Bracing up for challenging times ahead

Cargo executives are finding it difficult to smile. Year 2015 has been a tough one for the air freight business. Overall, freight load factors have been on a downward spiral given the sluggish world trade growth. After a modest performance this year, what challenges does the air cargo industry have to face in the year ahead?
Surya Kannoth

Excess capacity, modal shift to ocean freight, relocation of production via near-shoring, and lowered demand from high-usage air freight customers have taken a toll on the sector.

As if slipping freight load factors were not bad enough, this challenge is worsened by an increase in passenger aircraft deliveries which adds hull capacity. “Generally speaking, for every one tonne of hull capacity added by a wide-body freighter, three tonnes will be added by a wide-body passenger aircraft,” recaps International Air Transport Association (IATA) in its latest Cargo eChartbook.

“A tough global economic environment and feeble world trade have subdued air cargo demand,” the industry body said. “Emerging markets have struggled; a slowdown in China has sent commodity exporters wobbling.”

Meanwhile, the carriers of each region are growing at different speeds, for instance, the Middle East and Asia Pacific carriers are adding capacity faster than American carriers but many of these carriers don’t restrict the business to their home regions and some are growing faster in other markets. Specific markets such as Africa that are a focus for some carriers may see faster growth in competition, especially if dedicated freighters are deployed, believe industry experts.

Take for instance, Ethiopian Cargo, which has phased-in six brand new B777 freighter aircrafts in less than three years, the last two being received on October 2015. While this has given Ethiopian a competitive advantage on less operational costs and better dispatch reliability. “The huge ownership cost put pressure on the profitability especially when coupled with the lower yield, lower investment leading to lower airfreight movement and the low fuel price,” said Fitsum Abady, MD, Ethiopian Cargo Services. Despite all these setbacks, “we have managed to close the calendar year with profit by increasing our capacity and decreasing our operational cost.”

The demand into Europe remains weak with only small spots of increased demand for very short spells of time, which has resulted in the push for the traditional European carriers to review their pricing policies. This has, in turn, caused the Middle East carriers to do the same. The European carriers are also looking towards North America for better payload utilization, which have led American-bound carriers to adjust pricing.

“The competition is stiff in each market and there are varying factors that determine the stability of each. It’s a buyers’ market now and the buyers will determine the price they want to pay. Unlike previous time where with sufficient data we could estimate and predict spikes, market volatility is becoming increasingly unpredictable,” says Eddie Sng, Executive Director, Agility Asia Pacific.

Going forward, the air cargo market is expected to remain weak through 2016 due to sluggish world trade growth, IATA stated.

Demand is expected to accelerate next year to three percent from 1.9 percent in 2015, slightly ahead of GDP growth, which is set to average 2.7 percent, IATA forecast in its 2016 industry outlook.

Commenting on the performance of the industry Glyn Hughes, global head of cargo at IATA says that the air cargo industry “did not live up to the promise that it hoped for at the end of Q1”. “If we look at the global FTKs for last few years, we see that in 2012 we saw a contraction of nearly one percent; in 2013 growth of 1.6 percent and in 2014 we had a tremendous growth rate of five percent in terms of global FTKs and we hoped that expansion and growth would continue through and Q1 started well but the rest of the year taped it off,” elaborates Hughes.

According to Hughes, one year of growth does not predict or determine that we would be back to a steady growth pattern year over year. “Right now we are forecasting 2016 to show slight improvement on that 1.9 perhaps coming in around 3 percent growth in FTKs and that would be predominantly based on the fact that global GDP is projected and forecasted to expand by slightly greater percentage than this year,” Hughes added.

According to Bram Gräber, EVP, Air France KLM Martin Air Cargo, the imbalance between capacity and traffic, supply and demand remains a key issue. “Next to this, security and safety, which remain our utmost priority, trigger challenges that we need to absolutely include in our strategy,” Gräber adds.

Oversupply remains one of the biggest challenges for the air freight market. “With little or no growth globally, and coupled with the fact that carriers can now afford to fly bigger aircraft, supply will continue to exceed demand and carriers will be under pressure to keep their planes full,” believes Agility’s Eddie Sng.

IATA’s forecast of 2.7 percent increase in GDP for 2016 would have generated much faster international trade and air cargo growth prior to the global financial crisis, but that pattern of growth appears to have stopped as companies bring supply chains closer to home.

Due to near-shoring trends, many companies are looking towards bringing production back closer to their home ground. “Therefore, domestic transportation such as trucking and rail will become more prevalent options, thereby lessening the need for air freight. With the condition of road infrastructure improving around the world, land transportation will become an increasingly viable option,” apprehends Eddie Sng.

“The cargo industry has become very difficult to predict. A great example is 2015, which started well before being hit by a fuel surcharge decrease slowing down demand in the developing world. GDP multipliers for air cargo are no longer predicting cargo growth accurately so it’s impossible to tell what 2016 will bring. However, Qatar Airways Cargo is committed to its plans for growth and expansion, even if 2016 turns out to be flat or only grows slightly,” says Ulrich Ogiermann, chief cargo officer, Qatar Airways Cargo.

Another challenge is the need for improvement in procurement and demand forecasting. Many shippers plan to ship their products by ocean with air freight kept to a minimum. With the increasing sophistication in procurement and demand forecasting tools, as well as ERP systems, more and more goods are transported via ocean freight. The increased usage of technology by all of those involved in the air freight market will be both a challenge and opportunity and one that carriers, forwarders and ultimately customers need to work together to embrace.

Total cargo revenues are expected to shrink slightly to $50.8 billion next year from $52.2 billion in 2015 even as volume grows to 52.7 million tonnes (58 million tonnes) from 51.3 million tonnes.

Average yields will fall by 5.5 percent in 2016, a significant improvement on 2015 when yields are expected to slump by 18 percent, partly due to the appreciation of the US Dollar, which impacted non-dollar revenues.

Strong demand for passenger travel, which grew 6.7 percent this year and is forecast to increase by 6.9 percent in 2016, and low oil prices are offsetting the impact of a weak cargo sector and will boost profits next year, IATA said.
The airline industry will post a record net profit of $36.3 billion in 2016 following earnings of $33 billion in 2015, with more than half of the profit coming from North America carriers. IATA had previously forecast 2015 earnings of $29.3 billion.

“The outlook for air cargo continues to be very difficult,” IATA DG and CEO Tony Tyler said. “While there was some optimism from third quarter growth it has all but disappeared as the industry basically flat-lined … early signs of improvement in export orders may bode well for trade and air cargo but this is unlikely to prevent air cargo [from] finishing 2015 on a low note.”

Overall, supply will continue to exceed demand. “As a result, freight rates will continue to stay weak as airlines stay focused on gaining as much business as they can. While global economic growth remains low the market is likely to remain soft,” added Eddie Sng.

Recalling what their Group Chief Executive, His Excellency Akbar Al Baker predicts, Qatar Airways Cargo’s Ulrich Ogiermann states, “We believe that we will see the exit from the industry of at least two cargo carriers in the next five years. In order to compete in tomorrow’s world, cargo carriers need to invest in technology, infrastructure and people. Qatar Airways Cargo is doing all three with its recently-launched next generation cargo management information system CROAMIS, the construction of a second cargo terminal at its hub in Doha, and by investing in its team.”