The BOC Blast 224 – Air freight demand growth starting to look sustainable

Air freight demand growth starting to look sustainable

Greg Knowler, Europe Editor | Mar 19, 2018 11:28AM EDT

Air freight appears to have entered a period of sustainable growth with steadily increasing volume from the e-commerce and pharmaceuticals sectors over the past few years leading to a decoupling of air cargo demand from goods trade growth and muddying the research waters in the process.

The International Air Transport Association (IATA) said typically modal shift has eaten into air freight market share during periods of economic stability, with shippers shifting greater volume to ocean. Yet even though freight ton kilometer (FTK) growth has outperformed global goods trade growth in every year since 2014, demand for air freight continues to rise.

“The bulk of this outperformance has not been explainable by the usual cyclical indicators of demand,” IATA Economics said in its air freight forecast for 2018 to 2022. “This suggests that other factors — potentially the increasing importance of areas such as e-commerce and pharmaceuticals — are helping air freight growth to decouple from global goods trade.

“In our baseline forecast we expect that this modest decoupling between air freight and goods trade growth continues across 2019 to 2022, with a degree of FTK outperformance broadly in line with the average seen since 2014. This is a key area of uncertainty and a prime area for our future research.”

IATA has forecast industry-wide freight ton kilometers to grow by 4.9 percent on average over each of the next five years. Despite the risks to global trade posed by recent protectionist measures, IATA’s business surveys still point to solid annual FTK growth of about 5.6 percent in the second quarter.

The general expectation is that the outlook for air freight over the next five years will be supported by a brighter economic and trade backdrop than what was seen between 2012 and 2017. Having accelerated in 2017, global GDP growth is expected to remain relatively robust over the next five years.

The International Monetary Fund (IMF) forecasts real GDP growth to average 3.1 percent between 2018 and 2022, compared with 2.8 percent during the previous five years. Global goods trade is also forecast to grow more quickly than it did in the 2012 to 2017 period, with the IMF forecasting global goods trade growth to average 3.9 percent between 2018 and 2022, up from 3.1 percent.

IATA said the IMF forecasts were consistent with an increase in global goods trade-GDP multiplier over the coming five years compared with that seen between 2012 and 2017, and the ratio was expected to remain well below the two times average that was the norm in the decades before the global financial crisis.

Robust FTK growth has been forecast by IATA on the segment-based trade lanes to, from, and within Asia over the next five years. A stronger economic backdrop in Europe is also expected to drive faster growth on the key trade lanes to and from the region up to 2022 than in the previous five years.

Stronger global economy, trade volumes boost air freight

Demand for air freight has been boosted since mid-2016 by the stronger economic and trade backdrop, by bottlenecks in manufacturing supply chains, and a broader inventory restocking cycle. Although this is good for airline margins, the strong demand has been a nightmare for shippers with record high freight rates and severe shortages of space at peak periods.

The supply chain manager for a European auto parts shipper told JOC.com that even with the rail option now available from China to Europe, there was usually no middle ground between air and ocean.

“Either there is time for the parts to go via ocean or not enough so we have to use air. It is only emergency, but anything by air is too much these days,” he said. “It seems our air freight volume keeps rising and there is a premium to secure space, so we have to pay a lot. More than $5 million a year.”

The high cost of using air freight is not going to diminish much this year. IATA said the daily utilization rates of large freighter aircraft trended upward into 2018 and remains at its highest level in more than five years. While this will help to further reduce unit costs for airlines and reinforce cargo airline financial performance, it will keep the squeeze on shippers.

Mike Piza, senior vice president of Apex Global Logistics, said seasonal demand, business cycles, and emergency shipments have driven a volatile “boom or bust” marketplace, but there was a new paradigm in the air market today.

“A few years ago, it was too much capacity and low volume, ‘just in time’ and emergency shipments. Now, it’s speed to market that is straining capacity everywhere, especially in peak seasons which seem to be getting longer,” he said.

Manel Galindo, CEO of Freightos WebCargo, said there was no indication on the horizon that demand would drop this year, with cargo movements in January and February higher than they were in early 2016.

“So it seems likely that come the next peak season there will be similar capacity constraints, which will have a similar impact on pricing. Right now, as well as e-commerce growth, generally healthy world trade is also pushing up demand,” he said.

