Changes in Air Freight
Air freight is learning its lessons from the crisis and becoming a different industry
The massive decline in international air freight traffic due to the global recession—over 20% year-on-year at the lowest point—has given way to the first signs of recovery. But cargo will likely never again experience “business as usual”.
IATA expects 2009 to show a 13% contraction, with a modest improvement of 7.7% in 2010. Total freight volumes will remain 10% below the 41.8 million tonne peak recorded in 2007 although cargo demand is rising slightly faster than world trade as companies look to replenish inventories. Yields have been hit hard, last year plummeting 15%. They are expected to only improve by 0.9% in 2010.
And even though marginally better times may be on the horizon, a cautious attitude to the figures is still advised. Brian Pearce, IATA Chief Economist, stresses that air freight has so far only recovered about half of the volumes lost in 2008.
“There are headwinds to any growth,” he says. “Banks are still short of capital, high unemployment effects will come into play, and consumer debt is high—it’s 130% of annual income in US. This affects spending patterns and will ripple through the system.
“Another factor is the unevenness of growth,” he continues. “There is only a small increase in demand in developed nations compared with the likes of India, China and Brazil.”
Islands of isolation
Changes in the cargo environment have both external and internal drivers. Externally, issues such as the fuel price will continue to be a significant variable, capable of great impact. An average oil price of $75 per barrel (Brent) is expected in 2010, up from the $61.8 average expected for 2009.
This challenge is shared with the passenger sector, and cargo will similarly find the solution in better fuel management, such as operational efficiency and new aircraft.
Air freight will also have to be aware of the pervasiveness of protectionist measures, which stifle trade flows. Any global economic crisis tends to push countries towards protectionism as they seek to safeguard jobs and the national economy.
Even countries who are signatories to the World Trade Organization (WTO) still have room to erect trade barriers given that many current tariffs are significantly below the maximum level allowed.
“The first challenge is to protect the engine of prosperity, the global village that we helped to build,” says Giovanni Bisignani, IATA Director General and CEO. “With global trade everybody wins. But the forces of de-globalization are gathering strength and governments are taking protectionist decisions.
Replacing the global village with islands of isolation would be a step backwards. Protectionism is the enemy of global prosperity. In the 1930s, it prolonged the depression and it will not work today. To secure our future and build a strong global economy we must fight hard to keep the world trading.”
Even with the world trading, air freight must fight to keep its market share. It has been losing ground to maritime transport—not just during the economic downturn, when slower, cheaper shipping was the order of the day, but even in the years leading up to the credit crunch. It is thought current cargo growth will fall back in line with world trade, implying any previous losses in market share to shipping lines will not be recovered.
However, this interpretation may be unnecessarily pessimistic. Robert van de Weg, Senior Vice President, Sales & Marketing, Cargolux says recovery has been strong since the third quarter 2009. “Inventories have not topped out yet as companies are simply catching up with demand that was underestimated,” he says. “This is typical for boom/bust cycles. All in all, the supply/demand ratio has improved greatly.”
And ocean freight has been having problems of its own—yields were down 39% in the second quarter 2009 compared to the 20% drop in air cargo, and there is as yet no noticeable upswing.
The unsynchronized nature of trade routes—the most obvious example is aircraft flying full of manufactured goods from Asia to the US, but returning with only a fraction of available capacity utilized—may also be smoothing out into a more prosperous future.
Although the imbalances are expected to continue, there are promising signs that the variation could decrease in magnitude. An IATA Business Intelligence Services (BIS) survey suggests it could shift as much as 25% between Asia and the US compared to current figures—meaning less than one million tonnes discrepancy in the trade flow in future.
A similar swing is anticipated in Asia-Europe traffic.
In part, this move to rebalance trade flows will come through political will and legislative efforts in the countries concerned. “Also, the expected weaker performance of western nations compared to Asian economies could lead to slower demand in the west for manufactured goods,” suggests Pearce.
Additionally, the stimulus packages launched in many countries, designed to kick-start national economies, have promoted local and regional trade. This may have dampened western demand for eastern manufactured goods.
A different industry
With so many variables, the one certainty is that the industry must eke out every efficiency. One significant danger as the market improves is excess capacity. Over 200 freighters were taken out of service in 2009, a drop in capacity of some 3%. Nevertheless, nearly 500 new cargo aircraft are due to be delivered over the next couple of years. With capacity on the up, efficiency will be vital.
IATA’s e-freight program already has 23 live locations. The aim is to implement it in 44 countries by the end of 2010. Replacing some 20 documents with electronic messages will save the cargo supply chain some $4.9 million per year and, most importantly, decrease delivery times by 24 hours.
“Full implementation will take time,” says Cargolux’s van de Weg. “We have to be determined but patient.” IATA’s Secure Freight project will also play its part.
Having a totally secure supply chain should stop piecemeal regulation, which not only adds cost but also slows delivery times. Simplifying air freight process could have a significant effect on its battle with sea-borne trade.
Shipments would be secured at origin, made tamper-evident, and then protected throughout the journey. Research suggests streamlining cargo security could save as much as $400 million annually. The first Secure Freight pilot operations will take place early this year in Malaysia.
Such initiatives imply that air freight is learning its lessons from the economic crisis and becoming a different industry—one that is leaner. Although external factors will always give cargo a bumpy ride, putting its own house in order will enable this important sector to enjoy much smoother progress in future.
Saving every penny
In a period where cash is king, arguably the most important initiative for air freight will be improvements in the Cargo Accounts Settlement System (CASS). Some $28 billion passed through the system in 2008 with 2009 expected to register a decrease to approximately $23 billion due to the adverse economic situation.
Aleks Popovich, IATA Head of Cargo, points out the number of shipments in 2009 look likely to drop only 6-7%, so the reduction in the number of transactions processed is relatively small compared to the overall decline in revenue.
The positive news is that CASS isn’t reporting any significant increase in defaults. It has a target of just 0.03% for bad debt and 2009 will come in around 0.025%. “We’re successfully collecting and distributing 99.975% of monies,” says Popovich. “We are making sure airlines get nearly every penny they are due.”
The IATA cargo chief says the economic crisis underlined the need to keep collection rates high and ensuring the risk management system was robust enough for the job was vital.
“We also learned that freight forwarders needed help, too,” he continues. “They effectively receive invoices from airlines and were impressed by CASS. We are rolling out a CASS derivative for them called Forwarder Billing Exchange (FBX). This is a settlement system for the freight forwarding community beyond airline involvement.”
Destination charges also reared their head. Cargo fees are for a one-way journey but, unlike the passenger model, there are charges at both origin and destination. Currently, CASS only deals with origin charges. At the destination, there are warehouse and handling charges for example, and these are usually invoiced by the ground handler.
CASS Import will be rolled out over the next 12 months to deal with this, and increase the efficiency of the overall system. Switzerland, Spain, Germany, Canada, Belgium and France will be among the first users.