A smoother ride ahead

posted on 7th June 2018
With the US economy showing continued growth and the Eurozone coming out of recession, air cargo could return to modest growth next year, writes Will Waters

The latest economic figures from the US offer some reasons for optimism within the air cargo sector, with both GDP and international trade in the second quarter growing more strongly than expected, broadly continuing a growth trend seen over the last two years. Indeed, the US Commerce Department recently upgraded its growth estimate for 2012, from 2.2% to 2.8%.

Second-quarter US GPD increased by 1.7%, with a significant pick-up in both imports and exports. Exports rose 5.4% in the second quarter, compared with a drop of 1.3% in the first quarter. Imports jumped 9.5%, compared with an increase of 0.6% in the previous quarter.

Various economists and analysts in the US speculate that the recovery in the US economy is “starting to take root”, with indications companies are investing in new equipment and construction projects, and a pickup in orders for durable goods indicates the gains will be sustained into the second half of this year. Analysts believe the negative effects of government budget cuts will probably wane, while job gains and rising home and stock prices are shoring up consumer sentiment.

Rising US confidence

The World Bank’s most-recent Global Economic Prospects report anticipates full-year US GDP growth of 2% this year, increasing to 2.8% in 2014 and 3% in 2015. To put that into context, in the 20 years to 2007, US GDP growth averaged 3% annually, compared with 0.6% a year in the five years to 2012.

These improvements contrast somewhat with the situation in the Eurozone, where GDP shrank 0.5% last year. However, after 18 months of contraction, the Eurozone economy came out of recession in the second quarter, with growth of 0.3%, thanks to better-than-expected performance in Germany and France and some southern European countries – suggesting forecasts of a 0.6% full-year contraction for the Eurozone should be revised upwards.

While there is still a long way to go, it appears that the worst of the Eurozone crisis may be over, with the World Bank predicting the Eurozone will return to growth in 2014, albeit at a “modest” 0.9%, followed by 1.5% growth in 2015.

It suggests that the global economy is “transitioning into what is likely to be a smoother and less-volatile period”, but notes that the recovery is uneven. “For high-income countries, fiscal consolidation, high unemployment and still weak consumer and business confidence will continue to dampen growth this year, while growth in the developing world will be solid but weaker than during the pre-crisis boom period.”

It said the financial conditions in advanced economies had improved, but “real-side” activity remains sluggish – “especially in Europe, where it is being held back by weak confidence and continued banking sector and fiscal restructuring”. Recovery in the US “is on more solid ground, where a fairly robust private sector recovery is being held back, but not extinguished by fiscal tightening”. Meanwhile, in Japan, a dramatic relaxation of macroeconomic policy appears to have sparked an uptick in activity, at least over the short-term.

Global GDP on the rise

The World Bank expects global GDP to expand about 2.2% this year and strengthen to 3.0% and 3.3% in 2014 and 2015. For high-income countries, growth this year will be a modest 1.2%, firming to 2.0% in 2014 and 2.3% by 2015.

The story for developing countries is, for the most part, rosier. Developing economies have more or less completely recovered from the 2008 crisis and less-volatile external conditions are expected to yield a gradual acceleration of activity in developing regions, the World Bank predicts. Developing-country GDP growth is now projected to be around 5.1% in 2013, strengthening to 5.6% and 5.7% in 2014 and 2015, respectively.

Looking at broader region-wide trends, growth in China has slowed as the authorities seek to rebalance the country’s economy, with 7.5% growth in the second quarter. Nevertheless, the East Asia and Pacific region is expected to grow by 7.3% this year, rising to 7.5% in 2014 and 2015; Developing Europe and Central Asia by 2.8% this year and by 3.8% in 2014 and 4.2% in 2015; Latin America by 3.3% this year and 3.9% next year; Middle East & North Africa (MENA) by 2.5% this year and 3.5% next year; South Asia by 5.2% this year, rising to 6% next year; and Sub-Saharan Africa by 4.9%, increasing to 5.2% in 2014.

The inside track: Insight from within the air cargo sector

Many of last year’s forecasts from individuals within the air cargo sector proved to be remarkably accurate, with both John Batten and Patrik Tschirch, for example, predicting that 2013 would be broadly similar to 2012 for air cargo – stable, but with little or no growth. So what do airport cargo managers expect in 2014 for the industry and their business?

Johan Leunen, cargo marketing manager, Brussels Airport Company

The market seems to prepare itself for improving air cargo volumes in 2014. Customers and prospects are looking more into details for new markets and different opportunities than before. Although the crisis is not over yet, buying power seems to stabilise, creating more demand – but only on an occasional basis. Charter operations can cover this type of demand when volumes are not sustainable enough for regular flight schedules. But yield is a big question. Because of the chronic overcapacity, it will take a much longer time for the yield to recover.

In 2014, we expect a positive contribution from new cargo carriers such as Cargojet, Demavia, Magma, Finnair Cargo and Ethiopian Airlines and the development of additional business from our existing partners.

Chris Mangos, marketing director for Miami International Airport:

2014 at this time shows better promise. MIA is seeing rebounds to and from Asian and European markets and the expectation is that that will continue, though not at rates prior to the 2011 slowdowns that we experienced. Additionally, there is solid belief that with the build-up of freighter services from MIA into Brazil (now serving 10 airports with freighters), MIA will no doubt experience a surge in shipments related to the hosting of the Olympics and the World Cup.  Brazil is already MIA’s number one cargo market in value ($13.2 billion in trade in 2012) and number two in volume, after Colombia. Growth projections for international freight at MIA may surpass 4% in 2014 due to the Brazil factor alone.

