For the global air cargo industry it mostly has been a case of too much lift chasing too little freight leaving yields under tremendous pressure. While industry stakeholders innovate to create specialised capabilities to shipping goods across different business verticals thus opening an opportunity to enhance yields; the consensus is that the current challenges are going to be there for some time but an upswing is certainly son the horizon.
Shreya Bhattacharya & Reji John
There are several factors that indicate air cargo market could soon be on the upswing even though the current challenges of over capacity and falling yields are market realities that the industry has to live with for some time.
According to the International Air Transport Association (IATA), there is some optimism over the prospects for the cargo business in 2017. The break in falling yields and a moderate uptick in demand (3.5 percent) will see cargo industry volumes reach a record high of 55.7 million tonnes (up from 53.9 million tonnes in 2016). Industry revenues are expected to rise slightly to $49.4 billion, which is still well below the $60 billion level of annual revenues experienced in 2010-2014.
Take for instance in October last year, UPS signaled an increased appetite for cargo aircraft, submitting an order to Boeing for 14 747-8 freighters, with the option to purchase an additional 14 over the next three years. UPS officials said the purchases will let the integrator upgrade offerings on current routes, but they also left the door open to using the extra capacity in new markets.
However, there are equally compelling factors that should keep the global air cargo industry on tenterhooks about the expected turnaround. Current slowdown in global trade, geo political concerns and the threat of protectionism pose risks to global trade thus impacting the prospects of air cargo industry.
Alexandre de Juniac, IATA’s director general and chief executive said that world trade is still sluggish, so air cargo is by no means flying easy. “Growth is the way to overcome the world’s current economic challenges,” Juniac said. “The EU-Canada agreement is a welcome respite from the current protectionist rhetoric and positive results should soon be evident. Governments everywhere should take note and move in the same direction.”
Boeing in its World Air Cargo Forecast stressed on the aviation industry’s importance to global trade, noting that as trade increases, so too will the need for cargo capacity. This demand will help the airfreight market emerge from what it calls “several years” of lower-than-expected growth.
“The air cargo market has faced several years of below trend growth. As trade continues to recover, we're confident the air cargo market will see growth over the long-term,” said Randy Tinseth, vice president of marketing for Boeing Commercial Airplane.
Boeing also sees freighters continuing to play an outsized role in air cargo, despite the introduction of larger and larger passenger planes with increased cargo capacity.
“Freighters will continue to carry more than half of the world’s air cargo for the next 20 years, as the majority of players in the industry continue to rely on and augment their cargo operations by flying freighters,” the report said.
The global air freight sector has shown varied growth and declines between 2012 and 2016, registering an overall compound annual growth rate (CAGR) of 0.7 percent between 2012 and 2016 to reach a value of $101.3 billion, according to an analysis from industry research firm MarketLine.
MarketLine’s latest report shows air freight growth is primarily driven by the Middle East and Asia-Pacific (APAC) as a result of increased manufacturing.
With an under-developed internal market, opportunity for future growth is also possible, particularly in larger countries like China and India.
“IATA suggested a global price drop per Freight Tonne Kilometre (FTK) in 2016. As such, a global decrease in the value was identified in 2016 despite volume continuing to climb. Whilst the price of crude oil has decreased, allowing a certain amount of breathing room for freight companies, the effect of overcapacity has suppressed freight yields and forced rates downwards,” said Paul Todd, an analyst with MarketLine.
The global market is forecast to grow with a CAGR of 3.2 per cent between 2016 and 2021 to reach a value of $118.7 billion, aided by increased infrastructure in the APAC region as well as by the advantages and cross-relation between different freight modes. Whilst volume growth has slowed in 2015 and 2016, new technology in the industry is set to increase volumes at a steady rate.
Reflecting on the business for 2016 Nabil Sultan, Emirates Divisional Senior Vice President, Cargo, said, 2016 has been a challenging year for the entire air freight industry. However, according to Sultan, the biggest challenge has not been with tonnage growth but with falling yields.
“This is something that all the stakeholders in the airfreight industry need to address together, especially now with increasing fuel costs. The industry will have to find a way of balancing yields with increasing fuel prices to ensure better route economics. This is necessary to sustain our operations — especially freighters — and ensure integrity of our service schedules,” he added.
