Tighten Your Seat Belts; More Turbulence Ahead

By Karen E. Thuermer

Published in Air Logistics Management, October 2012

 

            Industry analysts predicted 2012 would be the turnaround year for air cargo. But as the year nears its last Quarter, the industry remains a victim of the global recession. In fact, if air cargo is an early indicator of the worldwide economy – it’s time to put another notch in those seat belts. No smooth skies appear on the horizon.

Tenuous economic indicators are everywhere. In North America, manufacturing continues to be sluggish and money remains tight. In Europe, the European Union’s unending financial woes and troubled currency show little resolution. Economic indicators depict a softening Chinese economy in response to slower global trade. And in Latin America, particularly Brazil and Argentina, inflation is escalating. These factors, combined with high fuel costs, diminished cargo volumes, the cost of security and other challenges, and it’s easy to understand why the industry is troubled.

          Meanwhile, shippers continue to adjust supply chains and inventory holdings so that, only in rare instances, do they require air freight.

          “Many are beefing up their stock because the cost of carrying inventory is cheaper than the cost of air freight,” says Matt Parrott, director of transportation at A.N. Deringer.

At the June International Air Transport Association (IATA) meeting in Beijing, IATA Director General/CEO Tony Tyler told attendees that profitability within the airline industry is already “balancing on a knife’s edge.”

“If the bottom line worsens by even the equivalent of just 1% of revenue, our $3 billion profit very quickly becomes a $3 billion loss,” he said.

The deciding factor will be what happens economically in North America, Europe and Asia-Pacific — the world’s most important markets that encompass over 86 percent air cargo hauled. Mr. Tyler sees the crisis in the EuroZone as the industry’s biggest and most immediate threat.

“If it evolves into a banking crisis, we could face a continent-wide recession – dragging the rest of the world and our profits down,” he said.

Europe‘s biggest airline, Air France-KLM, has already seen losses widen to EUR895 million for the three months ending June 30, more than quadruple of the EUR197 million net loss accrued in the year-ago period. Officials say this was largely due to payouts to redundant staff.

In its latest report, IATA indicates slower growth in both air travel and freight, but with considerable variation by region and market. July freight demand was 3.2% lower than it was in the same month last year. This is down on the 0.1% year-on-year growth rate of June. IATA attributes a large part of that decline to a comparison with a relatively strong July last year, yet states that overall the trend in air freight is weak, in line with subdued world trade growth.

North American airlines’ international traffic fell 2.1% year-on-year in July (after rising 1.6% in June) in part owing to decisions to trim capacity, particularly on the North Atlantic market. Compared to June 2012, demand contracted by 1.3%. The load factor was 86.7%, the highest among all regions.

Asia-Pacific carriers saw demand growth of just 0.9% in July. This is a major slowdown from the 5.8% recorded in the June year-on-year comparison. Moreover, compared to the previous month (June 2012), demand contracted by 1.3%.

“European airlines appear to be benefiting more than Asia-Pacific airlines from the recently stronger trade flows from West to East, while the Middle Eastern airlines continue to offer strong competition on long-haul markets,” IATA writes. “The downward growth trend began in the second quarter of 2012 and has now continued into the third.”

Against this backdrop, IATA indicates Middle East carriers experienced the strongest traffic growth at 11.2% year-over-year, although this was surpassed by a 12.4% rise in capacity. Compared to June, traffic rose just 0.1%. The region’s growth trends were impacted by Ramadan, which commenced in July this year.

Etihad Crystal Cargo experienced an historic 22% year-over-year growth in freight tonnes carried during the first half of 2012; revenues jumped 13% percent. The Emirates Group posted a net profit of $629 million in 2011– its 24^th consecutive year of profit. Emirates added a staggering 22 new aircraft to its fleet, its highest in any single year, and ordered 50 additional B777-300ERs. It also added 11 new destinations and increased capacity to 34 cities, a record for the airline.

Middle East carriers are also shaking up global alliances. In September, Qantas Airways announced that it was entering into a 10-year alliance with Emirates that will see Dubai replace Singapore as the stopover point for its European services. The deal, which severs ties with British Airways and the OneWorld Alliance, is part of an effort to shore up losses from the Australian carrier’s diminishing international business.

Emirates President Tim Clarke hails the agreement, calling it “perhaps the start of a new thinking as to how the airline industry understands traffic flows across the planet.”

Meanwhile, airlines continue to reduce capacity, a move that has stabilized load factors at relatively high levels and provided some support for profitability in the face of high fuel prices.

Some, like Lufthansa Cargo, have switched capacity to more profitable routes. Lufthansa Cargo changed capacities from Asia to North America and added new destinations such as Detroit. Air France has canceled freighter service to Shanghai and is now focusing on markets in West Africa, the Indian Ocean, North America, Mexico, and Japan.

Carriers continue to retire freighters or exit that segment of the industry altogether. Jade Cargo quit the market in June due to ongoing weak demand to and from China. Air France Cargo is disposing of one Boeing 747-400ER freighter, which will reduce its fleet to two 747-400s and two Boeing 777 freighters. That’s down from a 12 cargo aircraft in 2009.

This year Cathay Pacific pulled three 747-400BCFs from its service. Cathay Pacific Group slipped into the red for the first half of 2012, reporting a new loss of US$120.5 million. The carrier, however, is adding three B747-8Fs over the next several years, bringing a total of 10 B747-8Fs to its fleet. Also on order are eight B777 freighters, which are scheduled for delivery between 2013 and 2016.

“Carriers have no choice but to renew their fleets with more fuel-efficient aircrafts, and this will continue to create over capacity during this period of low market growth,” comments Christian Sivière of Import Export Logistics Solutions in Montréal.

Meanwhile flurries of airline consolidations continue to afflict the market. The latest example is the merger between Chilean airline LAN and its Brazilian counterpart TAM.

“Consolidation will continue, in view of the low profitability of the airline industry and the capital required to renew fleets and to stay in business,” Mr. Sivière states. “But so far, the impact of the crisis has far outweighed the impact of airline consolidation.”

Despite today’s gloomy conditions, IATA’s Tyler offers a positive spin by noting how airlines have improved their competitiveness over the last 10 years. “Load factors have increased by 9.2 percentage points, and fuel efficiency is up by 24%,” he says. “Some 1.2 billion more people and 16 million more tonnes of cargo will fly this year than in 2001.”

Projections indicate an even more robust picture. IATA expects that by 2030 some 5.9 billion people will take to the air and cargo could triple to nearly 150 million tonnes.

“We should be optimistic about such a future,” Mr. Tyler exclaims. “But there are no guarantees.”