Carriers, and forwarders hope for, but don’t expect a bullish peak season for air cargo.
By Eric Johnson
Sluggish. Weakened. Lethargic.
The words used of late to paint the air freight demand picture from Asia to North America could easily describe the effects of the flu.
And air freight could be diagnosed as suffering from the same malaise as ocean freight — overcapacity coupled with sluggish, weakened and lethargic demand.
That’s led most in the industry to predict a not-too-rosy peak season for air freight, if one does eventually materialize.
“There is still expectation of a short, but sharp peak season out of Asia,” said Madhav Thapar, senior vice president of air freight for Africa and South Asia Pacific at DHL Global Forwarding. “However, it might come a bit later than usual and last for a shorter duration.”
The problem for air cargo carriers and forwarders is two-fold: capacity has increased this year, while North American consumers have been thriftier and retailers have been drawing down inventory levels.
Expectations of a short, but sharp peak season for air freight are driven by dwindling inventory in North America, not a projected demand surge.
“Any kind of (positive) movement on consumer demand should drive a peak” because of the need to restock, William Flynn, chief executive of New York-based carrier Atlas Air, told Dow Jones Newswires
Flynn told the news agency he expects a number of new product introductions this fall to help buoy this year’s peak shipping season, but that “it’s probably going to be shorter in terms of duration” than in previous years.
Atlas, incidentally, cemented a deal with DHL in early September to fly and maintain five Boeing 767 wide-body freighters owned by express carrier DHL Express in its North American network starting in 2012 (“DHL outsources B767 flying to Atlas” at www.AmericanShipper.com
The possibility for replenishment does bring hope to the air cargo industry, but another trend is working against air forwarders and carriers: low ocean rates.
There’s little doubt some goods often carried by air have switched to ocean in the last year due to extremely attractive transpacific rates. Those rates are enough to overcome the vast difference in transit times between air and ocean and have chipped away at demand growth in the air freight industry.
The International Air Transport Association (IATA) said air freight demand declined 0.4 percent in July compared to the previous year, with Asia-Pacific carriers seeing the biggest declines of 3.6 percent.
“A 20 percent decline in container rates versus a single digit-rise in air freight rates does little to close the large gap between the costs of shipping by air compared to ocean,” IATA said. “However, at the margin this may be one driver behind the loss of market share by air freight in the past year.”
In its monthly economic update for July, the latest report available at the time of writing, IATA said load factors are at pre-recession levels.
“Freight load factors have declined significantly (1.8 percentage points) to the pre-recession level of 45 percent,” the update said. “Growth in capacity, coupled with stagnating air freight markets, has led to a steady deterioration in the average air freight load factor. Asia-Pacific carriers, the largest in the market, have seen load factors slip to 58.1 percent (from 60.2 percent in July 2010). While the region suffers from a major imbalance with strong outward flows of manufactured goods and weak inbound traffic, the scale of their home carrier operations allows for better capacity utilization” in the future.
But the downfall in overall demand has underlined that growing inbound demand in China for high-end goods has not been enough to offset sluggish outbound demand, nor to compensate for the loss of some goods to ocean freight.
The Association of Asia Pacific Airlines, which represents 17 carriers in Asia that carry roughly one-third of global air freight each year, said its members sustained a 4 percent drop in cargo demand in July (the most recent month for which figures were available) and a 3.4 percent drop year-to-date through July. Hurting the situation, capacity has grown 1.7 percent during 2011.
Andrew Herdman, the association’s director general, described the air cargo market for Asian airlines as “lackluster.”
IATA said airlines must worry not only about volatile fuel prices, but also about downtrodden western economies that show little sign of waking from their slumber before the end of the year.
“During the second half of 2010 the weakness of air freight was due to a loss of share of world trade to other modes, partly due to the composition of goods traded,” IATA said. “World trade was expanding strongly during that period but other modes benefited. However, so far this year there has been no further growth in world trade — in part because of the disruptions caused to electronics and automobile supply chains by the earthquake and tsunami in Japan, but also a sign of economic slowdown. While this environment persists there is little scope for further expansion in air freight volumes.”