Glyn Hughes, global head of cargo at IATA is also of the opinion that falling yields is going to be there for quite some time. “When you have the situation where you have excess capacity then one obviously knows that it puts pressure on revenue and therefore pressure on yields. So one thing that we urge industry to do, and the fact is that the industry is responding to fantastically, is optimisation, which means we have to be as cost efficient as possible to build solutions around customer expectations and demands so you are actually providing the best value possible for the customer.”
Perhaps this is something that Emirates SkyCargo has managed to implement quite successfully. “The major trend that we have observed over the years from a customer perspective has been the movement towards specialised capabilities for shipping goods from across different business verticals. This is a shift away from moving general cargo. Given this development, it is necessary for us to have an increasing understanding of business in different verticals and we need to work closely with customers to come up with creative solutions to address business needs,” explains Sultan.
Emirates SkyCargo has recently launched Emirates SkyPharma, a specialised offering for the pharmaceutical sector ensuring that their high value and temperature sensitive shipments will be transported in a safe and efficient way through Emirates SkyCargo. It has also launched Emirates SkyWheels, a specialised transportation offering for premium vehicles across Emirates network.
For Hong Kong Air Cargo Terminals Limited or Hactl, one of the leading air cargo terminal operators in the world, it is the niche cargo product categories like pharma and perishables that matter most.
“Pharma continues to grow at above industry average rates, and is important business for Hactl and its customer airlines. Perishables into Hong Kong, and transiting Hong Kong to reach nearer China and the Pearl River Delta (PRD) region, is also important and growing business,” said Mark Whitehead, Chief Executive Officer of Hactl.
According to Whitehead, 2016 has emerged better than expected, both for the industry as a whole, and for Hactl. “Traffic levels have certainly improved in the second half of the year, and we have recently won two new carriers (and a third, soon to be announced) which will positively impact our business in 2017,” he added.
For Lufthansa Cargo the last few months of 2016 have been good as the carrier saw improved demand. “The market situation remained very challenging in the airfreight sector with regards to growing overcapacities,” said a spokesperson for Lufthansa Cargo.
In its World Air Cargo Forecast, Boeing also highlighted the importance of e-commerce to air cargo’s growth. Domestic e-commerce sales, the manufacturer said, have averaged 15 percent annual growth for the past 15 years, leading to the creation of an industry that was valued at an estimated $342 billion in 2015. Taking into account the entire world, Boeing projects that the $1.7 trillion industry will balloon to more than $3.5 trillion in the next five years.
“We see huge potential in eCommerce. Ecommerce is evolving and maturing, products are becoming more price-sensitive, and so eCommerce supply chains are under pressure to deliver at lower cost. This provides a dividend for the “traditional” airfreight sector, which is replacing the early one-at-a time shipping model, using high-cost integrator services, with bulk shipping and fulfilment nearer end-market,” said Whitehead.
In fact, Hactl’s value-added logistics arm Hong Kong Air Cargo Industry Services or Hacis is exploiting this growing trend with great success. Chinese consumers are driving an eCommerce explosion, and Hacis is using Hong Kong as an entry point for China and the Pearl River Delta region, providing low-cost, high-speed road feeder service connections to 8 depots. This network will increase, particularly when the new Hong Kong-Zhuhai-Macau Bridge helps to reach Macau by truck in 40 minutes. Ecommerce exports from China and the Pearl River Delta region are also switching to Hactl’s road-air model, thanks to expedited customs and the ability to use through MAWBs from its depots.
“We obviously see some great future opportunities in the rising growth of eCommerce shipments which of course bring with additional demands for speed and efficient services which in itself require investment and thereafter one hopes that actually drive up greater value for the user and therefore greater value for the provider of the service,” Hughes of IATA added.
Despite a positive outlook for the air freight sector, companies must always consider the threat from alternative freight methods. The advantages to the customer must be sufficient to ensure healthy growth in this sector.
It is estimated that the value of trade carried by air transport in 2017 is expected to be $5.7 trillion, a 4.9 percent increase on 2015. Air cargo accounts for around 35 percent of the total value of goods traded globally.