Improved global trade, the e-commerce boom and an accompanying tightening of the industrial real estate market have helped air cargo volumes, which account for just 1 percent of world trade by volume but 35 percent by value, to new heights this year.
The air cargo industry has been experiencing strong growth as the rising e-commerce sector and a stronger global economy have led shippers to increasingly turn to air transport, leaving many questioning how long this trend will continue, and what impact, if any, it will have on the ocean freight market.
While air transport provides speed and reliability, which is especially desirable as consumers continue to increase their expectations for faster and faster delivery times, maritime transport is much less expensive. According to Boeing’s World Air Cargo Forecast for 2016-2017, containership pricing is typically 10 to 20 times cheaper than air cargo per unit weight.
Air cargo accounts for less than 1 percent of world trade tonnage, but due to the relatively high value of those shipments, that 1 percent volume represents 35 percent of world trade by value.
“The highest value commodities, including computing equipment, machinery and electrical equipment, account for the highest share of airborne trade tonnage versus their share of containership tonnage,” Boeing said.
First-Half Flourish. Airfreight volumes—measured in freight tonne kilometers (FTK)—grew 10.4 percent in the first half of 2017 compared to the corresponding 2016 period, according to the International Air Transport Association (IATA).
“This was the strongest first half-year performance since air cargo’s rebound from the Global Financial Crisis in 2010 and nearly triple the industry’s average growth rate of 3.9 percent over the last five years,” IATA said.
At the same time, airfreight capacity—measured in available FTKs—grew just 3.6 percent year-over-year during the first six months of the year. “Demand growth continues to significantly outstrip capacity growth, which is positive for yields,” IATA said.
In July alone, IATA said airfreight demand jumped 11.4 percent from July 2016, illustrating how the air cargo industry still hasn’t let up from this breakneck growth pace.
During the second quarter of 2017, CEVA Logistics’ freight management division saw airfreight volumes skyrocket 15.6 percent year-over-year—with notable growth on the transpacific and intra-Asia trades—while the Netherlands-based third-party logistics provider’s ocean freight volumes experienced a modest increase of 3.5 percent.
And it wasn’t just CEVA. This trend of airfreight volume growth outpacing growth in ocean freight could be seen across the 3PL industry, with DHL’s global forwarding and freight division, DB Schenker and Kuehne + Nagel all experiencing higher year-over-year volume growth in airfreight than ocean freight for the first half of 2017.
DHL’s global forwarding and freight division’s airfreight volumes for the first half of 2017 increased 12.6 percent from the corresponding 2016 period, while its ocean freight volumes rose 6.5 percent; and at DB Schenker, airfreight volumes rose 11.4 percent from the first half of 2016, while its ocean freight volumes rose 8.9 percent.
At Kuehne + Nagel, airfreight volumes for the first half of the year soared 18 percent compared with the first half of 2016, while its ocean freight volumes ticked up 7.7 percent.
“In sea freight, Kuehne + Nagel gained market shares in almost all trades and exceeded market growth,” a Kuehne + Nagel spokesperson told American Shipper. “The stronger increase in international airfreight was mainly driven by restocking activities, high consumer confidence and e-commerce.”
Steady Tailwinds. A return of growth in the U.S. and European economies has helped strengthen the air cargo industry, David Ross, managing director at investment bank Stifel said in a phone interview with American Shipper.
Airports Council International, a global trade association that represents airport interests, said, “After a period of economic uncertainty regarding the United States trade policy and risks related to the United Kingdom’s vote to withdraw from the European Union, global commerce is no longer sidelined. The rise in business confidence translated into a robust recovery in airfreight volumes in 2017.”
“The rising e-commerce sector has a major impact on demand for airfreight, as consumers expect goods to be available faster than ever before,” the Kuehne + Nagel spokesperson added.
Aircraft manufacturer Boeing’s World Air Cargo Forecast for 2016-2017 also noted how surging global e-commerce looks set to continue to bolster air cargo growth over the next few years.
