International air cargo saw a strong final quarter in 2013, including a far more sustained pre-Christmas peak period than in the previous two years. But despite this end-of-year surge, especially in volumes from Asia, it is probably fair to say that the champagne corks have not started popping yet in airline cargo offices.
“We did see an encouraging upturn, but we don’t know how sustainable that is,” says Des Vertannes, head of IATA Cargo. “There is growing confidence, but we also know that there were a couple of significant products that were driving consumer behaviour, particularly in the holiday season.”
Key product launches including the latest Sony PlayStation and Xbox helped drive spikes in volumes from China and some other Asian origin points, contributing to growth of 4.4% in October and 6.1% in November and a 1.8% increase in December. This helped to sustain a six-week demand boom from late October and throughout November into December – a significant improvement from the three-week peak-seasons of the previous two years. Full-year figures for 2013 show overall growth of 1.4% worldwide, in Freight Tonne Kilometres (FTKs), with European carriers seeing the biggest improvements among the traditional ‘big three’ aviation regions.
Vertannes notes that another encouraging sign is an improvement in US air cargo. North American carriers reported a 2.5% year-on-year improvement in freight demand in November, following on from a rise of 5.3% in October. Both these figures are a major improvement over the performance in the first nine months of last year, in which volumes declined 1.1%, year on year, limiting the full-year decline to 0.4%.
IATA says North American business activity indicators in the manufacturing sector have been improving in recent months, recovering from any adverse impacts of the government shutdown in October. Although they are still below the levels seen at the start of 2013, recent months have also shown a pick-up in US trade volumes, and if that trend continues, there could be some improvement in the demand backdrop.
Vertannes says one major concern is what is happening to world trade growth, which has slowed to the same levels as GDP expansion – not at twice the pace of GDP growth, as it had been in the past – owing to rising trade barriers and ‘on-shoring’ of production.
However, IATA is optimistic that the positive outcome of December’s WTO Minsterial Conference in Bali will help to reignite world trade, thanks to agreement on a package of issues designed to streamline trade, particularly for developing countries and least-developed countries, and help development more generally. Of course, any improvements in world trade resulting from these initiatives will take some time to appear.
In the meantime, the spikes in fourth-quarter consumer activity and air cargo volumes indicate that “people are beginning to open up their purses”, Vertannes suggests. “But the problem has been that there is no confidence in the market that this is going to continue into 2014. I think it is still going to be a very challenging year. People are still managing their capacity expectations pretty prudently, and that is simply because there is an expectation of capacity growth with the new cargo-friendly aircraft being delivered in 2014, 2015, and 2016.”
Yield erosion
New aircraft deliveries are expected to expand the worldwide airline wide-body aircraft fleet by 7% in 2014, with the amount of available air cargo capacity, measured in tonne km, expected to increase by 4.7% this year. IATA predicts tonnage carried will grow by around 1.7% this year, increasing from 51.6 million tonnes in 2013 to 52.5 million tonnes in 2014.
“So there is growth coming, but it is more than offset by the growth in capacity,” Vertannes says.
Cargo revenues are expected to remain unchanged in 2014 from their 2013 level of US$60 billion, broadly the same as in 2007 and around 10% below their 2011 peak of $67 billion.
“If you look at the way things have gone, in 2012, yield declined by 5.8% year-on-year. The expectation for 2013 is a further decline of 4.9% over the previous year. So those are pretty depressing numbers,” says Vertannes.
World ACD estimates that yields, measured in USD, dropped by 3.6% in 2013, although measured in Euros or CNY, the drop was more than 6%.
IATA’s expectation is that yields in 2014 will drop by another 2.1%. Vertannes says this trend of declining yields cannot continue, observing that airlines are putting in place various yield-management measures, including tighter control of their capacity, but also investing in their handling capabilities for growth sectors such as express and temperature-controlled products, particularly pharmaceutical products.
Indeed, according to World ACD, Pharma was the only product category to achieve a yield increase in 2013, up around 0.7%, year on year.
Tighter control over capacity and the improvement in volumes meant that average load factors turned up toward the end of the 2013, taking full-year annual average load factors to 45.3%, a slight improvement compared with 2012 levels (45.2%), despite significant weakness throughout earlier parts of the year, when excess capacity entered the market through the passenger business.
