Recently, over a beer in a Bangkok bar, one leading air freight forwarder explained to your correspondent that air freight as an industry was now a completely different beast to the one he had originally started working in some 20+ years ago. “It’s not just the miniaturization of products and things like 3D printing, the whole idea of charging on a volumetric basis has been debunked,” he said. “In the future I can see multiple verticals finding new ways or producing goods which will erode demand for premium airport-to-airport services.”
     With more and more passenger flights adding to the large cache of structural freight uplift capacity in the market, he said that he had no idea how airlines operating large freighter fleets could be making profits on their operations at present, while for forwarders, margins were no longer available on point-to-point services. “It’s all about adding value either end, there’s no money in it otherwise,” he added.
     Driving margins by adding value in a commoditized air freight sector tends to favor the largest forwarders and 3PLs with global networks, experienced staff, and the ability to differentiate on service and product. This way they can turn handy profit on a low yield business by meeting the specific needs of shippers—a point reinforced by the tranche of recent financial results released by the leading players, which are, for the most part, still recording decent returns on their air forwarding businesses, even as many smaller agents and national or regional players are making cutbacks just to stay in business.
     Certainly, the ‘new normal’ of excess capacity and sluggish demand seems certain to continue putting the squeeze on many in the industry, although the latest volume and yield figures did point towards a slight upturn.
     IATA said that global air freight markets in April had seen a 3.2 percent increase in demand measured in freight ton kilometers (FTKs) compared to the same period last year, although yields had remained pressured as capacity increased 6.6 percent.
     “The increase in demand was broad-based across all regions, with the exception of Latin America,” said IATA. “The strongest growth occurred in the Middle East and Europe, with April demand up by 7.7 percent and 6.8 percent, respectively, compared to the same period last year.”
     However, IATA also pointed out that while growth appeared to be stronger than in the preceding months of 2016, this was largely due to the disappearance of distorting factors associated with the 2015 U.S. West Coast seaport strikes from the comparison data.
     “Overall, the demand for air cargo remains soft and lags behind the relatively robust growth on the passenger side of the business,” said IATA. “This is largely driven by weak world trade. The first quarter of 2016 saw the first annual decline in trade volumes since the global financial crisis in 2009, and the World Trade Organization (WTO) predicts only sluggish growth for the remainder of 2016.”
     Stifel and Drewry’s latest analysis of the air freight sector also concluded that oversupply had dramatically increased in the past year, as passenger traffic had continued to grow at a much faster rate than freight traffic, while demand remained relatively weak. “Since air cargo demand is not the main driver of most airline belly capacity decisions, we would think airfreight would tend toward overcapacity,” said Stifel.
     Drewry’s East-West Airfreight Price Index moved up 0.9 points in April to a reading of 80.4, after March’s 0.3 point gain. This followed a period of four consecutive months during which the index declined over 20 points after peaking in October.
     “Drewry expects airfreight pricing to remain under pressure, with further deterioration anticipated into the Northern Hemisphere’s summer months as more passenger aircraft are brought in to service to support the peak tourist season,” said the analyst.
     The Association of Asia Pacific Airlines (AAPA) also said its April figures showed a continuation of established trends—steady growth in international air passenger demand and weak air cargo demand. Indeed, April saw the region’s airlines carry 24.2 million international passengers, a 4.8 percent increase compared to the same month last year on the back of continued strong regional demand. By contrast, air cargo demand was flat, with volumes in freight ton kilometer terms similar to those registered in the same month last year.
     The ‘between the devil and the deep blue sea’ scenario of ever expanding bellyhold capacity alongside slow macroeconomic growth and freight demand saw the average freight load factor for AAPA carriers fall by 1.7 percentage points to 61.7 percent year-on-year in April, after accounting for a 2.8 percent expansion in offered freight capacity.
     AAPA Director General Andrew Herdman described international air cargo markets as “weak” reflecting “lackluster global trade conditions.”
     IATA’s Director General and CEO Tony Tyler said that while the April uptick in demand growth for air cargo was encouraging, the overall economic environment was not. “The decline in global trade does not bode well for air cargo markets in the months ahead,” he added.
     Unless, that is, you are a forwarder with a clear strategy and a significant global footprint!
Sky King