Thapar, of DHL, said factors outside of dwindling demand have not helped.
“The air cargo industry has been experiencing a period of volatility linked to the uncertain global economic situation,” he told American Shipper
. “By and large, the current capacity situation adequately matches the demand and there is not so much stress on space availability. However, certain routes do experience constraints from time to time.
“Market rates are more or less adjusted to route-specific demand and supply. Spot rating is available on certain sectors, but overall, rate levels are stable and expected to increase slightly in the mid-term. Carriers are under bottom-line pressure, so if yields do not improve, some capacity might get pulled out. The next few weeks should see a clearer picture emerge. Key factors will, of course, be global economic sentiment, political stability and oil production.”
Julian Keeling, chief executive officer of mid-sized freight forwarder Consolidators International, sees the Asia/North American air freight malaise as indicative of a longer range trend.
“Everything is sort of upside down in terms of Asia/USA,” Keeling said. “There’s far more capacity than is required and rates keep falling. It’s very much mirroring what’s happening with ocean freight. I see this as the start of more to come.”
Keeling has a somewhat contrarian view of the Asia/North America goods pipeline. A few years ago, his company pulled out of Asian markets — for imports and exports — because he found trouble turning a profit. His company now focuses primarily on U.S. exports, which account for 95 percent of its business, mostly to Europe, the South Pacific and Oceania.
The flipside is Ocean World Lines (OWL), a predominantly U.S. export-based forwarder that in recent years has been rapidly growing its Asia export business to North America.
“2011 has been a challenging year for most all air freight forwarders, one of the worst in memory due to the global economic situation,” said Eric Seamon, vice president of Asia-Pacific for OWL, whose air forwarding business out of Asia has also been expanding. “We were very cautious going into the second quarter of 2011 in terms of setting our expectations, and I now expect there may not be a peak of any significance this year. In terms of capacity, we see no reduction, so we assume pricing will remain steady and space available till the end of the year to the USA.”
As evidenced by poor load factors this year, excess capacity is putting stress on airlines and forwarders even if demand were to rebound.
“Capacity continued to expand throughout the past 18 months to July,” IATA said. “Since air freight demand shrank 5 percent in the past 14 months, load factors fell back to pre-recession levels.”
IATA said Asia-Pacific carriers did have the highest load factors of any region, helped by their position in the world’s primary manufacturing region.
“The regional divergence in load factors largely reflects the importance of the Asia-Pacific region as the major center for manufacturing,” IATA said. “Manufacturing, particularly industries such as electronics and capital goods, are key shippers by air. As a result the major flows of these goods are out from the Asia-Pacific region, while inward flows are much lower. Asia-Pacific airlines have the home carrier advantage in better utilizing their capacity and achieve by far the highest load factors.”
But Cathay Pacific, the home airline at the world’s busiest cargo hub, Hong Kong, said it struggled in the first half “with weak demand continuing out of both Hong Kong and mainland China,” James Woodrow, Cathay Pacific general manager for cargo sales and marketing, said in the airline’s operational update in August. “We expect the markets to remain soft through to mid-September.”
Cargo volume at Hong Kong International Airport has fallen 2.9 percent in 2011 to 2.3 million tons. But it fell 6.1 percent in July and has dropped 7.6 percent since April, according to airport statistics. Alternatively, Singapore Changi International Airport has seen cargo volume rise 3 percent to 1.1 million tons through July. The statistics for both airports include all destinations, not just North America.
Tony Tyler, IATA’s new director general and chief executive officer and former head of Cathay Pacific, painted a pretty bleak picture for airlines for the rest of the year.
“With business and consumer confidence now tanking, sluggishness in international trade, and high fuel prices, the expectation is for a weaker end to the year,” said Tony Tyler. “We are already seeing this in the shrinking air freight markets.”