The year 2011 began auspiciously for the heavyweight air cargo market, which had recovered much of the volume it had lost and the rate concessions it had made during the 2009 freight depression.
During the economic downturn, air carriers focused on improving their operational efficiency in an effort to stem losses in a very tough market. They re-examined everything from baggage and cargo handling processes to maximum take-off mass (MTOM). As a result, carriers were well poised for a return to profitability in 2010. Things certainly were looking up from the carriers' point of view: The International Air Transport Association (IATA) reported a new high in demand for cargo services on both freighters and passenger aircraft in the second quarter of 2010, and many of them did in fact have banner years. At the same time, market conditions for transport and fuel had driven airfreight rates higher than they were before the 2009 collapse.
Although 2010 and the first part of 2011 brought good news for the carriers, the outlook for the rest of 2011 appears mixed for several reasons. For one thing, the rate at which new aircraft are entering into service is greater than the projected increases in airfreight demand. As a result, rates generally are declining in most markets relative to where they started in 2011. But that is likely to be temporary. While inflationary factors (mostly fuel) have eased somewhat in June, where they go from here is uncertain. In addition, global political uncertainty arising from such events as the revolutions in the Middle East could generate large price shocks in oil markets. Further clouding the airline industry's overall financial picture are variable exchange rates; sovereign debt default in the countries like Portugal, Ireland, Greece, and Spain; and unclear patterns in consumer demand.
Carriers invest in capacity
Despite all that uncertainty, airlines are lining up to invest in new aircraft. Equipment makers Boeing and Airbus have delivered a combined 480 aircraft to their customers in the first half of 2011, including 97 new widebody planes. Their order books are expanding, with new orders for 948 more aircraft on the way. While most of these aircraft will be entering passenger service, their entry will impact air cargo capacity as well.
This level of investment suggests that carriers will soon encounter some economic turbulence, as the rate of aircraft delivery is outpacing projections for near-term growth in the airfreight market. In May 2011, for instance, capacity grew by 2.8 percent over the prior year while demand declined by 4 percent.
Given this discrepancy between the growth in supply and demand, load factors (the percentage of an aircraft's payload capacity that is actually filled) will decrease until the world economy starts to expand again. International freight load factors have already begun declining year-on-year, and that trend is expected to continue for some time. Moreover, with consumer confidence down over the past few months and gross domestic product (GDP) growth in developed countries predicted to be in the 2-percent range, there should be plenty of capacity through the rest of 2011.
How will all that affect freight rates? With base rates for cargo under pressure for economic reasons and capacity increasing, airfreight rates are unlikely to spike in the short term. But higher rates are likely over the next few years as stronger demand and fuel-price pressures will more than offset increases in cargo capacity. Increased demand for fuel due to a recovering global economy is expected to push energy prices higher. The U.S. Department of Energy, in fact, currently predicts that the price of crude oil will average more than US $100 per barrel in 2012. Higher fuel surcharges, therefore, will be a primary driver of rising airfreight rates over the next one to two years.
The upside of expansion
From the shipper's standpoint, the addition of so many new aircraft will bring a number of benefits. For example, the expansion of airline fleets will allow carriers to increase their service offerings. Understandably, they are expanding them faster in their growth markets. For instance, Delta Airlines went from 28 weekly departures from the United States to China in 2008 to 47 weekly departures in July 2011. The deployment of additional aircraft on more routes will have a positive impact on lead times and space availability. Furthermore, the resulting competitive pressure should keep base freight rates in check. Better service and competitive rates will, in turn, improve the value proposition of air freight relative to surface modes. As the economy improves in 2012-13, air transport will become more costeffective for some shippers. One reason why is that a rise in consumer demand will renew the need for inventory replenishment. When it comes to quickly replenishing inventory, shippers of fast-moving consumer goods will be much more likely to choose air versus ocean.
Additionally those shippers that have taken a totalcost approach to supply chain management may find it beneficial to use more air freight in certain cases. For example, shifting from air to ocean will reduce transportation costs, but when inventory carrying costs are taken into account the overall cost picture may change. The total supply chain cost for highvalue shipments will actually be lower if they are shipped by air than if they are shipped by the much slower ocean route. The cost difference may especially be noticeable in situations where ocean carriers have increased their use of slow-steaming practices and thus lengthened their transit times.
To sum up, the current supply-and-demand relationship does not presage a run-up in airfreight pricing for the remainder of 2011. The rate picture for next few years, however, is less certain as higher fuel prices and growing demand will likely tip the balance toward higher prices for air cargo, despite increases in capacity.
On the plus side, increased capacity will lead to more service and routing options for shippers, making air freight a more attractive option compared to surface transport modes.
Copyright ©2023. All Rights ReservedDesign, CMS, Hosting & Web Development :: ePublishing