Arrested development: difficulties for global air freight

4 September 2013

The global air freight market remains a high-profile casualty of the global economic downturn, despite encouraging growth in Asia-Pacific. James Lawson talks to Bob Dahl of the US consultancy Air Cargo Management Group, about rising costs, the modal shift to road and sea, and growth trends in China and India.

The days of reliable 6% annual growth in the global airfreight market may not be gone forever, but they are certainly taking an extended vacation. The industry only grew at around 2.4% annually between 2001 and 2013 and has shrunk since its most recent peak in 2010.

"The recession that began in 2008 led to a substantial decrease in air freight, especially in 2009," says Bob Dahl, managing director at Air Cargo Management Group (ACMG). "Some thought we were back on a long-term growth trend again in 2010, but the market has been stagnant since then."

Since 2010, there have been a series of false dawns, with upticks in growth rapidly followed by contractions. The end result is that global traffic in 2012 was very similar to that in 2007; the most recent figures from the International Air Transport Association (IATA), released in March, show that this cycle has continued.

After a tentative recovery in air freight demand toward the end of 2012, freight markets weakened again in March. Global freight ton kilometres (FTKs) dropped 2.3% year-on-year after seasonal adjustments. Volumes are now only 1.5% above the most recent low point in October 2012.

With critical markets in North America and Europe continuing to struggle, these figures are hardly surprising. The eurozone is still consumed by the sovereign debt crisis and, athough the US has recently returned to modest growth, its low consumer spending bodes badly for demand for air-freighted consumer goods.

The global air freight industry has also faced stiff competition from road and sea, the so-called 'modal shift'. Since the late 1990s, road freight deregulation in the US and Europe has made truck transport more attractive, while the move to ultra-large container vessels has ramped up shipping capacity.

"Only 2-3% of global tonnage goes by air, but by value it's 30-40%," says Dahl. "Air is reliable, predictable and fast, but it costs around ten times more than shipping by sea. Economies of scale from bigger container ships make the cost of air freight seem relatively higher."

The high oil price has had a big influence on air freight costs. In 2000, a barrel of oil cost around $30; currently, that figure stands at or above $100 and has done for three years or more, while the price of jet fuel has tripled in the past nine years. Despite this, air freight prices have declined 4.2% annually over the past two decades, but air cargo still struggles to compete with surface transport.

"We started to see oil prices begin to climb in 2003-04," says Dahl. "Fuel prices have increased the differential cost of air freight over ocean freight."

Eastern promise

Asia-Pacific is one bright spot in the global economy, continuing to grow relatively quickly at around 6-8%. Accounting for around 40% of global air freight, Asia-Pacific airlines buy more freighter aircraft than any other region in order to support intercontinental trade with the US and Europe.

Because of its export-led economies, the region's airlines have many high-capacity freighters in their fleets and a large share of the long-haul export business to the US and Europe. As a result, they have been particularly vulnerable to the slowdown in the West. The performance of big cargo carriers like Korean Air and SIA Cargo reflects this - both have recently posted significant losses.

"Stagnant economies in the West are affecting demand for all types of transportation, including air freight," says Dahl. "Intra-Asian traffic has remained at a reasonable level, but Chinese and other Asian freight carriers have suffered due to their reliance on long-haul exports to North America and Europe. In fact, Asian-Pacific freight carriers have suffered the most over the last two years."

"China's domestic air freight market is growing rapidly at 8-9% per annum and will overtake the US in size within 20 years."

IATA's figures showing that Asia-Pacific airlines have borne the brunt of the most recent market contraction, with their FTKs dropping 3.3% year-on-year, and 3% from January to March this year.

So has regional short and medium-haul traffic in Asia-Pacific helped make up for the drop in long haul? Along with Japan, China is the main driver for both intercontinental and regional air freight in Asia-Pacific. Even with reduced economic activity, China still posted growth of over 7% for Q1 2013.

Though nowhere near as influential as China, the Indian economy also gives cause for optimism. However, the Indian logistics sector is immature, fragmented and dominated by small players. With too few warehouses, inefficient customs and an impenetrable tangle of regulations, poor infrastructure also holds back domestic air freight growth.

"China's domestic air freight market is growing rapidly at 8-9% per annum and will overtake the US in size within 20 years," says Dahl. "India has a huge infrastructure problem. It doesn't have enough airports and there isn't enough capacity at the ones it does have."

"There will be more local and regional demand as the standard of living rises. The air freight market will not be as export-driven as it is today."

Neglecting the Indian subcontinent, nearly half of Asia's total exports represent trade within the region, and with vast distances and few ground transport alternatives, air freight is the natural choice. According to Boeing, the Asia-Pacific air cargo market constitutes 14.7% of the world's air cargo traffic in terms of tonnage and about 7.4% in FTKs.

"Short and medium-haul air freight in Asia is growing quite fast and shows a lot of promise," says Dahl. "Many electronic subassemblies are produced within the region and transported elsewhere for final assembly."

Around 60% of regional air cargo consists of these subassemblies and components which, in final form, are destined for export outside the area. This trade has helped regional tonnage grow at over 6% annually for the last 20 years, but it also means that regional air freight in Asia-Pacific is still heavily influenced by demand in export markets and global economic conditions in general.

Though there's little the air freight industry can do to stimulate demand, bullish long-term projections point to a resumption of global air freight growth in the coming years. Jet fuel prices are forecast to remain steady for the next three to five years and perhaps even drop, which will help airfreight compete with other transport modes.

Future trends

With Asia's overall GDP predicted to increase by nearly two and a half times by 2031, Boeing forecasts that the annual FTK for Asian carriers' cargo traffic to and from North America will rise by 6.1% each year over the next two decades to 2031. Europe-Asia cargo traffic will grow at 6.2% and intra-Asian traffic at 7.4%.

"Asia-Pacific will continue to be the global manufacturing centre for the foreseeable future," says Dahl. "That alone will require considerable amounts of air freight. There will be more local and regional demand as the standard of living rises and the air freight market will not be as export-driven as it is today."

So air freight will see a return to growth. The only question is - when?

Bob Dahl is managing director at Air Cargo Management Group.

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