“The Asia-Pacific region is the fastest growing e-commerce trading bloc, with China at the forefront,” Boeing said. “China is the world’s largest e-commerce market with $590 billion of goods sold in 2015. Online retail sales in China were half that of the U.S. in 2010 and by 2013, surpassed the U.S., growing at an average of 56 percent per year. Domestic China parcel shipments and revenue grew 55 percent and 39 percent per year, respectively, from 2010 to 2015. It is forecast that by 2020, China’s e-commerce market will be bigger than the combined existing markets of the U.S., Britain, Japan, Germany and France.”
Ross noted that just this year, state-owned postal service China Post launched regular flights between China and the United States, filled with strictly e-commerce airfreight.
He also explained that healthcare and pharmaceutical products, which rely heavily on air transport due to their high value and often perishable nature, continues to be a growth industry, adding more fuel to the airfreight fire.
In addition, Ross said that higher warehousing costs—also spurred by tightening capacity from a deluge of e-commerce freight—have helped increase air volumes. Goods that are shipped by ocean, for example, are more likely to sit in a warehouse longer after arriving in port, whereas air transport tends to offer more direct transit options.
“Healthy consumer spending and buoyant e-commerce sales are driving demand for warehouse and distribution space, pushing vacancy rates to a 17-year low and rents through the roof,” industrial real estate services and investment management firm JLL noted back in June.
With warehousing capacity being squeezed, pricing is likely to continue to rise as well, further compounding the already outsized affect of e-commerce on global trade flows. It won’t bring air cargo costs down to the still dangerously low level of ocean freight rates, but if storing goods in transit adds a significant amount to a shipper’s total landed cost, airfreight will naturally become a more attractive option.
Turbulence Ahead? Although the air cargo industry has held strong throughout 2017, there are signs that airfreight demand growth may be reaching its peak.
“Seasonally-adjusted airfreight volumes were flat in June and fell in July; and the global inventory-to-sales ratio has stabilized,” IATA said. “Air cargo often sees a boost in demand at the beginning of an economic upturn as companies look to restock inventories quickly. This tapers as inventories are adjusted to new demand levels.”
The Kuehne + Nagel spokesperson said the third-party logistics provider expects airfreight demand growth to remain strong, but below the levels seen so far this year.
Ross said that most airfreight forwarders that Stifel has talked to expect demand to hold steady for at least the remainder of the year, pointing out that a high percentage of flights from Asia are sold out right now. However, the air cargo industry could face some turbulence if the global economy doesn’t continue its upward trend, he explained.
American Airlines Cargo President Rick Elieson holds an optimistic view for the future of air cargo.
“Things are looking very positive for 2017 and beyond. This is a difficult industry to forecast, but all the signs I see at present show a trend that’s continuing upward,” Elieson told American Shipper.
“I don’t take any success for granted, but with the focus and determination our team has, there is certainly a lot of opportunity in front of us,” he added. “Healthcare and pharmaceuticals seem to be hot right now, but they have been important to American for many years. With the opening of our global pharma hub at PHL in 2015, that side of the business has gone from being strong to a point of true distinction on both active and passive shipments.”
According to Boeing’s annual Current Market Outlook for 2017-2036, the aircraft manufacturer shares Elieson’s optimism.
“As global GDP and world trade growth continues, air cargo traffic, as measured in revenue tonne-kilometers, is projected to grow an average of 4.2 percent per year over the next 20 years,” the report said.
While passenger airlines and dedicated freighters both transport cargo, dedicated freighter services provide a combination of reliability, predictability, and control over timing and routing that is often better than that of passenger operators, Boeing added.
“As a result, freighters are expected to continue carrying more than half of global air cargo to satisfy the demanding requirements of that market,” the company said. “Replacement of aging airplanes, plus the industry’s growth requirements, will create a demand for 2,480 freighter deliveries over the next 20 years.”
Boeing projects 1,560 of these freighter deliveries will be passenger airplane conversions, while the remaining 920 airplanes will be new.
“The overall freighter fleet will increase by more than half—from 1,810 airplanes in 2016 to 3,030 by 2036,” Boeing said.
Rival Airbus’ Global Market Forecast for 2017-2036 revealed a more modest outlook for freighter aircraft demand, however. Airbus forecasts demand for 1,950 freighter aircraft, consisting of 730 newbuild aircraft and 1,220 conversions, over the next two decades.