CARGO REVIVAL GAINS REGIONAL TRACTION

Air cargo has been stagnating since the 2008 global financial crisis, with the Asia-Pacific hit hardest of all. But recent forecasts, and early high season figures, indicate the business is experiencing a renaissance – and Asia is leading the way back to profit.

by CHIEF CORRESPONDENT, TOM BALLANTYNE  

November 1st 2014

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Finally, the air freight business has some good news. The International Air Transport Association (IATA)’s latest five-year forecast, issued in October, said international air cargo is expected to increase at a Compound Annual Growth Rate (CAGR) of 4.1% to 2018, with the Middle East-Asia route recording the highest annual growth rate of 6.2%. Read More »

IATA added performance in August recorded robust growth in air cargo volumes, with freight tonne kilometers (FTKs) rising 5.1%, compared with a year earlier. It was the second consecutive month for strong cargo volumes, following a 6.1% year-on-year rise in July. Even better, capacity grew at a slower pace of 3.4%, easing pressure on freight yields.

In August, Asia-Pacific carriers’ freight volume beat the global average, at 6.3%, continuing a solid acceleration that had been in evidence for more than two months. Cargo capacity in the region grew at only 4.4% and, according to IATA, a notable rise in Chinese export orders bodes well for future demand growth.

Cathay Pacific Airways and Dragonair, airlines that operate out of the regional cargo behemoth, Hong Kong International Airport, reported a 14.5% increase in cargo in September, helped by shipments of new products such as the iPhone 6, which produced a load factor improvement of 2.9 percentage points, to 62.2%.

Nevertheless, IATA director general and CEO, Tony Tyler, remained typically cautious about the recovery trend. “The outlook for air cargo is clearly getting better. However, there are some limiting factors on the extent of potential gains,” he said.

“Demand for air cargo is growing more slowly than global economic activity. Businesses are reported to have more confidence, but the list of political and economic risks continues to moderate how that confidence translates into actual activity.”

Tyler said the air cargo industry is moving at two speeds, with a sharp divide in regional performance. European carriers are reporting anemic growth, while all other regions are making solid gains. The growth in the Asia-Pacific is encouraging because it demonstrates a recovery in trade and a positive response to China’s economic stimulus, he said.

Dubai World Central (DWC) Airport is poised to pass all other airports in terms of freight and passengers

The association’s forecast said that by 2018, six of the ten largest international freight markets would be in the Asia-Pacific. The U. S. will still be the No.1 market, at 10,054,000 tonnes, followed by China (5,639,000), the United Arab Emirates (4,974,000), Germany (4,763,000), Hong Kong (4,648,000), Republic of Korea (3,487,000), Japan (3,480,000), the U.K. (2,808,000), Taiwan (2,350,000) and India (2,223,000).

The U.S., China and the UAE will each add more than 1 million tonnes of freight by 2018, compared with today, and the UAE would have replaced Germany as the third largest market.

“Air cargo remains as vital to the global economic system as ever. This year, more than $6.8 trillion worth of goods, equivalent to 35% of total world trade by value, will be transported around the world by air. So it is welcome that a forecast sees a return to growth for the sector after several years in the doldrums” he said.

“Nevertheless, trade protectionism is a constant danger. According to the World Trade Organization (WTO), between November 2013 and May 2014 alone, 112 new trade-restrictive measures were enacted by G20 governments. Geopolitical concerns, volatility of oil prices, and competition from rail and sea could also affect this forecast. The air cargo industry certainly cannot afford to be complacent.”

The largest freight traffic shares in 2013 were Within Asia-Pacific (21.6%), Europe-Asia Pacific (12.3%), and North and Mid-Pacific (10.0%). Looking ahead to 2018, Within Asia-Pacific and Europe-Asia are expected to increase their shares very slightly to 21.8% and 12.4%, respectively, with the Middle East showing the largest gain, 0.8 percentage points, to 6.9%, of global freight activity.

At an international freight forum in Seoul, South Korea last month, Boeing Commercial Airplanes vice president marketing, Randy Tinseth, released the U.S. planemaker’s biennial World Air Cargo Growth Forecast. For the first time in years he was able to echo the growing feeling among airlines that the cargo market, finally, is heading for better times.

“We see strong signs of a recovery as air freight traffic levels continue to strengthen after several years of stagnation. The air cargo market is now growing at nearly the long-term rates,” he said.

Among airlines, a cautious reaction to marginal gains and tentative recovery in late 2013 and early 2014 is turning to a belief the freight graph is on the way up.

An indication of the air cargo revival is the return of parked freighters to airline fleets. When air freight traffic plummeted in late 2008, air cargo operators parked as many as 70 B747-400 and MD-11 freighters, the mainstay of long-haul cargo operations. From July this year, operators were returning the planes to service as traffic volume picked up.

Airports, too, are reporting a strong freight rebound. The latest figures from Airports Council International (ACI), also for August, said freight volumes handled during that month were up 5.8% year-on-year and well above the overall average of 3.6% for the past 12 months.

Some weakness remains in domestic air freight markets, ACI said, but the trans-border shipment of air freight posted robust gains and international freight volumes jumped by 7.5%, coinciding with an expansion in international trade activity and increasing business confidence. Asia-Pacific airports posted strong increases in volumes, some 8.2% in August. The world’s largest air freight hub, Hong Kong International Airport, increased cargo volume by 8.6%.