“The major airlines are very much looking at the capacity that they are putting on offer today, and not chasing market share. Fundamentally, they are looking at their own operational cost,” says Vertannes. “You can see this in the more prudent measures being adopted by airlines like Air France-KLM, or IAG – and the announcement that they have made to work in closer collaboration with partners, as opposed to taking on the exposure themselves. I think there is going to be increasing activity along those lines. That is something that we have seen on the passenger side with alliances and the broader use of code-sharing agreements – and I think we are going to see much more closer collaboration between airlines on cargo.”
The cargo capacity partnership between IAG Cargo and Qatar Airways Cargo has been facilitated by Qatar Airways joining the OneWorld Alliance late last year. “But it is also to do with the fact Qatar has this increased fleet of freighters coming into the marketplace,” Vertannes ventures. “If you can deploy that freighter fleet between markets that benefit both itself and an alliance member, it makes absolute sense.”
Vertannes believes this kind of decision can also help to stabilise yields.
“If you are operating and have got sole responsibility for filling up the plane, then you have a tendency to chase the tonnes. If you are able to share the capacity and you don’t have quite as much capacity to fill, then you can afford to be a little bit more prudent with your pricing. And I think that is exactly what is going to happen.
“So I wouldn’t be surprised if we began to see some actions where yield stability is more the order of the day, as opposed to yield decline. And that is what is likely to happen this year: I think there will be a stability of yields rather than a decline of yield.” At least among those that are proactive enough to try to manage those things.
“Absolutely. But if you look at the major players, network profitability is critical, and the cargo in the belly is a very important contributor to your route profitability. I think this is why more and more airlines are putting the focus on their cargo business, looking to revamp it, looking to see what efficiencies they can bring from it.”
For example, airlines like Thai and United that had initially deferred investments in their IT have now installed new platforms. Vertannes says there is also a renewed, stronger focus on the operational floor, looking at where efficiency benefits can be found. “If you look at the business and what is driving e-Freight and the e-air waybill, we are finally starting to see traction in the last quarter of the year, because people are beginning to see the efficiency gains that come with electronic trading.”
For example, e-air waybill penetration “on feasible lanes” took a significant step up towards the end of the year, increasing by a whole percentage point in a single month to reach 11.2% in November, globally.
Although this figure is well short of the targets set at the start of 2013, this is the first time there has ever been a month-on-month increase of a full percentage point. “So it shows you that people are now beginning to take this much more seriously – they can see the all-round efficiency gain that e-cargo brings, and I expect that to be the order of the day in 2014, without a shadow of a doubt. I expect to see a great deal more acceleration in the penetration levels of the e-airway bill than we have had previously.”
The hope is that this can give some relief against yield declines. “It is the only way that you can measurably take out costs. If you want to take out costs, you have to stop doing things the way you have since time immemorial, and it shouldn’t require staff at airline handling facilities to have to rekey in data elements that can be transmitted so easily,” he says.
“And when you take a look at what else it can do in terms of accelerating the process of moving cargo, it diminishes the time that trucks wait at cargo sheds, etc. All of this reduces costs and increases the productivity of the people you employ – and that has got to help the overall bottom line.”
Vertannes continues: “I think that air cargo understands the challenges it faces, and now we are getting all of the actors within the air cargo supply chain – the forwarders, the airlines, the ground handlers – finally working together, realising that we’ve got to compress time, we’ve got to gain efficiencies, we’ve got to be more reliable, we have got to put the investments into infrastructure and new services. I am quite encouraged by that – I just want to see a little bit more acceleration in getting to the endgame.”
Ending the cycle
In the past, companies had survived without modernising, by doing the same thing for years. But the new commercial realities and pressures from regulatory and security authorities will no longer permit this.
“Regulation and the need to transmit advance electronic information, security declarations, and advance screening data, all of this is going to provoke everybody to have to play the data exchange game.
“So my view is that when the regulator starts to consistently demand the type of data that they are looking for, we will begin to see a completely new type of behaviour. And if that is what is needed to promote industry change, then all the better for it.”
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The long view
IATA’s Airline Industry Forecast 2013-2017, published in December, predicts that international freight volumes will grow by around 17% over the next five years. It says that this “consensus” outlook “incorporates a conservative estimate of the recovery in global economic activity and world trade volumes over the coming years”.
