Is there a way out of the hole for Asian airlines and the global air cargo industry? IATA, the international airline body, predicts improvement in the coming months but warns that the road is bumpy.
The industry’s predicament presents a stark contrast with the situation earlier in the year. The heady days of freighters filled to the rafters with Asian exports at premium rates to beat the paralysis at the US West Coast ports are barely half a year back, but they seem like a distant memory in a bleak market that is depressing yields and wiping out gains made in the first quarter of 2015. The boom of the early spring has turned into a summer of anxiety for airlines.
By the end of the second quarter, the surge from the first quarter had been nearly wiped out. Statistics from Airports Council International (ACI) show a paltry 0.9% growth in international air cargo traffic by June.
Hong Kong, the world’s top air cargo hub, registered 0.6% more cargo in the first half of 2015 than in the same period a year earlier. Shanghai Pudong and Incheon, Asia’s second- and third-busiest airfreight points, reported increases of 5% and 1.5% respectively.
“On the freight side of the business, air cargo demand began the year quite strongly but has lost momentum as a result of a slowdown in global trade and weaker demand for Asian exports,” said Andrew Herdman, director general of the Association of Asia Pacific Airlines (AAPA).
Figures for July released by IATA were equally dismal as ACI’s June numbers. They show a contraction of 0.6% in global airfreight in July, with declines across all regions except Africa and the Middle East.
AAPA reported a 2.2% drop in cargo demand during July. At the same time available freight capacity grew 2.9%, resulting in a 3.2% decline in the average international freight load factor to 62.1% for the month.
“The weak cargo market highlights some wider concerns about downside risks to the global macroeconomic outlook, including the effects of slower growth in China, exaggerated currency movements and stock market volatility, that could affect both business confidence and consumer demand going forward,” said Herdman.
The recent weakness in China’s international airfreight volumes also figured prominently in the analysis from IATA. “The combination of China’s continued shift towards domestic markets, wider weakness in emerging markets, and slowing global trade indicates that it will continue to be a rough ride for air cargo in the months to come,” IATA director general Tony Tyler said in a statement on the July results.
Mark Sutch, general manager of cargo sales and marketing at Cathay Pacific, noted that yields have been under severe pressure mainly as a result of overcapacity, for which he blamed an influx of freighter lift and slacker capacity management due to lower fuel costs and reduced operating risk.
Another factor that augurs ill for airlines is the divergence between passenger and cargo demand. Whereas AAPA carriers suffered a decline in cargo demand in July, their international passenger traffic climbed 6.5%. IATA registered 8.2% growth in passenger traffic in that month whereas cargo traffic fell. This indicates ongoing demand for passenger aircraft, adding more belly lift into a saturated market.
Unbowed by the dismal numbers, IATA has held on to its earlier prediction that airfreight volumes will improve in the months ahead as “economic growth and trade will improve in the second half of the year.”
Much will hinge on the development of the Chinese economy. Judging from historical patterns, the country should resume its growth trajectory before long, one pundit remarked, but added that volatility seems to have become a lasting feature of the new demand landscape.
The main long-haul markets for Asian goods show divergent fortunes. Maritime and global trade consultancy Hackett Associates observed recent gains in manufacturing and retail forecasts for Europe but warned that the region still faces “far too many political issues and economic problems” to warrant much optimism. In the US, GDP growth has outpaced predictions, but a high inventory-to-sales ratio remains a concern, according to Hackett.
Recent forecasts from US retailers and an increase in eastbound container volumes out of China suggest that peak traffic across the Pacific has begun to take shape. Shawn McWhorter, president for the Americas of Nippon Cargo Airlines, expressed optimism about the coming peak season, pointing out that by early September forwarders had begun to sign up additional charter capacity for the peak.
However, results for August show more grief for air cargo operators. Several major carriers reported declining cargo traffic, including Lufthansa (down 5.5%), IAG (down 4.8%) and Air France/KLM (down 8.9%). China Eastern (down 11.6%), LATAM (down 12.9%) and Delta (down 13.6%) suffered double-digit decreases.
For many carriers a recovery cannot come soon enough.
By Ian Putzger
Air Freight Correspondent | Toronto