“Although growth in domestic freight volumes in Europe and North America showed weakness in August, international freight volumes experienced robust growth in most regions, particularly at airports in the large exporting nations of the Asia-Pacific,” said ACI World’s economics director, Rafael Echevarne.

The Middle East is challenging the dominance of Asia-Pacific on the air freight front. Dubai World Central (DWC) is poised to surpass all other airports in terms of freight and passenger capacity and is now a major contributor to overall growth in freight volumes for the region, said ACI.

“Although it only recently commenced operations, in August alone air freight volumes at DWC quintupled to over 80,000 metric tonnes compared with 2013. Month after month, with increased operations, DWC is moving up the ranks to be among the busiest international freight airports in the world,” said ACI.

But the Gulf has a long way to go to catch up with the Asia-Pacific’s air cargo might. The region processes 38.5% of all air cargo being moved compared with Europe (22.9%), North America (21.3%) and the Middle East (13.1). Europe and Latin America are lagging well behind the growth trend, seeing freight volume growth of 1%-1.5%, a result of Brazilian economic weakness and EU sanctions on business with Russia, respectively.

In Asia, the Chinese economy has slowed compared with the double-digit rates of expansion of previous years, but the government stimulus of earlier this year has helped manage the transition of the nation to a slower growth path.

Recent results of purchasing manager surveys indicated gains in business activity in the manufacturing sectors and a notable rise in export orders. This should help sustain positive trade momentum in the region, which in turn ought to continue driving demand for air freight services on local carriers, said IATA.

Whatever the economic circumstances that exist in different world markets, it is universally accepted that China holds the key to the continuing recovery of air cargo. This fact was recognized in September when the International Civil Aviation Organization (ICAO) held the first Air Cargo Development Forum in Zhengzhou. “China is a very important market and that is why we are here,” ICAO’s regional director Arun Mishra told the gathering, because its represents 45% of the region’s air cargo market.

 Xia Xinghua, the director general of the China Civil Airports Association said a third of Chinese rely on e-commerce. “The rise of e-commerce in China is so fast that it forces freight handlers and airlines to find ways to work together, which is a very good trend,” he said. Wang Zhiqing, deputy administrator of the Civil Aviation Administration of China (CAAC) reported that air cargo had grown by 10% a year between 2002 and 2010, followed by a decline in 2011 to 2013. “We have finally come out of that, in the first half of this year, as domestic freight increased 5.7% and international 6.6%,” he said.

“The industry must adapt itself to meet changing demands with the rise of the express market and become integrated logistics operators.” China’s express market has grown 43.5% a year since 2008 and become the world’s second-largest after the U.S. This growth is underpinned by the rise in e-commerce, Wang said.

China’s freight fleet stands at 101 aircraft, of which 80% are used for express cargo. By 2016, based on a European E-Commerce Association estimate, said Zhu Gaozhang, director of compliance and facilitation the World Customs Organisation in Brussels, the value of e-commerce in China could reach $36 billion a day.

Boeing’s air cargo forecast should also cheer up operators for longer term prospects. It foresees freight traffic will grow at an annual rate of 4.7% over the next 20 years, more than doubling by 2033. Tinseth said world air cargo traffic began to improve in the second quarter of 2013, with growth reaching 4.4% for the first seven months of 2014, compared to the same period a year earlier.

If this trend continues, 2014 will be the highest growth year for the airline freight industry since 2010. “Much of the past weak air cargo growth can be attributed to two principal causes: an underperforming world economy and lackluster trade growth, particularly in those traditional commodities served by the air cargo industry,” said Tinseth.

The new Boeing forecast said Asia-North America and Europe-Asia would continue to be the dominant world air cargo markets. While Intra-Asia, domestic China and Asia-North America markets are expected to have the fastest rates of growth over the next 20 years.

With increased cargo traffic, Boeing forecasts airlines will take deliveries of 840 new freighters over the next two decades: 590 large freighters worth $190 billion and 250 medium-sized freighters (40-80 tonnes) worth $50 billion. With some 70% of the new planes in the large category, the sector will be dominated by the B777F and B747-8F because Airbus does not offer a cargo version of its A380.

The belly cargo debate Kostya Zolotusky, managing director of capital markets development and leasing at Boeing Capital, told Orient Aviation people used tidbits of anecdotal data to draw the wrong conclusions about air freight capacity. “Every day, the Asia to North America market over the Pacific has 150 wide body passenger airplanes going back and forward. Every day, that same market has 70 dedicated freighters. If you took all that belly cargo capacity it would be equal to about 10 dedicated freighters. If the Asian market doubles its wide-body capacity, which it is not about to do, it would only consume about 10 dedicated freighters,” said. “I think people are making much ado about nothing about the belly cargo. Belly cargo is a very important market, but relative to freight carried by dedicated freighters, it is relatively modest. You would need a dramatic shift in belly cargo capacity to have any impact on dedicated freighter traffic, which is not going to be the case.” “The challenge is that belly cargo is much lower yielding cargo. You have the capacity so you sell it at whatever you can get for it, which does drive down some of the yields for the dedicated freighter. But overall capacity is rather limited. There’s a lot of outsize cargo passenger aircraft can’t carry. There are nuances in the analysis, but Boeing certainly doesn’t see that belly cargo will have a meaningful impact on the overall cargo market. It’s an important part of it, but it’s not changing dramatically.”