Air freight demand growth is here to stay

posted on 27th September 2018 by Justin Burns
Air freight demand growth is here to stay

Air freight demand growth is here to stay, and fears about a significant modal shift have been exaggerated, according to research by management consultants McKinsey & Company, writes CAAS Editor Will Waters.

However, steady growth of air freight capacity, mainly from passenger belly expansion, is expected to keep yields under further pressure, with prices for general cargo forecast to drop by an average of three per cent, year on year, between now and 2025.

In a presentation yesterday at this week’s Air Cargo Handling Conference in Brussels, McKinsey partner Ludwig Hausmann said research by the organisation indicated that 80-90 per cent of demand for air freight is not at risk currently of being lost to other modes – although, by extension, 10-20 per cent is at risk. The product types most vulnerable included perishable and cold-chain shipments, because of improvements to competing ocean freight solutions.

Of the total cargo carried by air currently, an estimated 10-15 per cent will shift to ocean freight over the next seven years, research suggests, with only 1-3 per cent shifting to rail. Although intermodal transport from China to Europe does offer a competitive product, that market is not yet equipped to deal with big volumes, Hausmann said.

And with air freight demand growing from other sectors, for example the booming e-commerce market, McKinsey expects annual air freight volumes to reach 77 million tonnes globally by 2025.

Concerns about the loss of significant volumes of cargo to 3-D printing are also unfounded, Hausmann claims. McKinsey analysed the kinds of products that could be suitable for 3-D printing, concluding that between 2% and 5% of cargo overall, and between 2% and 4% of products currently carried by air will be produced by 3-D printing by 2025.

However, a possible global trade war could have a more significant impact.

Hausmann said world trade growth was currently still running at a multiple of 1.4 times GDP growth, creating baseline world trade growth of around 4.1% annually, currently. But if the trade war between the US and China continues along its current path, McKinsey estimates that the trade multiple may drop to 1.3 times GDP, which would lower expected world trade growth to 3.7% a year.

Those negative effects would increase significantly further if the US takes its trade war and extends it to the rest of the world. Under those circumstances, the world trade to GDP growth multiplier would drop to 1, reducing annual world trade growth to 3.1%. Air cargo growth would then be expected to drop down to 2% annually, a loss of around 3 to 4 million tonne of cargo each year, Hausmann said.

In terms of the of air cargo’s supply-demand balance, and the impact of this on pricing, he expects capacity growth of 3-4 per cent per year on average, principally due to increases in passenger capacity. “As a result, on the supply-side we will see a huge shift from freighters to passenger aircraft,” he noted.

That continues a trend that has been taking place for a number of years already. Freighters accounted for an estimated 51 per cent of air freight carried globally in 2014, a figure expected to drop to 49 per cent by 2019, and decline further to just 41% by 2025.

With the growth in passenger belly capacity outpacing growth in air freight demand, he predicted that the price of general cargo carried on passenger bellies will remain under pressure, potentially dropping by around 3% per year. However, certain products and commodities, for example those that need to be carried on freighters, will continue to attract higher rates.