Outlook 2017: On the rebound

posted on 3rd April 2018

Selected international air freight stakeholders discuss their expectations for the year

Economic outlook and traffic performance

Industry-wide FTKs grew 3.8% in 2016, the second-highest annual growth rate since the 2010 rebound after the global financial crisis (GFC). This solid growth in air cargo demand occurred despite a moderate deceleration in the growth rate of the global economy in 2016 and is explained by favorable cyclical and structural factors.

In 2017, the global economy is expected to accelerate moderately, as fiscal policies ease. However, there is significant uncertainty on the scale and timing of the stimulative policy interventions in the US and the extent to which impacts of the planned tax reform, infrastructure spending and regulatory overhaul will materialize in 2017.

Irrespective of this uncertainty, prospects for the US economy remain favorable with strong household spending, jobs growth, and continued signs of rising nominal wages. However, a strong US dollar may be a drag on exports, and impacts of US posture vis-à-vis trade policy are unclear. Expected increases in the US Federal Funds Rate may expose vulnerabilities among some emerging markets, although pick-up in growth in emerging markets is still to be expected.

Growth in the Eurozone has been a key driver underpinning the favorable demand for air cargo in 2016. The decelerating aggregate growth figures for 2016 mask the acceleration in growth that has been experienced across a number of Eurozone states. The broadening of the economic recovery in the Eurozone offered a key favorable tailwind for air cargo demand in 2016 and if sustained could do so again in 2017.

Review of 2016

In sum, the air cargo market had a weak first quarter but recovered and grew in the second and third. Growth accelerated further in the fourth quarter supported by a pick-up in Asia and a more intense peak season, as global product launches (eg Apple) and new marketing strategies (eg singles day, Cyber Monday) contributed to shoring up demand. One-off factors (eg Hanjin Shipping’s bankruptcy) may have also diverted some cargo flows temporarily to air, thereby boosting demand.

European and Asian carriers’ FTKs explain about 61% of growth seen in Q4 and about 64% of the growth in 2016. Middle East and North American carriers accounted for 24% and 11%, respectively, of traffic growth in 2016.

Demand environment and drivers

For the first time since the financial crisis, world trade in 2016 was estimated to grow more slowly than GDP, with total global merchandized trade estimated to have grown 1.7%. The IMF explains the trade slowdown since the financial crisis through changes in composition of economic growth, lower levels of activity, and restrictive trade policy, combined with other factors.

International FTK growth has fared better, growing 3.8% in 2016. In seasonally adjusted terms the market is almost 10% above the year-end levels reached in 2015. One of the contributing factors for the improvement in air cargo performance in 2016 has been the fall in business inventories compared to sales. The faster-than-expected pick up in demand has led to firms relying more on air cargo to replenish inventories.

The Hanjin disruption may have also had a favorable lagged impact on demand in international air freight in Q4 as a portion of the higher-value and time-sensitive goods initially held up at sea may have ended up being served by air.

Global PMI for export orders remains in expansionary territory. However, when looked at in year-on-year terms, it has decelerated somewhat, explaining some softness in cargo demand observed in November, and may be a sign of weaker short-term performance. Consumer confidence has continued to stay strong over the last quarter and remains resilient. Further medium-term optimism for the demand outlook comes from rising inflation in advanced economies and the knock-on impacts that may have on stimulating investment.

Capacity and competition

Expansion of in-service payload capacity for widebody freighters has continued on an upward trajectory for the seventh consecutive quarter. The increase in Q4 is explained by a reduction of in-storage capacity and delivery of new freighter aircraft. Payload capacity available in storage currently stands at about 13% of in-service payload capacity, above pre-crisis levels of Q1 2007 when it was 10.5% – despite an environment of higher fuel prices in 2007.

Since Q3, a significant increase in the delivery of new freighter aircraft can be observed. Payload widebody freighter capacity delivered in Q4 was the largest within a quarter over the past three years. This may in part be explained by the difficulty faced by airlines to further defer maturing orders on freighter aircraft without having to incur large financial penalties.

The capacity challenge is further exacerbated by the strong growth in demand in the passenger business. Deliveries of wide-body passenger aircraft have led to the addition of significant levels of belly capacity. The new widebody passenger aircraft entering the fleet have, on average, more payload belly capacity available compared to older models. Therefore, the growth in available belly capacity is higher compared to simply the growth rate in the number of widebody passenger aircraft. 2016 was a record year for delivered widebody payload belly capacity.

On some trade lanes, the continued addition of widebody payload belly capacity has had a significant impact on dynamics in the air cargo market.

AFTKs grew 5.3% in 2016 outpacing FTK growth of 3.8% by 1.5 percentage points. This means that on an annual basis, the increase in supply offered in the market has outpaced demand.

Some recent improvement in balancing air cargo supply and demand at an industry level has been observed. For the first time since Q4 of 2013, demand has outstripped supply and, while this is a welcome development for carriers, it may be short lived. The outperformance of demand was partially due to a more intense peak season and one-off factors, already discussed.

Annual developments point to the extent of the capacity challenge. From an annual perspective, the rise in capacity has increased the vulnerabilities of air carriers to a softening in the demand environment and, if continued, could lead to further yield erosion in 2017.

Revenues, costs and profits

Downward yield trajectory started to accelerate in the second half of 2014 as lower fuel prices were sustained. At an industry level, total international air cargo yields continued to deteriorate in 2016. Month-on-month comparisons show a bottoming out of 2016 yields towards the end of Q2, but in effect the deterioration in yields has continued into Q3 and Q4 when looked at in year-on-year terms. Yields in Q4 of 2016 were on average about 6% lower compared to yields in Q4 of 2015.

In parallel, jet fuel prices were on average about 8% higher in Q4 of 2016 compared to Q4 of 2015. The rise in input costs combined with decreasing unit revenues points to worsening profitability outlook for air carriers.

Increases in capacity (discussed in the previous section) amid a weak global trade backdrop are key risks for the air cargo profitability outlook. An IATA survey of heads of cargo confirms concerns over yield performance for the year ahead.

George Anjaparidze, IATA Economics

Adapted from IATA’s Cargo Chartbook Q4 2016 • www.iata.org