After five years of sluggish growth, the global economy will finally begin to pick up this year, which is good news for the air cargo industry, according to the International Air Transport Association.

“In 2017, we are expecting a modest acceleration in that growth,” said George Anjaparidze, senior economist at IATA, speaking at the 11th World Cargo Symposium in Abu Dhabi. “And this time, it’s real.”

The IATA estimate is based on the International Monetary Fund’s World Economic Outlook Update in January 2017, which expected global growth to rise from 3.1% in 2016 to 3.4% in 2017 and 3.6% in 2018.

The key issue behind the slow growth, according to Anjaparidze, has been the overall weakness of world trade.

“World trade used to grow at rates of about 1.5 times the growth rate of GDP,” he said. “Since the 2010 rebound after the financial crisis, global trade has struggled to keep pace with GDP growth. Actually, in 2016, world trade grew more slowly than GDP.”

Despite that, air cargo outperformed world trade in 2016.

“That’s only the second time that has happened since the 2010 rebound,” Anjaparidze said. “Over the course of the entire year, international freight tonne kilometres grew at 3.8% whereas world trade grew below 1.5%.”

One of the main reasons for that has been the broadening of growth in the Eurozone, which Anjaparidze classified as a structural factor.

“The latest data from the European Central Bank shows that 80% of sectors are growing,” he said. “Growth is also more balanced across sectors. In the Eurozone context, the economy is an open one that’s quite heavily dependent on air cargo, so that’s had a favourable demand impact on air cargo.

Another factor is the cyclical nature of economies. According to Anjaparidze, the pace of growth itself can be a driver of demand. For example, in upturn phases, FTK growth typically averages 3-5 percentage points above world trade, as companies rush to replenish inventories and source components to ramp up production schedules.

“In downturns, the opposite is true,” he said. “We observe declines in FTKs that are on average 5-7 percentage points below the growth of world trade because during a recession, the speed of delivery of components and final products becomes less important. In the second half of 2016, we really saw an improving environment for emerging markets, led in large part by China. This acceleration of growth helped boost air cargo demand.”

Air cargo performance can also be affected by disruption in other modes of transport. The South Korean shipping line Hanjin filed for receivership in August 2016 and was formally declared bankrupt by the Seoul Central District Court in February 2017. Anjaparidze said that this may have had a favourable impact on demand for international air freight, particularly in the fourth quarter, but stressed that the effect should not be overestimated.

What is clear is that the profitability of carriers in 2017 will be a function of capacity, fuel prices and yields.

The delivery of large numbers of widebody passenger aircraft means that the addition of cargo capacity is continuing to outpace demand. According to Boeing, six 747-8Fs, 13 767-300Fs and 11 777Fs were delivered in 2016, compared to three 747-8s, 88 777-300ERs, 35 787-8s and 102 787-9s. Airbus delivered just three A330-200Fs in 2016, out of a total of 66 A330s, 49 A350-900s and 28 A380s.

“When looking at new aircraft deliveries in 2016, we find that almost four times as much payload capacity was delivered in the bellies of widebody passenger aircraft compared to widebody freighters,” said Anjaparidze. “This bulging belly is contributing to the overcapacity situation on some trade lanes.”

He added that this is more of an issue on the Asia-Europe lane, where Boeing estimates freighters currently serve around 80% of the demand.

Jet fuel prices, which were between US$110 and US$140 per barrel from 2011 to mid-2014, plummeted to about US$40 per barrel at the beginning of 2016.

“But since the start of 2016, it has been on a gradual rise,” said Anjaparidze. “In fact, fuel prices have risen more than 70% since January 2016 lows. So it’s important to keep the fuel price dimension in mind when looking at yields.”

Even though yields remained mostly flat and increased somewhat in the second half of 2016, those increases have not kept pace with the increases in jet fuel prices.

“Yields in Q4 of 2016 were on average 6% lower compared to Q4 of 2015, while jet fuel prices were about 8% higher,” said Anjaparidze. “So capacity increases have made it hard for yields to go up with jet fuel prices and if this persists, we can see our profitability outlook become further strained.”

In addition, a number of risks lie ahead. Positive ones include a strong US economy, regulatory overhaul, infrastructure spending, normal inflation and broad growth, but on the downside are Brexit, the uncertainty from EU elections, capital outflows from emerging markets and a trade war.

IATA sees the risks being tilted toward the upside as those have a higher probability of materializing, which is why the association is optimistic about air cargo in the year ahead.

“On the demand side, we’ve seen a good start to 2017 and there are some positive tailwinds in the form of strong export orders and good consumer confidence,” said Anjaparidze. “So overall, our expectations for growth in 2017 are comparable to the growth we’ve seen in 2016.”