When uncertainty is the norm

posted on 8th June 2018


Ian Martin Jones reviews the forecasts of major economists and discusses with industry analysts and executives what, if anything, their predictions tell us about the prospects for air cargo.

The past couple of years have undoubtedly been tough for the air cargo industry, but this resilient business sector – so important to the success of global economics and world trade – has been through periods of stormy weather before and has always emerged from the bad times reinforced, slimmed down and, arguably, stronger.

But the conditions surrounding the near economic meltdown over the past two years have been different to those encountered at any previous time in the 100-year history of the industry, and ‘when is air cargo coming back?’ is not the only question everyone wants answered – many want to know simply ‘is air cargo coming back?’

It all depends on the macroeconomic situation, where improved economic conditions and increasing confidence will drive air cargo profits as the world gets back on its feet. We have seen similar scenarios before; but here lies a big problem: even the major financial and economics experts and watchdogs are not too sure what lies ahead.

In the overview to its most recent Global Economics Prospects report, the World Bank uses a word that has become familiar to the air cargo sector to describe the economic developments of the past year: “volatile”. However, it concludes that the news during the early months of 2012 has been “generally positive”.

Nonetheless, before anyone relaxes, the organisation cautions that should global economic conditions deteriorate, developing countries – seen by many as the potential source of global recovery – will be worst hit.

Changed parameters

Air cargo growth rates could, in the past, be broadly estimated to run at around twice the growth of GDP in percentage terms, but Ram Menen, divisional senior vice president for cargo at Emirates Airline, says things have changed: “We have definitely seen the traditional relationship between GDP growth and growth in air cargo disconnect from the norm. We have also seen the relationship between growth in passenger traffic and air cargo becoming disconnected. Whether this is a temporary aberration or not, only time will tell.”

He continues: “However, air cargo still remains the bellwether of economic activities. Usually, air cargo is first to take a dive (and the first to come out), with economic activity slowing down in about two to three months and, then, passenger traffic slowing within five to six months. Air cargo and economic activity still seem to have that relationship.” However, passenger traffic – despite the economic woes – seems to be weathering the storm better this time, observes Menen, expanding at an above-trend pace, while air freight volumes have shown only tentative signs of turning up from the lows of late 2011.

While the air freight sector often speaks proudly of its ‘bellweather’ status, this intrinsically means that the sector tends to have very little notice of impending crises and peaks. It also makes forecasting particularly tricky.

The International Air Transport Association (IATA) believes that air freight, having contracted during the second half of 2011, is now starting to show signs of an upturn in some markets, but warns of the risks if concerns about the Eurozone crisis intensify or of a spike in oil prices if global tensions lead to supply disruption. Projections for 2012-13 assume that oil prices will fluctuate at around $110 a barrel in 2013.

Losing ground

At IATA, global head of cargo Des Vertannes, observes: “GDP is not a good indicator for air freight, since it measures the spending on domestically produced goods and services. Air freight depends largely on international trade. We prefer to focus on world trade, not GDP. We’ve found that air freight has slowly lost share of overall world trade over time; however it is much more cyclical than overall world trade. Companies switch to air freight during economic upturns, when lead times are more important than cost. The reverse occurs during downturns. At the moment air freight is slowly losing market share – world trade has slowed but is still growing, while air freight is broadly flat in volume terms.”

Balaji Srimoolanathan, principal consultant for aerospace, defence and security at business research and consulting firm Frost & Sullivan, says that historical comparisons demonstrate that GDP growth rates have a direct impact on air freight growth, although the relationship has weakened over the last decade, and situations are often now too complex to fit the old equation: air cargo growth = GDP growth x 2.

“This cannot be assessed in isolation as several other factors also have a role to play in establishing this co-relation, such as fuel prices, trade policies, foreign direct investment (FDI), supply chains, capacity issues, value of shipments, level of local industrialisation and so on, amongst many others,” he says.

“Particularly since 2004 the direct co-relation between GDP and air freight growth has deteriorated due to the increased impact of these variables. When assessing emerging markets, particularly markets like China, FDI has played a major role in air freight growth. FDI is a leading indicator of manufacturing capacity development, a precursor to air freight growth. Significant growth in Chinese air freight exports was influenced by the high inflow of FDI into China as foreign companies started establishing Chinese manufacturing capabilities. FDI, along with GDP growth rates, is an important variable to utilise when analysing which emerging markets may be poised for growth in air freight.”

According to Ludwig Bertsch, president of container outsourcing specialist CHEP Aerospace Solutions, given the economic uncertainties in Europe and the US, as well as the significant slowdown in Chinese output, it is “unrealistic to believe that the air cargo industry will flourish in 2013”.

