Air freight set for further falls

PMI and inventory-to-sales data suggest several more months of declining demand, notably ex-China, although the long-term prospects remain positive.

Air freight is facing several more months of declining global demand, with various trade indicators pointing towards falling volumes from key markets until at least this summer, although the long-term prospects remain very positive, key industry specialists told last week’s Air Cargo News conference in London.

Marco Bloemen, managing director of air freight data specialist Seabury Consulting, highlighted in particular Purchasing Managers Index (PMI) figures for China, the US and Europe, and also US inventory-to-sales ratio figures, that normally provide strong predictive indications of air freight’s performance in the following three months. These accurately predicted the year-on-year decline in global air freight volumes in the final months of last year that has continued into 2019. And with all of those figures currently in negative territory, air freight exports from China look set to be down, year-on-year, until at least July, with air exports from the Eurozone set to remain in negative territory until at least the end of May.

Bloemen noted that if the Chinese air freight exports are not growing, “then the rest of the world is affected. It is not just China, there are other factors; but China is really big part,” he said. According to Seabury figures, Global air freight volumes fell by around 2.7% in the three months from December to February – mostly due to declines in transpacific and intra-Asia traffic – but volumes out of China fell by around 7% during that time. Of the major global air freight trade lanes, Europe to North America was the only lane to record positive growth during that period.

In terms of commodity types, fashion goods volumes fell by 7%, consumer goods by 6%, automotive shipments fell by 5%, and high-tech shipments by 4%. The only significant increases during that period came from temperature-controlled products, which saw around 9% growth, and around 20% growth in the relatively minor live animals sector.

Commenting on the general trends, Bloemen said: “We are seeing that inventory is growing faster than sales for the first few months (of 2019). The (inventory-to-sales) figures we have are only for the US, but we think it is also the case worldwide, and that is hitting the air freight business.”

Other important trends have included the price of fuel, which is 36% higher now compared with mid 2017. Alongside adding to the costs of airlines and their cargo customers, he said that if fuel prices go up further, this could put freighter operations under pressure.

One bright spot has been the continuing strong demand growth from e-commerce business, which has contributed to a compound annual growth rate (CAGR) for international mail parcels carried by air of more than 13% a year from 2006 to 2018, and growth of air express traffic annually of 5.8% during that time. That compares with general air freight growth of 1.8% and a decline in letter mail annually averaging around 3.4%.

Even though the volumes of international mail parcels has been growing from a relatively small base, this “starts to matter” because of the strong double-digit growth rates, he noted. Global e-commerce markets have seen around 26% average CAGR between 2012 and 2017, he noted.

E-commerce trends have also affected the average weight of air express shipments, which have fallen from around 16 kg in 2011 to 12.7 kg and 2018. This is not because B2B shipments are getting smaller; it is because there are more B2C shipments – which are, on average, smaller – Bloemen explained.

On the capacity side, capacity growth coming from the introduction of new passenger aircraft bellies has averaged around 6% in recent years, but this year it is likely to be significantly lower, at around 2.7%, which may help limit the downwards pressure on pricing resulting from the expected weak air freight demand growth this year.

In terms of global orders for new freighter aircraft, these are appeared to be drying up, Bloemen highlighted. However, other commentators noted that the demand for ever-newer passenger aircraft was making passenger aircraft available for conversion to freighters at an earlier point in the life cycle, with these converted freighters not appearing on the Seabury new freighter aircraft order data.

Looking again at demand trends for 2019, Bloemen said global air freight volumes in the first quarter (Q1) had fallen, year on year (YoY) by 2-3%, with Q2 also looking like being negative. But by the fourth quarter, because volumes “fell off a cliff” in Q4 2018, the YoY comparisons may return to positive territory, Bloemen said.

Nevertheless, Lufthansa Cargo CEO and executive chairman Peter Gerber, who is also chairman of IATA’s Cargo Committee, remains positive in his view of the sector’s long-term prospects.

Compared with December 2018, he said the rate of YoY falls had slowed down in early 2019, and said “the market is shrinking from a very high level”. Noting that in late 2017 and the early months of 2018, there was “so much demand that we could barely handle it”, he said that although the shrinkage in the last few months was a concern, it was “not catastrophic”.

Gerber believes the softening of demand in early 2019 may be due to caution among customers in response to global economic and trade uncertainties, such as the US-China trade tensions and Brexit. He said it was difficult to anticipate what is going to happen in the second half of 2019, but he was positive that some resolution of the US-China trade disputes may help bring a good second half of the year – and growth overall for 2019 as a whole.

And he stressed to the conference that the long-term prospects for air freight remain very positive – not least because of the growth of e-commerce, but also rising global populations and wealth levels that are creating millions of new consumers each year that are potential customers of air freight.

Source: lloyd’s