Air cargo took a dip into negative territory in June for the first time in over three years. IATA figures showed a 0.8% fall in traffic, the first monthly decline since May 2005. Statistics from other organisations also show a downward trend. The Association of Asia Pacific Airlines recorded a fall of 4% in cargo traffic for June, while the Association of European Airlines, the Airports Council International and the US Bureau of Transportation Statistics all show modest growth at the start of 2008 trending down near to zero by mid-year. July continued the trend, with IATA showing a 1.9% fall, and the AAPA recording a drop of 5.5%.
Whether this marks the start of a wider downturn in air cargo, and how big that downturn might be, is anyone's guess. The answer depends on whether the global economy - and so global trade - is in for a prolonged recession or a short-term dip. In cargo, it is the period from late August to early November - the pre-Christmas peak season - that really matters. Any trend will therefore not be clear until January or February.
One thing that can be stated with certainty is that the picture is not yet as bad as in 2001, when a pronounced dip was evident as early in the year as April.
"Then, every area of the global economy was slowing: now there are areas of strength," says IATA chief economist Brian Pearce. "We are seeing a slowdown in world trade, but no contraction because of growth in Asia. China is still exporting, and the weakness of the dollar means its exports are seeing an 8-10% growth." For this reason, Pearce expects that there will be slow growth but no actual declines in traffic this year.
Carriers generally agree with this assessment. For instance, Robert van de Weg, senior vice-president sales and marketing at Cargolux, says demand growth is slow but not negative, while Ram Menen, divisional senior vice-president cargo at Emirates, points out that key markets are "pretty much at status quo" at the moment.
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"We are optimistic not because of demand, but because the supply of capacity is reducing,"Robert Van Der Weg |
The retreat of oil prices from their summer peaks is a cause of relief for all in the aviation industry, of course, but it is worth noting, as Pearce does, that oil prices at $110 a barrel are still 50% higher than they were on average in 2007. The cargo sector, particularly freighter operators, was screaming earlier this year when fuel hit $110 a barrel: even at that level, says van de Weg, operating Cargolux's state-of-the-art, factory-built Boeing 747-400 freighters was a challenge.
Hiran Perera, who is in charge of freighter operations at Emirates, says even 747-400 freighter conversions are uneconomical at over $100 a barrel. That being said, if oil eases to $80-90 a barrel, most efficient cargo carriers could probably bear it. Air France, for example, says it became the launch customer for the 777-200 freighter - due for delivery in November - on the basis of $80-a-barrel oil.
It has to be whispered that oil prices of up to $147 a barrel have not been all bad news for air cargo. They have had the effect of vastly accelerating the retirement of older freighters - mainly 747-200Fs - as well as causing some of the more ambitious airlines to sobre up and adopt less bullish expansion plans.
The retirement of 747-200Fs has been dramatic and, for some carriers, painful. Air France took an early lead, scrapping its three remaining 747-200Fs late last year instead of keeping them to tide it over until 777F deliveries start. It dry-leased a 747-400 conversion and took over a factory-built 747-400ERF that was delivered to KLM in October to cover the capacity shortfall. Even so Marc Boudier, Air France Cargo's former executive vice-president cargo, who retired in mid-September, says the result was a 5% cut in main deck capacity for the carrier.
Nippon Cargo Airlines also waved goodbye to the last of its 747-200Fs earlier this year - it will eventually get 747-8Fs to make up for the loss, but in the meantime is foregoing capacity growth. Japan Airlines intends to retire its remaining 747-200Fs this year, while Cathay Pacific/Dragonair is phasing out four this year and two next year (although they plan to keep two for intra-Asian routes).
Northwest Airlines, which started the year with 13 747-200Fs in its fleet, having famously declined to upgrade to 747-400Fs, also retired three over the summer. The future of the rest of the fleet looks highly doubtful under the planned merger with Delta.
Perhaps even more significant than these phase-outs by major airlines is the failure of a number of secondary airlines this year. Air France's six 747-200Fs were due to go to Ocean Airlines of Italy, but it was grounded in January and declared bankrupt in May. Malaysian carrier Transmile (operating Boeing MD-11 freighters), Kitty Hawk of the USA, wet-lessors Tradewinds and Gemini, and Variglog of Brazil are other carriers that have succumbed to the high oil prices, taking their older freighters with them.
This is cheerful news for carriers with modern equipment such as Cargolux, which has been predicting just such an eventuality all year. Van de Weg says that the removal of capacity gives it hope of better yields in the coming months.
"We are optimistic not because of demand, but because the supply of capacity is reducing," he says. Boudier also believes there would have been "terrible overcapacity" had these older freighters not gone out of the market. "As it is, capacity has adjusted nicely to demand," he says.
Some reflection of this can be seen in the AAPA figures for June, which show not only that cargo traffic for its members dipped 4%, but that capacity fell 5%, while in July capacity was down 5.9% on a 5.5% fall in traffic. IATA figures show that the global picture is not quite so good, with capacity up 2% in July despite the 1.9% fall in traffic, while first half capacity rose 4.6% on a 2.4% traffic rise.
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© Qatar Airways |
But Pearce is relatively optimistic, believing that in this downturn cargo is going to avoid the overcapacity that characterised the 1991 and 2001 downturns. Then, like now, the slowdown occurred just as freighter deliveries were about to peak - currently there are 75 777 freighters on order, with deliveries due to start later this year, 78 747-8Fs due from late 2009 onwards, and 77 Airbus A330 freighters scheduled to come on-stream around the same time.