He went on: “In my opinion, the industry has to accept that volatility with rather minimal growth will stay and flexibility to adjust capacity and pricing according to short-term developments will become key success factors. There might be some relief from the currently high fuel prices, as some oil traders seem to expect overcapacity and less oil consumption due to the weak economic development. This situation might even push prices down, but this will not help the air cargo industry in prospering long-term.”

So, what can our major global economics institutions tell us about what the future holds?

Launching the 2012 Economic Outlook of the Organisation for Economic Co-operation and Development (OECD) earlier this year, secretary general Angel Gurría called the present day “a particularly challenging time”, noting: “The global economic outlook is still cloudy.
At first glance, the prospects… are somewhat brighter than six months ago. On closer inspection, though, the global economic recovery is weak, considerable downside risks remain and sizeable imbalances have yet to be addressed.”

Gurria said policymakers need to act even more forcefully and to focus on growth and to create more jobs, in order to rebuild confidence. But it remains unclear whether policymakers, the majority of whom remain obsessed with austerity as a means to keep interest rates low in order to continue to service their debts, have any intention of changing strategy.


Changing old for new

The World Economic Outlook published by the International Monetary Fund (IMF) finds that GDP in many emerging and developing economies has been “somewhat weaker than expected”, but growth has surprised on the upside in the advanced economies. However, this activity took a sharp turn for the worse during the last quarter of 2011, mainly in the euro area.

In emerging 
Asian countries and in Latin America, trade and production
has slowed noticeably, owing partly to cyclical factors,
including recent policy tightening. But growth in many emerging markets generally still far exceeds that seen in most established economies.

Vertannes observes: “There is lots of growth in intra-Asia air freight, not only due to distributed supply chains generating flows of components and part-built products, but also as middle income classes grow creating their own demand in the region.”

In the Middle
East and North Africa, activity has also been subdued by social unrest and geopolitical uncertainty. But growth in sub-Saharan Africa growth 
has continued largely unabated, helped by favourable commodity prices.

US bankers JP Morgan, which recently provided US$1 billion in financing for new aircraft for Ethiopian Airlines, says it is committed to continued expansion in the sub-Saharan Africa region “where our clients are seeking cost effective, large scale funding to facilitate their strategic growth plans”.

Demand for exports into Africa has remained strong, according to Avient Aviation, an all-cargo carrier with scheduled freighter connections between Europe and the continent. “In fact, we have seen it strengthen over recent months,” observes commercial director Liz Woolmington. “With the continued interest of oil and gas activities in the continent we are optimistic about market conditions – and our plans for the future see this continuing.”

Sanjeev Gadhia, CEO of Nairobi-based intra-Africa freighter operator Astral Aviation, says African air freight did suffer to an extent in the recession as perishable exports into Europe were affected as a result of the Eurozone crisis. But he notes: “China has now become the single largest investor in Africa overtaking the traditional investment partners of Europe and the USA. Trade between China and Africa was estimated at $150 billion in 2011 and in 2012 China has pledged $20 billion to new investments into Africa.”

Gadhia adds: “While the reality is that the Chinese investment is linked to natural resources, many African countries need the investment to support their growing infrastructure needs and they enjoy the non-interference policy of the Chinese government, hence it is likely that Chinese investments will continue to grow in Africa for many more years to come.”

Difficulties ahead

To round up, the economic pundits predict that the medium-term prospects will remain very challenging for the advanced countries, but much better for the emerging and developing economies. But one key question is whether the forecasts for emerging Asia and Latin America are too optimistic, or whether it is realistic to expect emerging economies to drive global growth. Taking an average of the forecasts available, real GDP growth overall is expected to have slowed to about 3.5% over the whole of 2012, from about 4% in 2011, and it will return to 4% in 2013. In the advanced economies, growth is projected at only about
 1.5% in 2012 and 2% in 2013.

The OEDC’s Gurría notes that although the prospects for the global economy have improved in recent months, the recovery remains “lacklustre and uneven” across countries and regions. At the same time, the dynamic emerging-market economies, including China, which have provided much impetus for the recovery, are now showing signs of a slowdown.

She remarked that policies that solely pursue national goals are increasingly challenged and will become less effective. “Looking beyond the crisis, the world cannot go back to business as usual,” Gurría remarks. “A new vision for growth needs to be developed and sustained in recognition of new challenges, opportunities and sources of growth for advanced, developing and emerging-market economies.”

So it seems safe to conclude that economists still believe there are a few problems to solve, if we are to see stable, long-term, global economic growth.

In terms of the outlook for the air freight sector, Menen concludes: “Right now we are in a situation where the old rules don’t apply and the new rules are not yet written. The traditional relationship between the US dollar, oil price and gold prices has also seemed a bit disconnected, making it extremely challenging to forecast anything with confidence.

“We will need to wait and see whether the traditional air cargo model is broken or not. It is too early to make an assessment whilst we are in the middle of a storm. So, I will hold that call and just focus on managing the moment before changing the books. Let the storm pass.”