Headwinds Batter Air Freight
By Mike King
“The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it,” noted U.S. political philosopher and economist Thomas Sowell. He was not, of course, talking about air freight logistics in 2018. But the cap certainly looks a good fit entering the second quarter of 2018.
Securing capacity to ship project cargoes by air is increasingly a question of managing scarcity; of finding a solution when pricing is prohibitive, and the availability of suitable equipment and capacity is erratic.
It wasn’t always thus. Turn the clock back just two years and rows of freighters were parked in the desert, and airlines around the world were scaling back cargo operations to reduce losses. According to Brian Clancy, cofounder and managing director of specialist advisory Logistics Capital & Strategy (LogCapStrat), back in 2014-15 analyzing the air freight business was the equivalent of “writing its obituary”.
Much has since changed. The industry, riding the tailwind of strong global economic growth, has seen international and U.S. domestic air freight demand soar, a trend given added impetus by the rapid expansion of e-commerce, which is transforming air freight demand – look no further than Amazon’s investments in its own air freight capacity for evidence of that particular trend.
As previously reported by Breakbulk, all-cargo airlines are finding it increasingly difficult to retain slots at leading airport hubs. This is an issue for shippers, forwarders and carriers alike, because the largest hubs typically offer excellent connections, good onward shipping options and, critically, the best ground handling services for specialist cargoes.
Yet this is just one side of the coin. The flip side is the simple lack of capacity available. Sometimes scarcity is seasonal, sometimes it is specific to key trade lanes, but when unitized shippers are struggling to find space on scheduled freighter services and the charter cupboard is bare, then the squeeze is on for those at the specialist end of the market.
“In seven of the last nine years, capacity had outstripped demand growth, but that trend stopped in 2017 and now, demand exceeds capacity,” said Brandon Fried, who has been the executive director of Washington-based The Airforwarders Association, or AfA, since 2005. “We have particularly seen the impact of excess demand on most Asia routes to the United States. The issue has caused many of our members like Flexport, for example, to secure its own charter capacity twice a week from Hong Kong to Los Angeles.”
Bourne Out in Statistics
The figures tell the tale. According to the International Air Transport Association, global air freight demand, measured in freight ton kilometers, or FTKs, grew 9 percent last year, more than double the 3.6 percent annual growth recorded in 2016.
According to analysis from consultancy WorldACD, worldwide air cargo yield reached a level of US$2.05 per kilogram in December 2017, 23.5 percent higher than a year earlier. December brought an end to what the analyst called a “truly remarkable air cargo year.”
Yet while airlines enjoyed double-digit revenue growth during the latter part of 2017, the analyst admitted that shippers had to contend with “capacity shortages in a number of markets”.
So far in 2018, demand growth has shown few signs of slowing down, with the latest figures from IATA indicating that global demand increased 7.7 percent year-on-year when January and February volumes were combined. Ahead of Chinese New Year, capacity constraints remained, particularly out of key load hubs such as Shanghai and Hong Kong. Post-Chinese New Year the market evened out, but most analysts predicted a further tightening through the second quarter.
Fried anticipated “extreme demand” for the rest of the year barring “any extreme geopolitical event”.
Air freight demand is being driven by “significant economic growth in most countries and of course, the e-commerce megatrend,” he said. “This means that shippers and forwarders should be prepared for higher costs, tighter space and the need to work with shippers in more accurate forecasting in determining preparation time and space needed.”Running Out Of Options
Rogier Spoel, air transport policy manager at the European Shippers’ Council, said for shippers and forwarders flying out-of-gauge, project or breakbulk cargoes, procuring suitable capacity, even for those willing to pay a premium, has become increasingly difficult.
“These shippers have extra challenges, because the number of full freighters with a nose cargo door is very limited,” he explained.
“Heavy and out-of-gauge shipments are especially challenging and are often bumped off flights because of the amount of unusable space that is left aboard the freighter if heavy or out-of-gauge is loaded.”
