- THE MAGAZINE
Airline profits have been described as moving from razor thin to paper thin; not the language of a resounding recovery. Air cargo volumes are mixed, but showing some slow recovery and regional strength. Capacity utilization remains low, ahead of the holiday shopping and shipping season.
The U.S. year in review showed 2012 lagging 2.4 percent behind 2011 in revenue ton miles (RTM), according to the U.S. Federal Aviation Administration. The reduction was attributed to slower growth in the Chinese economy and also to the European debt crisis, resulting in a 3.6 percent decline to 24.3 billion RTM. During the same period, there was little momentum in domestic cargo RTMs, which increased by 0.1 percent to 12 billion.
FAA projections show that total revenue ton miles are likely to increase by 0.4 percent by the end of 2013, and that they will continue to grow at an annual average rate of 4.6 percent in RTM for the next twenty years. The FAA also believes that International RTMs will increase by 1.1 percent in 2013 and by 5.7 percent per year on average through 2033 (based on projected growth in world gross domestic product) and that domestic cargo RTMs will decline by 0.9 percent in 2013, and then increase by an average of 0.8 percent per year.
The trade group Airlines for America (A4A) reported 10 major U.S. airlines achieved a cumulative 2 percent profit margin during the first half of 2013. The ten U.S. passenger airlines — Alaska, Allegiant, American, Delta, Hawaiian, JetBlue, Southwest, Spirit, United and US Airways — collectively reported a net profit of approximately $1.6 billion, up from $1.2 billion during the same period last year, says A4A. This translates to a net margin of 2.1 percent, also improved from the 1.6 percent margin reported in the first half of 2012.
“While the airline industry is making the transition from razor-thin to paper-thin margins, keeping just 2.1 pennies per dollar of revenue generated in the first half of 2013, it is reinvesting in the product and travel experience for customers at a rate not seen in 12 years — to the tune of $1 billion per month,” says John Heimlich, vice president and chief economist for Airlines for America (A4A).
Despite some slight fuel-price relief during this six-month period, Heimlich adds, jet fuel remains the airline industry’s single-largest and most volatile expense. By late August, he notes, fuel prices had already risen 26 cents per gallon since the end of the reporting period in June. Every penny increase in the price of a gallon of fuel per year costs the industry $180 million annually, he points out. And with the summer ending with tensions escalating in Syria, oil prices were on the rise again.
Carriers continue to invest in new aircraft and engines, winglets and operational procedures in-flight and on the ground, among many other initiatives. And they are working to deploy commercially viable, environmentally preferred alternative aviation fuels that will bring additional emissions reductions in the future, notes A4A.
“The U.S. airlines are proud that their business models align with environmental interests — airlines are a green engine of the economy and we’re only getting greener,” says Nancy Young, vice president of Environmental Affairs for A4A. “While aviation contributes less than 2 percent of the total U.S. greenhouse gas emissions, we are committed to doing even more to reduce our environmental footprint.”
On a larger scale, the International Air Transport Association (IATA) reports that, though still weak, air cargo expanded 1.2 percent year-on-year in June or 0.1 percent in the first half of 2013 vs. 2012.
With business confidence weak, says IATA, expansion has actually been strongest in developed markets vs. emerging markets. For instance, one quarter of the 0.8 percent increase in air cargo from May to June 2013 came from European airlines. At the same time, Asia-Pacific and North American airlines reported declines.
“It’s too early to tell if June was a positive turning point after 18 months of stagnation,” says Tony Tyler, director general and CEO of IATA. “Air freight volumes are at their highest since mid 2011, but that good news needs to be tempered with a dose of reality. The global economic environment remains weak and the basis for the acceleration of air cargo growth in June appears to be fragile.”
On a June 2013 vs. June 2012 comparison, international freight ton kilometers (FTKs) rose 1.2 percent, as did domestic FTKs. But on a year-to-date basis, the first six months of 2013 showed a 0.2 percent decline in international FTKs and a 1.8 percent rise in domestic FTKs, giving the overall market a narrow 0.1 percent increase.
Load factors on international markets were just below 50 percent while domestic freight load factors stood at 30.2 percent for the first half.
By region, Asia-Pacific volumes were down 2.3 percent in the first half. Eurozone freight volumes were up 2.6 percent. North America volumes were down 1.6 percent in the first half. The Middle East was considered high growth with a 12.7 percent rise year on year. Latin America saw a 7 percent rise in June; nearly double the year-to-date rate of 3.7 percent. Africa was trending up at 4.3 percent year to date and was expected to see demand for light-weight consumer goods rise, according to IATA.
