The IATA reports that air cargo global growth continued to perform below its potential – “mediocre growth is now the new reality”.
Growth in freight tonne kilometres (FTK) had positive momentum since 2H2015 and into January of 2016, but subdued expectations on export orders and poor performance of semi-conductor shipments point to downward pressure for air cargo growth in the short term.
In the medium term, strong consumer confidence and lagged impact of lower oil prices leave room for cautious optimism.
Lower oil prices have brought freighter capacity out of storage, which can put further downward pressure on yields.
Economic outlook & traffic performance
Global economic growth softened towards the end of 2015 and preliminary data suggest further waning in 2016. Air cargo performance in 2015 was weak.
December levels point to year-on-year growth of just 1.4% in FTK. Compared to 2014, volume year-to-Dec FTK growth was 2.2%. These small gains in volumes over the year are explained by the surge in activity in Q1 because of the US West Coast seaport backlog and recalls in the US for Japanese auto-parts.
Advanced economies continued to expand but the rate of growth has slowed. The drop in US growth is in large part due to a sharp fall in investments in the energy sector, weather events and weaker export performance on the back of an appreciating USD. Crucially, underlying demand drivers look positive, with unemployment continuing to fall.
The slow pick up in wage growth is not an immediate concern and is explained by lower inflationary pressures and retirement of baby boomers. Broad-based growth has continued in the Eurozone, aided by lower oil prices, but weaker exports create headwinds. Emerging economies continue to grow well below their potential.
The slowdown and rebalancing in China has put commodity exporters under severe pressure. The Brazilian economy is expected to shrink by 3.2% in 2016, while India, a net commodity importer, is set to be the best performing major emerging economy.
Our forecast for 2016 points to acceleration in air cargo growth – FT and FTK growth of 2.7% and 3.0% respectively.
Risks to our forecast are tilted to the downside. Global growth continues to stay mediocre while the combination of heightened financial market volatility and threat of deflationary pressure add to risks to the forecast and the global recovery. However, action by policy makers, through coordinated accommodative monetary policy and where appropriate fiscal expansion along with structural reforms, can mitigate adverse impacts.
Demand environment and drivers
Global trade growth has been weak in 2015, December levels were up just 0.6% from a year ago, growing slower than air cargo. Trade growth failed to regain momentum at the end of the year with month-on-month growth rates in November declining by 0.3% and staying flat in December. This is explained by weaker performance in trade of bulk commodities/heavy industry. Air cargo benefited from increasing share of global growth originated in advanced economies in 2015. Even if growth in air cargo in 2016 outperforms world trade, the weak economic recovery will subdue growth potential.
Global PMI for export orders dipped into contractionary territory in February. This suggests that in the short term downward pressure on air cargo growth can be expected.
The increase in business inventories to sales ratio offers another explanation on the weakness observed in FTK. The continuing build-up of US inventories suggests that even if a higher than expected acceleration in economic activity was to materialise it may not significantly stimulate air cargo volumes as inventory overhang threatens to subdue air cargo growth prospects.
The decrease in semi-conductor shipments is yet another indicator that points to weaker demand drivers in the short term. Consumer confidence has been strong, despite some minor dips in latest data. However, consumer spending in the US has supported stronger growth in the services sector or has been moderated due to a higher shift to savings, limiting the upside impacts for air cargo demand. Nevertheless, the continued strength in consumer confidence, falling unemployment in advanced economies and prospects for favourable lagged impact of lower oil prices are factors that in the medium term can be a source of optimism.
Capacity and competition
In-service payload capacity for wide-body freighters increased for the fourth consecutive quarter. The increase is explained by a reduction of in-storage capacity and delivery of new aircraft. In-storage capacity remains at levels comparable to historical highs but has reduced as aircraft have come out of storage. The pace of retirement of older aircraft has continued to slow, with retirements of only two aircraft in 2015Q4 and one aircraft so far in 2016Q1.
The combination of these factors has meant that in-service wide-body freighter payload capacity in 2015Q4 grew by 1.6% compared to Q3 and 3.9% compared to 2014Q4. While capacity in storage in 2015Q4 fell by 2.2% compared to Q3 and 9.5% compared to 2014Q4.
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 hull capacity. On some trade lanes this has had a significant impact on dynamics in the air cargo market.
Increasing aircraft utilisation translates to higher availability of capacity. With aircraft utilisation hovering near all-time highs, this points to another means through which capacity has been boosted in the current market environment.
Revenues, costs and profits
At an industry level air cargo yields have largely stayed flat in Q4 although a gradual downward slide in yields continues when including other charges.
Jet fuel prices in Q4 were on average 9% lower compared to Q3. They ended the year at a third of the price compared to the February 2013 high. The year on year yield comparison, at an industry level, shows that the falls in yields do not exceed what can be expected from the impact of lower oil price.
However, an increase in wide-body freighter payload capacity and continued deliveries of belly capacity will put downward pressure on yields. IATA survey of heads of cargo confirms the concerns over yield performance for the year ahead.