While a slowing global economy and protectionist trade measures could have a negative impact on air freight, so, too, could capacity. Air freight does not have the chronic overcapacity issues of ocean, but it is facing its own unique set of circumstances. As airlines modernize their fleets, the new aircraft they take on board are capable of carrying more cargo for longer distances than the old planes — the Boeing 777 passenger aircraft has been described as a mini freighter with its 25 tons of belly cargo capacity.

IATA said 292 tonnes (322 tons) of payload capacity have been added to the freighter fleet so far in 2018, although belly capacity continues to dominate with more than four times the payload having been added via deliveries to the widebody passenger fleet. Current demand is enough to absorb the capacity entering the global market, but that could quickly change with any slowdown.

No end in sight for air cargo rate pressure

Chris Barnett, Special Correspondent | Mar 12, 2018 9:28AM EDT

LONG BEACH, California — Aligning capacity with fluctuating demand and sticker-shock pricing is always a tough dance in the air cargo spot market, but sharply rising volumes and lift constraints today are buffeting shippers and forwarders, with no swift solution in sight.

Historically, a full 50 percent of this volatile “boom-bust” marketplace has been driven by emergency shipments plus business cycle or seasonal demand factors, Mike Piza, senior vice president of Apex Global Logistics, said last week at the 18th Annual TPM Conference in Long Beach, California.

“But there’s a whole new paradigm in the air market today,” he added. “A few years ago, it was too much capacity and low volume, ‘just in time’ and emergency shipments. Now, it’s speed to market that is straining capacity everywhere, especially in peak seasons which seem to be getting longer.”

Sanne Manders, chief operating officer of Flexport, a San Francisco-based digital freight forwarder and customs broker, said demand growth in 2017 was stronger than anticipated. “You saw a rise in e-commerce and in freighters flying full directly from China to the US.”

But while volumes were large, actual tonnage was not, Manders contends. “When you get a parcel from Amazon, there’s a lot of air in that parcel, so air is filling up the plane very quickly with volumetric cargo.”

Adding to the demand for air cargo capacity last year, said the Flexport COO, were a series of new product launches of electronic goods manufactured in China, most notably the suite of Apple iPhones. On the supply side, capacity shortages arose when some large freighter operators “had a relatively large number of planes on the ground for heavy maintenance servicing,” said Manders. He cited Korean Air Lines as an example.

“There is also a lot of capacity parked in the desert such as passenger 747s. They can be converted to freighters but that takes capital and maybe six to nine months for the overhaul. Not like you can just go into the desert and get a few planes.”

Cargo complications arise

Claudia Andersen, import-export manager-enterprise logistics for 1-800-Flowers.com, said she gets good service on ocean and uses air only when forced to. But the spot market today, she claims, is a “mess.”

“Before, it took 24 hours to get a quote and now it takes 48 hours,” Andersen said, “plus it’s increasingly compounded by missed connections. A five to seven day service can take seven to nine days. I was paying for a three to four day premium service in the last two months of 2017 and sometimes getting deliveries in 11 to 12 days.

Andersen declined to identify her primary air cargo provider, noting delays and service gaps are “an industry problem across the board, not just one airline. We will return to the [air cargo] market, we will pay for the premium service, we just expect to receive what we pay for.”

Glyn Hughes, global head of cargo for International Air Transport Association (IATA), said demand for air cargo capacity was up 9.3 percent in 2017, while growth in supply or lift was up 3 percent. “We’re still forecasting [supply/demand] growth for this year.”

The IATA official said air cargo growth from the mid-1990s was steady and “predictable” but ever since the global financial crisis of 2008 to 2009, “there have been many  false starts” and the industry has been plagued by disruptions of the supply-demand equilibrium.

“To have a sustainable growth industry, you need to have a sustainable growth pattern,” said Hughes. He sees the rebound of 2017 continuing.

“E-commerce is still less than 10 percent of total retail sales but the potential [for expansion] is huge.”

Easing the crunch

Hughes called for even greater transparency and communications between the “tripartite” — the customer, carrier, and forwarder. “The sooner you can anticipate the demand happening, the sooner we can provide the freighter capacity to move it. But we haven’t digitized the support services and this industry is historically non-communicative. We talk to the ground handler but not to the forwarder.