Both Boeing and Israel Aircraft Industries also have full order books for years to come for 747-400 conversions, although some of these are waiting on A380 and 787 deliveries to free up the conversion candidates from passenger fleets.
Pearce forecasts this might produce some overcapacity, but much more muted than in the past. And of course, much depends on how long or short the slowdown for cargo is. The industry has a history of rebounding sharply from downturns, and that rebound may well occur some time next year, chiming in well with the flood of new freighter deliveries.
All of this assumes that there will be a slowdown in the growth of belly capacity. Air France's 5% fall in freighter capacity will be negated by the rise in belly-hold space as 777-300ERs, which can carry 25 tonnes of cargo per flight, join its fleet over the coming months, leading to a 1% rise in cargo capacity overall. Emirates is also seeing big capacity rises which have enabled it to sharply cut freighter operations to India, while maintaining the same cargo capacity.
On the other hand, the very fact that Emirates is trimming freighter capacity to match the belly cargo growth in this market is a sign that the Asian operators in particular are being a lot more responsible in this downturn than in the past. For instance, Korean Air Cargo, which once seemed determined to add capacity regardless of market conditions, has reined back on expansion, scrapping a new freighter service to Chengdu in China earlier this year.
Meanwhile, Cathay Pacific, despite having a large number of new freighters joining its fleet in the coming year, is retiring old capacity in proportion, ensuring that its fleet will only grow by two units to 28 freighters this year, and 29 by the end of 2009.
Singapore Airlines has also been pursuing a policy of flexible capacity in its freighter schedule since late 2006, according to senior vice-president sales and marketing Tan Tiow Kor. "The principle is that at peak periods we run our full capacity, with all the resources we have. But in other months we reduce our scheduled freighters," he says.
"For example, to the US or Europe, off-peak flights may be up to 20% less than in the peak season." Overall, adds Tan, the approach has produced a pronounced yield improvement in the first half of the year for SIA, despite a decline in traffic.
Elsewhere in the world, the high fuel price is causing carriers to look carefully at freighter routes, which has resulted in some longer sections being axed. Northwest stopped flights to Guangzhou earlier this year, a market it had chosen over Hong Kong with great fanfare little over a year before, while Cargolux took the painful decision to withdraw from San Francisco after 25 years because the fuel cost was not justified by its earnings on the route.
From a short-term perspective, the outlook for the air cargo business does not look too bad, and the measures it is taking to deal with it seem measured and responsible.
But some air cargo managers are still worried. Several note the discrepancy between the well-used Boeing forecasts - the latest of which still talks of 5.8% annualised growth over the next 20 years - and the lower growth seen recently.
Boudier points out that the rot really started in the fourth quarter of 2006, when air cargo grew only 2%, rather than the 5% average in the first three quarters of that year. In 2007 the figure was 4.3%, and in the first half of 2008 it was 2.4%.
These are still respectable growth figures, but what bothers Boudier is that during the same period, global trade has been booming - it rose 7.5% in 2007, for example. The passenger side of the business has also been buoyant and so has sea freight. "When you see a strange slowing of growth like that when all other indicators are performing well, then it is a signal that a long-term trend is at work," he points out.
One possible culprit is a shift in traffic from air freight to sea freight, driven by high fuel prices and the fact that sea freight is becoming more efficient and more able to deliver goods by a specified date. Pearce agrees that this is a trend, and the figures of leading freight forwarders confirm it too. For example, global logistics giant Panalpina saw a 7.5% rise in ocean freight in 2007, but only 4.3% in air cargo. It believes the air freight market as a whole grew 2.3% in the first half of 2008 while ocean freight grew by 5.6%.
Air cargo managers are split into two camps on the topic of air vs sea freight. Some, such as Menen at Emirates and Ron Mathison, outgoing director and general manager cargo at Cathay Pacific, dismiss it as a short-term trend or one that has always been there and is now just being overplayed.
Others can point to worrying examples of how sea freight has removed formerly lucrative air freight markets. At American Airlines, for example, president cargo Dave Brooks says that the shipment of seafood from Chile to the USA - formerly a mainstay of the Latin American cargo operations - has declined as exporters move towards freezing their products and sending them by sea instead. He has also seen a decline in the movement of automotive parts by air.
"The just-in-time equation that supported our business for many years is being eroded, and until fuel comes down in price I am not smart enough to figure out how to get it back," says Brooks. "For every product that can support a fuel surcharge, there are many products that cannot. When you see forecasts predicting 6% growth in air cargo - well, we are not going to get anything like that."
An even bigger worry might be that the kind of consumer product innovation that has been a mainstay of air freight for so long - the new must-have mobile phones or LCD screens for computers - is slackening off. Boudier believes many of these items have now become mass market items, meaning they are produced in bulk and shipped by sea.
"I think that brings into doubt some of the classical statements of air freight - that technology is air-freight friendly, that express will grow faster than general cargo, and so on," he says. "There will be a rebound after the present crisis for sure, but the question is what the post-crisis trend will be. I think air freight will recover some of the traffic it has lost, but not all of it."
For more on the shift of some types of cargo from air to sea freight, see: flightglobal.com/cargo
Source: Airline Business