Anne-Cécile Gibault, senior project manager for customer relations, cargo and development, Aéroports de Paris:

Tony Tyler, IATA’s director general, recently expressed his difficulty ‘to find optimistic signs for air cargo growth’. But that does not prevent us from being optimistic. Although the air cargo industry is one of the first sectors directly affected by the economic situation, it is also one of the first to recover.

Gerton Hulsman, cargo manager for Düsseldorf Airport

We do not know how the economy will develop until and during 2014, so it is very difficult to predict. Nevertheless we see good opportunities for further growth at our airport, because there are potential destinations that are not served yet and there are market potentials that could be served by a further upgrade in aircraft capacity.

Due to the fact that we are directly involved in the air cargo handling activities at our airport, we experience a very high level of competition and pressure in regard to costs. In general, the costs are rising every year and at the same time the pressure on the rates is increasing. Especially because of the increasing demand for training activities, security measurements and investments in the cargo infrastructure this is affecting the business. In the long term, this development will probably affect the quality level in the entire industry.

Luis Aviles, air cargo development manager for Houston Airports:

With new oil and gas developments around the world, we are sure that our numbers will pick up next year. One example is Brazil, Houston’s number one air cargo trade partner in the Americas. Although imports from Brazil slowed down last year, exports from Houston to Brazil grew by more than 20% and that is even without freighter service to Brazil. Most of these exports are equipment and machinery for the oil and gas industry, which is growing tremendously in Brazil. We strongly believe that in 2013 we will able to start a freighter operation to Brazil and 2014 will be the year to consolidate additional freighter service to this country.

Bernhard Hoffmann, head of business development for cargo at Leipzig/Halle Airport:

In 2014, we expect a rise of cargo volumes of 5%, due to the development of DHL in LEJ.

Enno Osinga, senior vice president for cargo at Amsterdam Airport Schiphol:

All predictions are difficult in air freight, as it is highly-volatile and reacts quickly to unexpected events and consumer sentiment. Air freight globally is under attack from other transport modes, as industry becomes more and more sophisticated in its supply chain engineering and purchasing. It seems unlikely we will ever see major annual growth again, so we need to be content with static figures or modest increases – and these will only come if the industry increases its focus on efficiency of processes and overall speed.

E-freight should be viewed as a way of strengthening the industry’s hold over its markets, and a way of removing costs – but too many people continue to argue about who benefits and who should pay.

At the same time, fundamental elements of the industry such as ground handling are overdue for a serious re-think. Nobody seems happy with the present situation in which truckers lose their vehicles for too long, ground handlers cannot afford to invest in new technology, and many airports are incapable of accommodating the needs of those industries such as pharma, which really do represent the future. We need open debate on an industry-wide basis, involving airports, airlines, handlers, 3PLs, truckers and IT providers. Everyone has a part of the solution, but until we work together, we will not achieve the change the industry desperately needs.

Doha International Airport

We are expecting our upward trajectory to continue, with a 2014 forecast of 14% growth and total projected volumes at 1,135,000 tonnes. As cargo operations transition to Hamad International Airport (HIA), this momentum will be witnessed to an even greater degree.

Ylva Arvidsson, director for cargo at Swedavia (operator for Stockholm Arlanda, Gothernburg Landvetter and Malmo aisports):

Sweden has the largest economy in the Nordics and the economy is strong and stable compared to many other European counties. The expected GDP growth this year is 1.7 % and 2.5 % in 2014. We can see that the overall air cargo market is recovering and we expect growth in the coming months. However some Swedish shippers, who used to have air cargo as their main mode of transportation, look at other transport solutions in order to reduce cost. It is hard to predict what impact this will have on the total air cargo market.

Cargo’s long-term perspective – Des Vertannes

Alongside its various initiatives to modernise and improve the efficiency of the air cargo sector, IATA puts a certain amount of energy and resources into researching and understanding global economic patterns and their implications for air cargo sin the short and medium term. So, what can we say about the longer-term perspective, beyond 2014, in terms of possible structural changes taking place affecting air cargo? Will Waters asks IATA’s global head of cargo, Des Vertannes.

“One of the things we don’t see changing is the fact that you have got a growing population, and as a result you’re seeing an increased burden being put on cities; you’re seeing migration from the rural areas into the urban areas, and where that is going to continue to happen, at least for the foreseeable future, they are going to need air cargo.”

He says air cargo is an important part of the logistics system that builds and sustains life in cities or megacities, helping to provide power, transport, food, medical equipment, entertainment, communication and clothing. And as emerging economies see a growing middle-class, these needs increase further. “So on a long-term basis, air cargo will bounce back and it will certainly be sustained. That’s certainly how we anticipate it.”

But he can also imagine some moves towards near-sourcing, as manufacturers analyse things like high fuel costs and environmental or distribution challenges and the erratic nature of supply and demand – coupled with the fact that in some mature markets, there is pressure to rebalance their economies – perhaps via governments providing incentives. “So, not in the next two or three years, but we suspect by the end of this decade, or maybe early in the next decade, you will begin to see some investments in what are now service-based economies to be slightly more balanced with some manufacturing output.”

Re-balancing air cargo

One potential benefit of this, Vertannes believes, is that it may help to address the traditional directional imbalance in air cargo. Meanwhile, even as more and more passenger wide-body capacity is introduced, freighters will still needed, for example to serve peak periods, markets that are not sufficiently well served by traditional wide-body passenger capacity, and particular cargo types. But Vertannes says airlines and shipping lines now have far greater focus on their operating costs, “which is why we have seen airlines strip out capacity when they feel the need has not been there. So I think they’re able to be far more agile, and I think that is going to help mitigate some of the on-going threats that they will face.”