CSCMP's Supply Chain Quarterly
Air
October 23, 2018
Air

On the rebound?

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Airfreight in the United States is seeing robust growth, as companies look for an alternative to high trucking rates and freighters move into smaller markets.

From an overall industry perspective, the airfreight industry is coming off a good year, with healthy growth in volumes and rates. This growth was a welcome change for a sector that was essentially stagnant for much of the past decade. In 2017, however, robust growth drove rates up by double digits. The shipping consultants Drewry reported average rates hitting highs over US$3.00/kg in late 2017, which put rates at their highest level in five years.1 The key question for shippers and industry players alike is whether this represents a true turnaround or just a temporary blip.

Not an island ...

Article Figures
[Figure 1] Freighter volume growth rates for key airports (2012-2017)
[Figure 1] Freighter volume growth rates for key airports (2012-2017) Enlarge this image
[Figure 2] Seasonally adjusted imports of consumer packaged goods (CPG)
[Figure 2] Seasonally adjusted imports of consumer packaged goods (CPG) Enlarge this image

When answering that question, it's important to realize that the U.S. airfreight market doesn't operate in a vacuum. It is clearly affected not only by the passenger side of the business but also by market dynamics in other modes of transportation. Indeed, the industry's current growth is partly being driven by the fact that road-freight pricing is at historic highs and truck capacity is tight.

As a result, transporting product from large, coastal gateways such as New York, New York, and Los Angeles, California, to the middle of the country by truck is much more expensive than it was a few years ago. This shift changes the dynamics of the total cost to deliver and is causing shippers to view air freight much more favorably. At the same time, the increasing importance of e-commerce and its dependence on fast delivery times are also pressuring shippers to look to cargo airlines to support critical locations like Ohio, Kentucky, and Indiana with faster service and lower cartage costs.

While demand is up for airfreight to smaller markets, passenger airlines are mostly focused on chasing passenger revenue, which has also been growing robustly. As a result, they are adding larger planes and more routes to key demographic areas and not smaller markets. This has created an opportunity for cargo airlines—those that operate freighters and don't cater to passengers—to build market share in smaller markets that are less-well-served by passenger routes. As a result, international freighter capacity has grown in markets like Dallas, Texas; Cincinnati, Ohio; and Boston, Massachusetts; at a much faster rate than in more traditional air hubs like Los Angeles; Miami, Florida; and New York (see Figure 1). The growth of nontraditional air hubs is possible because, especially over the past year, the heavyweight airfreight industry has experienced a significant rebound in cargo volumes due to general economic growth.

The strong growth in passenger traffic has also played a role in airfreight capacity the past year. Simply put, demand growth exceeded capacity growth from 2016 through 2017. But in the second quarter of 2018, this trend reversed. And since then, growth in airfreight capacity has continued at a rapid pace, but the growth of airfreight volumes has slowed. The International Air Transport Association (IATA) reports that, at the industry level, total capacity increased around 6 percent.2 Capacity growth now exceeds the 4-percent demand growth rate expected in the market for 2018.3

The tariff effect

Whether or not airfreight will continue to see increased demand and rising rates will depend on the impact of the growing number of tariffs and the increasingly likely trade wars. We expect that demand will be tamped down when tariffs begin to hit electronics and other air-focused commodities.

In fact, we might already be seeing the effects. If you look at the U.S. Census data for imported consumer packaged goods (CPG) over time, you see a large buildup in demand that peaks in Q1 of 2018 (see Figure 2) and then sharply drops. Imports, while still robust by recent standards, have already fallen away from their 12-month peak, and seasonally adjusted volumes are down some 27 percent in May 2018 relative to February highs. Based on increased prices driven by tariffs, volumes could be poised to continue that downward slide. If that trend continues, the airfreight market could be even tougher than economists have predicted for carriers and forwarders.4

And yet, airfreight can be a valuable tool to respond to a dynamic marketplace. As new tariff increases are announced, shippers will scramble to get product distributed ahead of implementation. The punishing level of tariff rates is high enough that shippers will choose to ship by airfreight instead of by ocean—which is less expensive but slower and less predictable—just to make sure that products are already in the country before the tariffs go into effect. As the government continues to announce new tariffs, shippers can expect to see temporary airfreight capacity crunches, which will, in turn, impact pricing and service levels.

Given these trends, industry experts like Drewry expect further rate level increases. But the uncertainty ahead, especially in terms of international trade, means both shippers and carriers can expect their fair share of challenges in servicing their customers. Demand spikes and lulls will drive service levels in terms of booking availability and rate variability. But despite economic and political volatility, shipping growth is here to stay, and by moving into smaller and more widespread markets, the airfreight industry seems poised to take over more share.

 

Notes:

1."Airfreight rates slip in May but bounceback expected for June," Air Cargo News, Feb. 7, 2018, https://www.aircargonews.net/news/airline/freighter-operator/single-view/news/airfreight-rates-slip-in-may-but-bounceback-expected-for-june.html

2."Air freight volumes look to resume a modest uptrend," IATA Air Freight Market Analysis May 2018, https://www.iata.org/publications/economics/Reports/freight-monthly-analysis/freight-analysis-may-2018.pdf

3.Ibid.

4.Patrick Burnson, "2018 Rate Outlook: Economic Expansion, Pushing Rates Skyward," Logistics Management, Jan. 12, 2018, https://www.logisticsmgmt.com/article/2018_rate_outlook_economic_expansion_pushing

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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