“We urge more people to get around a common table and talk so all our needs can be understood and balanced,” Hughes argued. “In air cargo, we are looking for optimization and equilibrium.”

To add stability to the volatile air cargo market, Manders of Flexport called for consistent volume shippers of goods such as high-value electronics and perishables “to lock in your pricing and capacity as soon as possible. The regular shippers who buy long-term contracts will still be subject to the [market’s] stronger volatility and a little bit higher rates but they will be somewhat cushioned.

“The shipper who only needs air capacity for, say, a certain month or a short period of time, cannot lock in and will be subject to extreme volatility.”

All the panelists agreed airport infrastructure problems, facility congestion, and traffic are adding to air cargo shipment delays, while freight plays second fiddle to passengers in airport expansion planning and new terminal construction. One solution often heard is to develop secondary airports with a focus on freight.

Hughes summed it up by saying, “It’s all about consistency and visibility. You have a 10-ton blocked space agreement with a carrier and you show up with 14 tons, our supply forecasts are off” and the equilibrium is upended in that one spot alone.

Choose space over price in 2018, air cargo shippers warned

Greg Knowler, Europe Editor | Mar 07, 2018 2:07PM EST

LONG BEACH, California — Book air freight cargo early and prioritize space over price is the advice from forwarders as the robust demand experienced for much of last year continues into 2018.

Data from the International Air Transport Association (IATA) shows that global air freight demand rose 8 percent in January compared with the same month last year and well up on the 5.8 percent annual growth recorded in December 2017.

 

Sanne Manders, COO of Flexport, said shippers can expect the air freight market to be tight through 2018, driven largely by global e-commerce. “Rates will be on average high, and volatile. It will be hard to secure space. That’s why we decided to secure space in the form of biweekly charter from HKG to LAX,” he told JOC.com.

“My advice: prioritize space over price. Those are two sides of the same coin, but shippers often overlook space. Locking in space well in advance is a good strategy, but expect to pay a small reliability premium for that.”

Shippers certainly paid the price in 2017, with rising volume through most of the year keeping available capacity under severe pressure, pushing air cargo rates up to unprecedented levels. Delays of 15 to 20 days were reported out of China airports during the peak November to December season as fast growing e-commerce combined with general cargo to generate high levels of traffic, and air freight rates on the busy China-North America routes shot up to $12 per kilogram.

No sign of end to rising air cargo demand

Manel Galindo, CEO of Freightos WebCargo, said there was no indication on the horizon that demand would drop this year with cargo movements in January and February higher than they were in early 2016.

“So it seems likely that come the next peak season there will be similar capacity constraints, which will have a similar impact on pricing. Right now, as well as e-commerce growth, generally healthy world trade is also pushing up demand,” he said.

Alexandre de Juniac, IATA’s director general and CEO, said demand drivers for air cargo were positive and global demand for manufacturing exports was buoyant. Meeting this strong demand was leading to longer supply chain delivery times, and de Juniac said companies seeking faster delivery times to make up for these longer production times could push demand even higher.

 

“With 8 percent growth in January, it’s been a solid start to 2018 for air cargo. That follows an exceptional 2017 in which demand grew by 9 percent,” he said. “We expect demand for air cargo to taper to a more normal 4.5 percent growth rate for 2018.”

Unlike container shipping, there is limited supply of air cargo space, which is keeping upward pressure on freight rates.

“That means shippers are facing high prices again next peak season. Big shippers can agree on allotments well in advance, but smaller shippers don’t have much leeway in booking ahead,” Galindo said. “Smaller shippers only get a four-week window for booking ahead. Airlines aren’t inclined to allow early bookings because they make most of their profit in peak season. That said, in peak season, booking four weeks early can still make a big difference.”

C.H. Robinson said capacity will become harder to find as airlines try to engage with large shippers in a variety of industries and negotiate directly for their air freight needs.

“There is only so much air cargo space available,” the third-party logistics provider said in a report on air trends in 2018. “If large shippers absorb a larger slice of the available capacity, small- and medium-sized shippers will probably find it a lot more difficult to secure air space for their freight.

“Generally speaking, the longer the lead time you can allow between pick up and delivery to customers, the more able you will be to find available space and contain your costs.”