It’s no secret that the trend of passenger business revenues is diverging from the trend of cargo business revenues after years of moving in sync.
“What we consider then is what’s causing the diversions,” Julie Perovic, senior economist at the International Air Transport Association, said Monday at the CNS Partnership Conference in San Antonio, Texas.
One of the reasons for the divergence is modal shift, mainly to oceanfreight.
“The share of total world airfreight has been declining,” Perovic said.
But a more important reason for the trend is on-shoring of manufacturing, she said. Though world trade has been growing at a faster rate than industrial production – which is good for air cargo – world trade is only growing one times the rate of domestic output. Historically, it was two times the rate of domestic output.
“If we’re not seeing growth in world trade, we’re not going to see growth in any freight transport,” Perovic said.
Part of the cause for this shift is the increase in protectionist trade measures all over the world, she explained.
“What that essentially means is production and activity is staying at home,” which explains the growth in the domestic output rate, Perovic said.
She said the airfreight industry should support the Bali trade agreement, a set of measures agreed upon by the World Trade Organization to facilitate trade by improving customs procedures. After doing preliminary analysis, IATA believes the agreement will have a positive effect.
At the same time, Perovic said there are “sound economic reasons” for on-shoring, including the increase in Chinese labor costs and the mounting energy crisis in places such as the U.S.
But there are high points in air cargo. By discounting the integrators’ share of freight tonne kilometers (FTKs), it becomes apparent that FTKs are not declining in international trade. Growth in e-commerce has also remained stable.
“It looks like some parts of the business have fared a little better despite the weakness,” Perovic said.
She pointed out that jet fuel prices have been high for a few years now.
“On the fuel side, it is stable in the sense that it’s high and it probably will continue,” she said.
But the price could rise if political turmoil escalates in the Ukraine, Perovic predicted.
Capacity coming from the freighter fleet has been stable, while capacity from wide-body passenger aircraft has increased. Asset utilization has improved, and freight load factor has seen a recovery. Yet cargo yields are still declining.
“It doesn’t look like that pressure on yields is going to change,” she said.
But in general, Perovic said “the economic cycle is starting to pick up.” Business confidence and manufacturing have both picked up since the fourth quarter of 2013, a trend that IATA believes is sustainable.
IATA hopes the air cargo industry will see stronger demand than in 2013.
“It’s going to be a more stable period of growth in the next couple of years than we’ve seen in the past,” Perovic said.
But there is uncertainty. With the U.S. economy improving, a lot of funds are moving from the emerging markets and into U.S. dollar assets. This is wreaking some havoc in emerging markets, making banks in those regions increase their interest rates. It’s possible that as a result, the economies of emerging markets could slow down if they don’t respond to this moving of funds properly, Perovic said.
China has also slowed recently.
“Slowing in China can lead to weakness in the region and put down pressure on trade in the region,” she said.