Air Cargo Growth
“Throughout history, air cargo has been a resilient industry averaging a six percent annual growth,” says Boeing’s regional director of air cargo, Russell Tom. “This trend was seemingly interrupted only recently with the economic recession in 2008-2009 that issued a decline. In 2008, air cargo was down three percent. It further declined to ten percent in 2009. After that, it rebounded strongly, with a 19 percent increase in 2010 and good performance in early 2011. For the latter part of 2011 and in 2012, it remained relatively flat.”
A major driver of the decline was overall lack of world economic growth, says Tom. For air cargo, the challenge was to survive the slowdown and to be positioned to return to a growth mode in 2013. Oil prices also tripled since 2000. These price increases get passed along in the form of fuel surcharges, which makes shipping by air even more costly than it already is.
“A combination of these factors have inhibited air cargo’s growth, and what we have experienced in the air cargo industry over the past few years has been that the traditional five to six percent growth that we have always been accustomed to, just hasn’t been there,” says Bob Dahl, managing director of the Air Cargo Management Group (ACMG), which offers cargo consulting and market research services to cargo companies, airlines, equipment manufacturers, financial institutions, industry suppliers, and airport authorities. “We underwent a period of significant decline in 2001, but we then moved into a period where we were recovering until the 2008-09 recession,” says Dahl. “There was a substantial post-recession rebound, but air freight demand has been stagnant since mid-2010.” The primary explanation for it has been a weakened global economy.
Dahl acknowledges that there has also been a global shift to build everything in China, along with increased competition from the ocean transport mode. “There is an interesting dynamic going on here that takes into account both manufactured and consumer goods,” he points out. “These are not bulk but merchandise items. If you look at the value of these goods that move globally, about 30 to 40 percent go by air. However, on a tonnage basis, only two to three percent goes by air. Most of the air freight items are high value like electronics or perishable goods with short shelf lives like fish, vegetables, fruits or flowers; or goods that require rapid times to market, such as fashion items. If the goods fall outside of these parameters, there is a tendency to ship them by ocean because air transportation is significantly more expensive.”
What Customers Want
Despite the higher costs of shipping by air, customers still see a need for air cargo in their intermodal shipping strategies.
“Above all, customers want reliability and speed,” notes Tom. “This is what they have always looked for when they have engaged air cargo as their method of transportation. The reason is that the goods they ship are high value, highly perishable, subject to short marketing life cycles, or in need of special handling.”
Tom says that the focus in the air cargo industry has turned to improving services for customers. “One way this is being done is by tailoring service to meet the unique needs of different shippers,” he says. “For example, in the pharmaceutical industry, there is a great need for rigid environmental controls during shipment.”
These service differentiators are important because there is a tendency for customers to look at shipping costs first — and air cargo (when compared to other modes of transportation) is at a natural disadvantage when this happens.
“What we try to instill to customers is that there is more to their transportation mode selection than direct shipping costs,” says Dahl. “There is also a competitive aspect to air cargo that is important for shippers to recognize. Air can offer premium times to market for perishable and time-sensitive goods, with high reliability. This becomes critical when you start thinking about the cost of delays and inventory carrying costs.”
There are some shipping routes where air cargo is really thriving. This includes many large markets in Asia, which use air cargo shipping routes between the Asian producers and their consumers in North America and Europe. “We anticipate above average growth in this Asia-to-North America and Asia-to-Europe trade over the next 20 years, and we also expect to see consumer demand grow in Asia itself,” says Dahl. “Other strong air cargo market routes are between Europe and South Asia; North and Latin America; and between China and the Mideast and China and Africa. Emerging markets will play a key role going forward.”
Where Air Cargo is Focusing
Understanding that its shipper-customers are extremely price-sensitive and also concerned about meeting sustainability, time-to-market and security targets, the air cargo industry has focused on fuel efficiency practices and technologies that will reduce or contain costs; streamlined and enhanced services to please customers and expedite shipments; and heightened security for a world that is more at risk.
Of these three, fuel efficiency is the area that has gotten the most immediate attention from shippers.
“We are doing considerable revamping within the air freight fleet to attain greater fuel efficiency,” says Boeing’s Tom. “Older freighters are being phased out. The new aircraft that we are adding are bringing much more reliability and fuel efficiency. This helps to mitigate the fuel cost.
In the model 747-8 Freighter aircraft, for instance, we can now carry 16 percent more cargo than the 747-400 Freighter. This improves the per-unit fuel cost by approximately 16 percent. It makes a big difference.”
