SkyÆs the limit?
Shippers eye peak season supply as air freight market soars.
By Eric Kulisch
The revival of air cargo business during the fourth quarter of 2009 has carried forward during the first half of 2010 and led to airlines offering optimistic projections for near-term financial performance.
All-cargo operators have been gradually reintroducing capacity during the past six months as consumer demand picks up and shippers face difficulties moving more orders to end markets via an ocean liner industry with constrained supply. Tight air capacity, especially out of Asia, has allowed airlines to raise rates. But it is unclear if cargo owners will face delays getting space on aircraft during the traditional peak shipping season.
Nonetheless, shippers appear to be switching more cargo to air from ocean, and the trend is likely to continue into the fall, BB&T Capital Markets analyst Kevin Sterling said in a research note. So much freight moves by sea, analysts say, that even a small mode shift can have a significant impact on the air cargo market.
Large retailers such as The Limited are using cheaper warehouses in China to arrange store deliveries and then transport the merchandise by air to keep inventories low and store shelves stocked, Sterling said. The strategy is the opposite of using cheaper ocean transport and more expensive domestic logistics providers to sort shipments for particular stores, but it is a good way to manage the uncertain economic environment. Persistently high U.S. unemployment has retailers and economists worried about the sustainability of the recovery.
'If the consumer continues to spend, then a retailer will ship their product by air, but if the economy double-dips, then retailers are not stuck with a lot of inventory to discount,' he wrote.
John Dietrich, chief operating officer of Atlas Air Worldwide Holdings, agreed many battered retailers learned from the recession that having inventory on hand when demand wanes, and engaging in heavy discounting, is more costly than using air freight, despite the fact it is several times more expensive than ocean transport.
'I think fast retail will be the wave of the future, which bodes well for air cargo,' he said April 28 at the U.S. Chamber of Commerce's annual aviation summit.
Sterling estimated that if just 10 percent of fashion and apparel shippers switch to air it would result in an additional 2.5 million tons of air freight for the industry.
U.S. imports were up sharply in the first half of the year compared to 2009. The container liner industry, which suffered at least $15 billion in cumulative losses last year, has been careful about adding new vessel capacity too soon. That has led to a spike in ocean freight rates, particularly in the Asia-to-U.S. trade lane. Analysts and industry executives say the combination of tight ocean capacity, higher rates, large peak season surcharges, a shortage of containers, and slow steaming to save on fuel costs has led many shippers to contemplate air transport.
'Historically, when ocean freight rates spike and backlogs develop, there is a strong boost to peak season demand for air freight, as shippers shift modes in order to get their goods from Asia to Europe and North American in time for the holiday shopping season,' David Harris, editor of Cargo Facts, wrote in his blog. Cargo Facts is the monthly newsletter published by Air Cargo Management Group (ACMG), a Seattle-based consulting and information services firm.
IHS Global Insights forecast that containerized trade volumes would rise almost 10 percent this year ' slightly more on the mainline east/west trade lanes. The National Retail Federation's Global Port Tracker report estimates that container volume at U.S. ports increased 15 percent to 6.8 million TEUs during the first half of the year, but that the pace of growth will slow in the fall.
U.S. air freight volumes, as measured in revenue-ton miles, declined 21 percent last year, according to the Federal Aviation Administration. International volume fell 23 percent and domestic throughput dropped 17.7 percent. Cargo airlines, which handled almost three quarters of all shipments, experienced a 20 percent decline and cargo flown on passenger planes dropped 23.5 percent.
Almost nobody expected the air freight market to recover as quickly as it has, with volume now superseding even the record levels achieved in 2007 and early 2008.
'The cargo business is currently absolutely booming. For the first time in over 10 years we are seeing not just strong imports out of China, but also strong exports to China' as rising wages there drive demand for American and European goods, Lufthansa CFO Stephan Gernkow told Reuters television. The increase in Chinese demand has helped airlines improve their yields on backhaul flights, which traditionally struggle to produce enough revenue to cover operating costs. The revenue imbalance, for example, can be as much as 9-to-1 eastbound versus westbound on flights from Shanghai, according to an ACMG study.
Global air freight volume rose 26.5 percent in June, according to the International Air Transport Association. The rate of growth over 2009 is slowing, however, as businesses have mostly replenished depleted inventories. Volume was 34 percent higher in May versus May 2009. Movement in the semiconductor market from air to ocean, as chips fall in price, is another signal the restocking phase is ending, the association said. IATA added that May volumes were likely unusually high due to some volumes being held back in late April from the volcanic ash crisis in Europe.
The growth in air freight is uneven, with Europe lagging the rest of the world.
Volumes in June were 6 percent above the pre-recession peak in early 2008. IATA now predicts 18.5 percent freight growth this year from last, up from 12 percent in March. It also significantly increased its forecast for yields to 4.5 percent from 3.1 percent.
But the airline group said air freight stopped gaining share from ocean, and continued volume expansion is due to growth in consumer spending and global trade.
Many industry officials believe all-cargo operators will face even greater demand with the passage of the Aug. 1 deadline for screening 100 percent of U.S.-origin cargo, and a smaller amount of inbound volume. The new rule is expected to slow cargo loading for shippers and logistics companies that don't prescreen cargo, and some see freighters as an alternative. Government officials have warned shippers they shouldn't count on freighter space given market conditions and are better off getting certified to self-screen their shipments before tendering them to airlines.
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Carriers are responding to the sharp rise in international trade by adding frequencies and bringing back capacity, but available space is rising slower than demand. IATA said 40 percent of aircraft scheduled to enter service this year are replacement aircraft and that air freight capacity will only increase 5.4 percent this year.
'What we really don't know yet is, are we going to run into a capacity crunch on the air freight side,' ACMG Managing Director Robert Dahl said in an interview. 'It's safe to say that most of the high-quality freighters that were parked, such as the 747-400s, have been put back into service, but the less desirable ones have not come back. So, we really have to presume the capacity in the market is certainly no greater, and possibly less than back in 2008 when we had during the prior peak.'
The types of older, less efficient planes remaining idle include 747-100s/200s, DC-8s and DC-9s. Through 2015 there will be sustained shortage of freighter capacity and shippers will face higher prices than they are used to, said Michael Steen, chief marketing officer for all-cargo carrier Atlas Air, at the Cargo Network Services May conference in Miami.
Most industry experts anticipate a fairly substantial peak season this year, but Dahl said the peak may appear flat relative to the current record levels, as happened in 2007.
Dahl also noted there is not a direct correlation between the number of planes and the amount of capacity.
'Airlines have some flexibility to operate aircraft at higher utilization rates, so there is some elasticity in the market that can pick up some of the slack. And airlines are careful not to schedule maintenance during the peak season, so you have a higher effective capacity during the peak season than the rest of year,' Dahl said.
Meanwhile, British Airways Cargo and Virgin Atlantic Cargo have warned the industry not to undermine the rate recovery, and profitability, by introducing extra capacity too quickly.