According to this analysis, international freight volumes are expected to grow at a five-year compound annual growth rate (CAGR) of 3.2%. The largest (US) and the third largest (China) air freight markets are predicted to add more than one million additional tonnes each over the forecast period. As a result, China will supplant Germany as the second largest air freight market in 2017.
Africa is forecast to be the fastest growing region over the forecast period with a growth rate of 4.0% CAGR, with the intra-Africa market predicted to expand at an average rate of 5.3%.
Not far behind Africa are the Middle East and Latin America regions, both forecast to have an average CAGR of 3.8%, and Asia-Pacific at 3.5% per annum, followed by North America and Europe at 2.7% CAGR and 2.4% CAGR, respectively
Vietnam is expected to be the fastest growing country for air freight volumes over the forecasting horizon, with a CAGR of 6.6% per annum, followed by Bangladesh (5.7% CAGR), Brazil (5.5% CAGR), Ethiopia (5.3% CAGR), and Peru (5.2% CAGR).
By 2017, the five largest international air freight markets will be the United States, China, Germany, Hong Kong, and the UAE, according to the forecast.
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Airline cargo bosses in optimistic mood
IATA’s quarterly survey of airline CFOs and heads of cargo in January has revealed cargo chiefs to be in an increasingly positive mood.
More than half of respondents reported seeing growth in air freight volumes over the previous three months, with only 22% seeing volumes deteriorate – figures that are broadly consistent with wider industry air freight volume data. IATA says that the survey on average covers 30% of industry revenues, “so it is a solid representative sample”.
The outlook for cargo volumes also continues to improve, with more than two thirds of respondents expecting an increase in demand over the next 12 months, while just 2.6% expect a decline and 30% expect no change. These results indicate the greatest level of expectation of growth among airline heads of cargo since mid-2010, which was a very strong year for air freight.
However, the yield picture is less rosy, from an airline perspective. Consistent with excess capacity and weak load factors, responses from airline heads of cargo suggest that overall yields continued to decline in the fourth quarter of 2013, despite volume improvements. More than one third (34%) of respondents reported that their fourth-quarter cargo yields declined, compared with 18% that saw a yield increase and 47% that reported no change. However, these figures are an improvement on the figures in the October quarterly survey, in which 42% of respondents reported yields declining in the previous three months.
According to airline cargo bosses, the outlook for cargo yields shows some slight potential for improvement. More than 22% of respondents expect yields to increase this year compared with almost 17% that expect them to decline, while 61% expect no change.
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Airline focus: Lufthansa Cargo
Revenue tonne-km (millions): 8,731 in 2013; 8,728 in 2012 (+0.0%).
Available tonne-km (millions): 12,490 in 2013; 12,531 in 2012 (-0.3%).
Average cargo load factor: 69.9% in 2013; 69.7% in 2012 (+ 0.2 percentage points).
Cargo tonnage carried:
1.715million tonnes (estimated) in 2013; 1.732 million tonnes in 2012 (-1%).
Cargo revenues: €2.7 billion in 2012; 2013 figures published in March.
Main hub handling throughput: 1.4 million tonnes (Frankfurt)
Changes to products & services in 2013:
New flights to Guadalajara, Chongqing, Tel Aviv and Lima. The first two of five new B777 freighters delivered. GSM trackers now available for all customers. Electronic Consignment Security Declaration introduced in Germany.
Initiatives or investments in cargo handling capabilities or service quality in 2013: Significant investments in quality and on time performance.
Planned aircraft fleet changes for 2014:
Two further B777F will join the fleet in the first half of 2014.
Cool-chain capabilities:
Lufthansa Cargo Cool Centre in Frankfurt; Pharma hub in Hyderabad.
Overview:
Lufthansa Cargo continued to demonstrate strict demand-driven capacity management in the challenging market environment of 2013, which was characterised by muted demand in global air freight markets, as in 2012. This allowed the company to boost load factors and remain one of the few profitable cargo airlines in the world in 2013.
CEO Karl Ulrich Garnadt comments: “We are able to hold our own even in a difficult market environment and have laid the basis in 2013 for important developments in our company. If the welcome trends of recent weeks in global air cargo markets, particularly in Asia, continue, then we can feel optimistic about the new year.”
