Air Freight Forwarding
The decline in demand for air freight service has had a negative impact on some of the freight forwarding industry and the structure of many companies. While the general view is that this downturn was universal, there are differences in what has transpired in some markets and a more trade lane specific review is probably in order. Here’s an insightful overview on what’s ahead for the air cargo industry.
It would be an understatement to say these are unusual times. In fact, I doubt if anyone has ever experienced anything like the current upset to the world economy. Like many others, it is my view that a new normal is being established and just what that will mean is yet to be evident. There is no question that the future will take more imagination, greater effort and stronger communication skills to survive.
In the first half of 2008, the volume of air freight worldwide was still substantial, capacity on some trade lanes was insufficient, freight rates were at a high and everyone thought the relative good times would continue. Then, current reality set in and the world was turned upside down. Market improvements today are measured not in terms of real growth but improved volumes month over month. Reality is, current volumes are still well below November 2007 and forecasters say we could be in negative numbers comparatively speaking well into 2010.
During the last 12 months, we have seen the demand for goods drop substantially, inventories have not been depleting sufficiently to create demand and the need for air freight has reduced on many trade routes. Additionally, the number of people flying for business and pleasure has declined. These realities have translated into the airlines amassing huge losses and the air freight market becoming very unsettled. In the short term, it might even be said it has become a buyer’s market for those in need which obviously does not help the airlines.
What Has Changed?
The decline in demand for air freight service has had a negative impact on some of the freight forwarding industry and the structure of many companies. While the general view is that this downturn was universal, there are differences in what has transpired in some markets and a more trade lane specific review is probably in order.
Freight volumes from China/East Asia to North America and Europe for example, declined steadily between November 2008 and June 2009, creating excess capacity and airlines were forced to reduce capacity. Coincident declines in freight rates did not stem the decline nor help airline yields. Freight rates for the movement of general freight between Europe and North America also declined significantly and there appears to have been a lesser demand for charter shipments, again a sign of the change in the world economy.
By contrast, air freight demand and capacity within Asia and the Middle East continues to grow and thereby impacts the world activity percentage figures favorably.
Thankfully the downward trend seems to be reversing but the upturn remains fragile and will do so until the economic recovery broadens out from an inventory cycle to stronger consumption and business investment. In fact, the volume of air freight in July 2009 versus July 2008 was only down ll.3 percent compared with the June results which showed a decline of 16.5 percent over June of 2008 and the -19.3 percent performance average for the first seven months of 2009.
At present, the excess freight cargo capacity and the increased cargo space on passenger aircraft caused by the decline in passenger travel (less baggage), has brought to the markets a hunger by the airlines to handle any cargo offered at whatever the buyer is willing to pay.
The so-called buyer’s market on certain trade routes does however, come with some risks and/or consequences. In terms of risk, the airlines seem to becoming more sophisticated in managing revenue opportunities, i.e., when freight must be left behind, it is more directly related to the revenue benefit to the carrier than who the customer is.
Another of the consequences is that airlines are more apt to keep equipment on the ground and cancel flights if the demand is insufficient; again, potentially delaying freight movement that clients are counting on.
What is Ahead?
The outlook for the balance of 2009 and 2010 is for improvements in volume and better yields but fuel costs are again rising and better revenue may not translate into profits.
To survive, airlines will need to find ways to control costs, be it resizing their capacities, forming more alliances, negotiating better fees with various airports, or restructuring, because forecasted volumes for 2009/2010 put passenger revenue at a level similar to 2006 and cargo revenue at a level similar to 2003/2004.
The resizing of capacity, for the movement of air freight, can be either good news or bad depending on the types of aircraft ultimately made available and the relative freight capacity of the given aircraft.
There is some good news. Generally speaking, the major airlines have stronger cash balances than before the 2001 downturn and they have raised new cash on the capital market and on aircraft sales and leaseback transactions; fuel costs have declined in the last year and the market hopes current levels may prevail for a while.
Freight forwarders will need to ensure they too are right sized and will be challenged to encourage customers to understand the need for “right” pricing by the industry if they are hoping for reliable and consistent service and are wanting to help the world economy improve.
Something to Watch
Historically, air freight has proven to be a very timely indicator of overall world trade volumes even though there are timing differences in terms of the activity curves. Interestingly, some monetary policy committees and economists use airline data as the most timely indicator available on world trade developments. The future is ours to influence.