year of rebound that few shippers quite expected such a rapid cooling off. Most are flabbergasted by the speed of the economic downturn and the general softness of the current market.
Typically, the three summer months are a quieter shoulder period for airfreight, and volumes might be expected to be lower. Even in the fall months, there are few signs that the market is accelerating quite as rapidly as would be expected in the build-up to the busy Christmas shipping period.
Due to the stronger earlier months of 2011, it can be expected that total throughput for the year will be slightly higher than last year; a total annual growth of 2.4 percent is forecast. If there are some real signs by early spring of next year that the economy has been kick-started, air cargo growth may be strong.
Unfortunately, many of the government’s economic proposals are structural and may take more than just one year to implement. As a result, only an increase of around 3.8 percent can be expected in 2012. The picture in the medium term is one of steadier, more sustainable growth of around 3.5 percent annually until 2021.
The Arab Spring has created a two-speed market in the Middle East and North Africa. Egypt and North African countries are slowly adjusting to a more cautious political arena, and there are real signs of nervousness going forward. Few agencies have provided revised GDP forecasts for the regions affected by the unrest.
By absolute contrast, the Gulf carriers — Emirates, Etihad and Qatar — are forcing the pace of growth by aggressively feeding the system with new capacity and offering very competitive cargo rates.
The Gulf carriers clearly are not immune from the global downturn, but with available capacity positions, a rates war seems inevitable. One Asian analyst recently overheard that rates as low as HKG$9 per kilo were being offered for westbound freight via Middle East hubs out of Hong Kong.
The Middle East market seems set for much lower rates than those seen during the surging growth of 2010, as both the slowdown and the impact of changing politics take effect. As a result, cargo growth in 2011 is expected to be 4.97 percent.
In 2012, higher growth of 8.85 percent is likely, as more capacity becomes available, perhaps attenuated by a more realistic market-pricing strategy. As the sustained additional fleet capacity feeds into the system, strong growth of around 10.55 percent will be encountered until 2021.
The slowdown in the North American market has yet to impact the main players in South America, with LAN Airlines reporting strong increases in cargo of 8.6 percent up to July and 9.9 percent in August. Increased capacity, with the introduction of new Boeing 767-300 freighters, is contributing to this growth.
Much of the market from South America is based on seasonal fruit and vegetables, so the impact of the market stagnation in North America may not yet have taken effect. However, some cargo flows involve discretionary items, such as flowers from Colombia and Ecuador, and these may be vulnerable as consumers tighten their belts.
Cargo in Latin America is expected to show some restraint in 2011, rising by 3.38 percent for the year. This growth is likely to improve to 4.16 percent next year and rise by an average of 3.89 percent until 2021.
The European marketplace has seen the greatest impact of the rapid downward change in economic conditions in 2011, with one shipper reporting that all markets appear to be softening at the same time. Fuel is squeezing margins, and many corporate buyers have been cutting back on computer or mobile phone replacements.
Lufthansa Cargo saw a drop in revenue-tonne kilometers of 2.2 percent in August, but its year-over-year growth is up 6.8 percent. Similarly, International Airlines Group saw traffic down 2 percent in August and year-over-year growth of 5.5 percent. Air France/KLM Group saw only a slight fall of 0.2 percent in August; the carrier’s overall year has been similarly flat at 0.6 percent.
Milan Malpensa Airport increased total freight for the first seven months of 2011 by 10.1 percent, but the airport only managed a 3.4-percent bump in July.
Much of this activity involves pre-finished items of fashion goods from the Far East prior to the “Made in Italy” labeling being completed in Italy itself. Interestingly, a growing volume of such items are making a rapid return to the Far East, as the appetite for designer labels continues to rise.
Generally speaking, the overall growth in European cargo is a function of the wide economic difficulties currently being encountered in the EU. With significant job losses being announced daily throughout the region, it is clear that the last two months of 2011 are likely to be tough all around.
It, therefore, seems that any earlier growth in demand for the first half will be wiped out by the sudden decline recently experienced. Europe will end 2011 with a 1.68-percent growth rate.
Going forward, the slow picture is set to improve slightly in 2012. A relative maturity and the impact of emission regulation is likely to hold back airfreight in Europe, so beyond 2015, rates of around 2.5 percent will be maintained until 2021.
The mighty Asia-Pacific market has been hit by the global picture more than most, with a sudden softening of markets all around. Most shippers have been accustomed to very strong growth since 2010 and are generally amazed at the rapidity in the downturn. August, typically a quieter month, saw air cargo at HKIA decline 7.8 percent, bringing the year-to-date growth figure down to 1.3 percent.
At Incheon International Airport, cargo for August was down 1.1 percent, year-over-year, but down 4.1 percent on the year so far. Particularly revealing is the decline in outbound cargo, which saw a drop of 9.1 percent so far in 2011; inbound freight has seen a small rise of 1.1 percent so far this year. At Tokyo Narita, traffic was 15-percent lower in August and is down 13 percent so far in 2011.
Australasia, which has fared well economically during the recession, has seen its currency strengthen leading to almost U.S.-dollar parity in recent months. Qantas, however, reported air cargo tonnage was down 7.4 percent in the year ending June 2011.
This sharp general market downturn points to a negative forecast for 2011, with a decline of 2.63 percent. It is easy to be blinded by the short-term picture, and it must be recognized that medium-term growth is likely to return. There will be steady growth of around 6.7 percent in 2012, and if external market conditions can remain steady, a sustained growth of around 7 percent by 2021.
African air cargo is vulnerable in the current climate, but there are hotspots — South Africa is currently enjoying a post-World Cup economic mini-boom. In December 2010, South Africa became an official member of the BRICS (Brazil-Russia-India-China-South Africa) group.
China has become the top destination for South Africa’s exports since mid-2009 and is also South Africa’s leading source of imports. It has also become the dominant investment partner among emerging partners and uses South Africa as a gateway to other African countries.
Air cargo, including auto parts and electronic goods, is fueling the expansion, but the sharp downturn in manufacturing and consumption is likely to impact overall volumes. This is also true for the agribusiness out of Kenya, with flowers, in particular, susceptible to consumer spending and weaker economic confidence abroad.
Overall, the prospects for Africa in 2011 are weak, with an anticipated drop of 1.24 percent by the end of the year. Strong recovery is likely in 2012, with a more than 5.1-percent jump. This is likely to be sustained in the medium term and positive growth rates of up to 5.3 percent will be maintained until 2021.
This forecast was created by Frank Elder of Feather Consulting on behalf of ASM (Airline Strategy and Marketing Limited). OAG Cargo also contributed to the article