Spoel said that the phasing out of inefficient, older Boeing 747-400 freighters by legacy airlines because of maintenance and fuel costs and noise pollution had also reduced the options available to project shippers.
“There are still some orders for the new 747-8 freighter model, which is more efficient and silent, but as I understand it, there are some delays in production,” he added. “Even then, not all Boeing 747-8 freighters have the cargo nose door option, because this feature actually decreases the total amount of weight it is able to carry because of the weight of the cargo door.
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“The 747/8 freighter is, in particular, the workhorse for breakbulk, out-of-gauge and heavy shipments. The focus of the legacy airlines on belly cargo operations is hurting this particular business.”
However, according to Spoel, although choices are more limited than they were two years ago, project shippers do still have uplift options, not least those available from dedicated freighter operators. “The specialized air cargo carriers such as AirBridgeCargo, Cargolux and Silk Way are more and more becoming the frontrunners in this market,” he said.
Pack Smart, Shippers Told
While securing suitable uplift space is increasingly difficult for project cargoes, the AfA is urging forwarders and shippers to use the most efficient packaging possible to reduce excess volumetric air freight costs.
Yet Fried acknowledged that “some outsized commodities, regardless of packaging, demand larger gauge aircraft with special capabilities” able to handle such shipments.
“The scheduled market for such flights in the domestic United States market is largely confined to the integrated carriers – UPS, FedEx etc. – but a robust domestic charter market does exist,” he added. “For example, charter operators routinely fly aircraft for automobile plants in Michigan to the Mexican border and back each day with outsized shipments. Many of the aircraft used are converted passenger planes including the Boeing 737, MD-80 and Boeing 767 and are flown by small operators.
“Of course, many Asian passenger carriers still fly freighter aircraft and will handle outsized cargo on routes to and from the U.S. In addition, unlike on domestic routes, all international carriers are using wide-body planes to and from the U.S., with ample room for large shipments,” Fried said.
However, there are increasing signs that even the world’s leading integrators are running short of capacity. Cathy Roberson, founder and head analyst at U.S.-based Logistics Trends & Insights, told Breakbulk that air freight demand remained strong and capacity was a growing concern.
“During UPS’s earnings call in February, the company announced plans to purchase additional airplanes, thanks to the recent federal tax changes as well as to meet its growing air demand,” Roberson said. “But meeting demand now is difficult while they are waiting for the new airplanes.
“From what I understand, integrators – not just UPS – are struggling with capacity concerns, and added to this are rumors of a lack of pilots as well as the U.S. military wet leasing cargo planes, thus reducing commercial capacity even further.”
Indeed, a number of sources confirm that a lack of pilots has allowed the U.S. military to suck capacity out of the global charter market at a time when capacity is already scarce.
Extra Capacity In The Pipeline
On the positive side for project cargo shippers, Airbus and Boeing told Breakbulk they anticipate more orders for freighters suitable for operations in a range of global markets, which should in the next few years address the current mismatch between supply and demand.
UPS, which already operates a global airline network of more than 500 owned and leased aircraft and offers project shipment services via its UPS Supply Chain Solutions arm, has ordered 14 Boeing 747-8 cargo jets and four new Boeing 767 aircraft earlier this year. This followed orders for 14 Boeing 747-8 freighters in 2016. UPS said all 32 of the new aircraft would be added to the existing fleet with no retirements in a bid to “provide additional capacity in response to accelerating demand for the company’s air services”.
Eventually supply will catch up with the recent surge in demand in air cargo markets. But, in the short term at least, analysts agree that only a global trade war that turns confidence and demand bearish can rebalance air freight’s supply and demand fundamentals.
Interestingly, Sowell’s theory on economic scarcity concluded that “the first lesson of politics is to disregard the first lesson of economics”. We can safely surmise he didn’t have Trumpian trade policy in mind when those words were penned.
Michael King is a multi-award winning journalist as well as a shipping and logistics consultant.
Photo credit: Boeing
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