The air cargo industry has also called for changes in documentation and processes that will facilitate greater reliability in communications and enhanced services for customers. “These changes are often complex,” comments Tom. “In every industry that works on standardizing, the progress tends to be slow.”
Cargo 2000 (C2K) has been a major driver of documentation and process reform. The C2K initiative was spearheaded by the International Air Transport Association (IATA), with the goal of reducing the number of individual air cargo supply chain processes from 40 to 19 C2K is supported globally by airlines, freight forwarders, ground handling agents, trucking companies and IT providers. The work will move paperwork to electronic documents and help to eliminate duplication of effort.
“There are a number of things that the air cargo industry is doing,” Dahl points out. “Many involve the IATA as a major lobbying organization for air cargo and the Cargo 2000 standards and process improvement effort. We also know that we have many stakeholders engaged whenever we move goods — from shippers; to government regulators and customs; to freight forwarders and recipients at the end of the shipping process. This is why streamlining our processes, enhancing them for security, and understanding at every stage of the process where goods are going is important but very complicated. Cargo 2000 and the IATA e-freight initiative are steps in the right direction for the industry, but we must find ways to work together to get these programs implemented expeditiously on a global basis.”
Securing the Supply Chain
It comes as no surprise that security is one area where the air cargo industry has experienced significant structural changes, including security regulations imposed by the Federal Aviation Administration (FAA) and the Transportation Security Administration (TSA).
When a bomb was found by police in a shipment of U.S.-bound printer cartridges at East Midlands airport in the UK in October, 2010 it was a heads-up to the air cargo industry that physical screening of cargo in itself was not a sufficient security measure. It was then that many new informational requirements surfaced, such as where the shipment was originating and who are the shipper and consignee. This prompted policy and procedural changes across the globe.
In response to these new requirements, air cargo carriers and regulators have been working across borders to coordinate agreements so security can more seamlessly be executed without an excess of procedures that are important but that can also be needlessly duplicated. They are also sharing best practices.
As these policies and procedures continue to be developed, there are additional needs for validations and audits that ensure more robust security and also require more work and expense. For instance, work still needs to be done to certify foreign country air cargo security programs to ensure that they all share common standards and practices. Air cargo carriers, freight forwarders, customs officers and others also have work to do in security coordination.
The Challenges of Reinvention
Although there have been myriad changes in the global marketplace, ACMG’s Bob Dahl still maintains that the air cargo industry has fallen short in areas of innovation and reinvention. “One of the challenges that the air cargo industry faces is improving the value proposition the industry offers,” says Dahl. “There just haven’t been that many innovations over the past twenty years. What we must do going forward is improve our services or reduce our costs to meet shipper needs and compete effectively with surface modes of transportation. There is great volatility today, and it looks to be a continuing condition.”
Boeing’s Tom says that new work processes also prominently factor into improved services to customers.
“In new aircraft design, transportation is just one of many elements,” says Tom. “You also have to ensure that your work processes allow for the accompanying documentation and paperwork to be able to keep up. This means that both work processes and documentation should be standardized across borders. If these standardization initiatives are successful, the industry will benefit from improved aircraft service levels and tracking.”
Air cargo has been through periods of flat and declining growth in recent years that it had not seen in prior years — and that it is not likely to see going forward — as traffic again picks up to more historical levels. Yet in the recent period where growth has stalled, the industry has been actively working to align itself with new requirements for the global trade arena in which it operates.
Certainly, tightened security guidelines and industry pressures to develop uniform processes that are error-proof and efficient are helping to build efficiencies into the industry. At the same time, the air cargo industry is hard at work clarifying air cargo’s advantages to shippers so they perceive it as more than a high-cost option when it comes to transportation spends.
“There have been some misconceptions about the air cargo industry in general,” says Dahl. “One example is the extended period of time that it took to get the news out about the post-recession rebound in air cargo. There was a general impression that we had experienced an extended period when air cargo traffic was just plummeting. In reality, at the recession we quickly recovered to reach a new level of peak traffic for the industry.”
To be sure, a growing number of shippers “get it.” Now the key to future expansion is to show shippers how air cargo can complement their multi-modal shipping strategies. If your market window is tight and you risk losing everything if you don’t get goods to market in time, your shipping costs are not going to matter when compared to the revenue opportunity you could be losing.
“Air cargo remains vital to global trade,” concludes Dahl. “We are confident that air cargo demand will increase as the economy improves, although questions remain about the rate of future growth.”