CSCMP's Supply Chain Quarterly
October 21, 2018

In a holding pattern

Although there are some bright spots in the air cargo market, generally flat cargo volumes coupled with increasing capacity are keeping things fairly calm for now.

The global heavy airfreight industry has remained in an uneasy stasis in 2012, mirroring the general conditions of the world economy. As is true of any market, the two primary drivers are supply and demand. With the global economy showing alternating flashes of growth and recession, then, the airfreight market will likely drift along for the rest of the year.

Overall demand remains flat
Demand in the passenger market has seen steady growth since bottoming out in 2009, and wide-body jets with significant cargo capacity continue to capture an increasing percentage of that market. Cargo volumes, by contrast, have given up all post-recession gains since growth trends turned downward in 2010. In most markets, cargo volumes are flat or down relative to 2011. One reason is that an increasing number of cargo shippers are relying on ocean freight instead of air freight to ship their goods overseas. As a result, cargo utilization continues to decrease in most markets, and cargo rates have echoed that trend.

Although overall worldwide demand is down, several regions, including Latin America and the Middle East, have shown rapid growth in airfreight volumes over the past year. In addition, while Asia has traditionally been (and continues to be) a source of exports, over the past year international trade has expanded on lanes **italic{into} Asian markets. This has driven increased demand for aircraft space on lanes that traditionally were considered back-hauls.

While yields on these lanes are not high enough to flip the westbound trans-Pacific into a head-haul or induce more freighters into service, the additional revenues are enhancing trans-Pacific carriers' bottom line. Moreover, the airfreight market is experiencing more "demand shocks" caused by sales of blockbuster electronic products like Apple's third-generation iPad. Airfreight rates and service availability will see increased variability as manufacturers continue to rely on event-driven sales as a marketing tactic.

More wide-body capacity
On the supply side, carriers seeking to capture the growth in passenger volumes have been adding new wide-body jets to their fleets at a rapid pace: 65 in the first quarter of 2012 alone, and this January was the busiest for deliveries in over four years. Both Airbus and Boeing are continuing to enlarge their order books, and carriers worldwide currently are awaiting the delivery of almost 4,000 wide-body jets.

Most of that new capacity will be devoted to keeping pace with the growing passenger market, where yields are continuing at pre-recession levels, according to the International Air Transport Association (IATA). Still, the addition of cargo capacity on passenger routes as more wide-bodies come online, together with flat-to-decreasing demand, will keep the pressure on cargo pricing and yields in most markets.

As carrier networks absorb this new capacity, wide-body network coverage continues to expand, with carriers adding or replacing many existing routes. Through April 2012, U.S. carriers added 61 weekly flights spread over destinations in Asia and Europe—more than double the rate of coverage growth experienced in 2011. These new routes have had the positive effect of increasing service options in a down cargo market.

Supply (capacity) and demand are not the only factors influencing pricing. The cost of jet fuel, which has experienced dramatic increases since 2010, continues to be the primary driver of airfreight-rate volatility. In the near term, at least, things may be calmer. While jet fuel prices are up about 9 percent since 2011, the U.S. Energy Information Administration is projecting flat prices through 2013.

A look down the runway
Where does all this leave the air cargo industry? As was the case in 2011, there may be short-term increases in cargo volume and rates that will be driven by market forces that are not yet very clear. Over the longer term, freight rates will be kept within a range—held down by slack capacity on the one hand, and pushed upward by what could be mistaken for an economic recovery led by the United States and developing markets on the other. Fuel costs will continue to be the unpredictable factor driving overall airfreight cost volatility.

One positive note: When robust economic growth begins in earnest, air cargo networks will have excess capacity in place on the major East-West routes to absorb growth without service interruption.

Joshua Brogan is a vice president in the Transportation practice of A.T. Kearney, a global strategy and management consulting firm.

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