30-Nov-2011 2:07 PM

Airlines and airports feeling impact of global economic weakness with continued freight pressures

Analysis

Airlines and airports are feeling the impact of the current global economic weakness and declining consumer spending in Europe, which is having a noticeable impact on air cargo volumes. Cargo traffic, which generated USD66 billion in revenue in 2010, has declined every month since May-2011, according to IATA upon the release of its Oct-2011 traffic results, with a 4.7% year-on-year reduction in cargo demand in Oct-2011 amid reduced manufacturing confidence and businesses switching to slower modes of transport.

"Cargo is the story of the month. Since mid-year the market has shrunk by almost 5% and this is far greater than the 1% fall in world trade. Air freight is among the first sectors to suffer when businesses confidence declines," IATA director general and CEO Tony Tyler said. Meanwhile, Boeing CEO Jim McNerney separately stated the company has seen a softening of freight demand in recent months, describing the freight market as a "watch item".

Summary

Cargo traffic has declined every month since May 2011, with a 4.7% YoY reduction in cargo demand in October 2011.
The decline in cargo reflects downward trends in world trade in goods and a loss in confidence among purchasing managers in the manufacturing sector.
Asia-Pacific carriers have witnessed the largest reduction in freight traffic, with an 8.2% reduction in international freight traffic in October 2011.
Airlines have responded to weaker demand by reducing their freighter fleet, but capacity continues to be added through wide-bodied passenger aircraft.
Cargo rates have come under downward pressure due to weak demand and falling utilisation, although surcharges have been rising sharply due to increased jet fuel costs.
Airlines such as Cathay Pacific, ANA, Korean Air, EVA Air, China Airlines, and Air France-KLM have all experienced reductions in cargo volumes and revenues.

IATA monthly international freight traffic (FPKs, billion): 2006 to Oct-2011

IATA total (domestic and international) freight traffic (FPKs, billion): 2006 to Oct-2011

Cargo declines reflect downward trends in world trade in goods and loss in confidence

IATA noted that overall world trade in goods has declined over the past five months, but by less than 1%. "This is partly because Asian demand for bulk commodities, transported by sea, remains strong. But also because industrial output has yet to decline, whereas business confidence has slumped during the past two quarters," IATA said.

IATA also highlighted that the confidence of purchasing managers in the manufacturing sector has fallen to its lowest level since 2009. "This loss of confidence appears to have caused shippers to switch some transport needs to slower and cheaper sea options to the detriment of air freight," IATA noted. IATA added that while business confidence has declined considerably in recent months, industrial output has not, although "purchasing managers are now cutting air freight and switching to cheaper and slower transport modes, in anticipation of weaker economic activity".

Worldwide growth in air travel and business confidence: 2006 to Oct-2011

The World Trade Organisation reduced its forecast for growth of 2011 world trade to 5.8% in Sep-2011, marking a dramatic reduction from growth of 14.1% in 2010. It citied the global economic concerns for the slower growth, warning the actual figure could be even lower.

Asia Pacific freight operators benefit from dominance of trade flows to Asia but
experience largest reduction in freight traffic

Asia-Pacific carriers account for around 40% of global freight markets, reflecting the position of Asia as the world's manufacturing hub. The region's airlines witnessed the largest year-on-year reduction in freight traffic in Oct-2011, with an 8.2% reduction in international freight traffic (FTKs) and a 7.7% reduction in total (international and domestic) freight traffic in the month.

IATA international freight traffic growth by region (FTKs, % growth): Sep-2011 vs Oct-2011

IATA total freight traffic growth (domestic and international) by region (FTKs, % growth): Sep-2011 vs Oct-2011

While Asian airlines are the most exposed to the volatility of freight volumes, reflected by air freight being the weakest in this region, the Asia Pacific region is also still benefiting from the dominance of trade flows to Asia, IATA said. Industrial production is still rising in Asia, whereas it is in decline in Europe.

Airlines reducing freighter fleets but capacity added through bellyhold capacity

IATA stated that airlines have responded to weaker demand by reducing their freighter fleet. However, "this has not stopped a steady and substantial five percentage point fall in freight load factors compared to their early 2010 peak," IATA said, as capacity continues to be added via widebodied passenger aircraft, as additional capacity has come online during the year. Passenger single aisle aircraft utilisation has dipped but is well above the recession levels.

IATA passenger load factors and aircraft utilisation: 2007 to 2Q2011

Asia Pacific carriers have freight load factors of 12 ppts above the global average

Asia Pacific carriers, in Oct-2011, posted the highest freight load factors on a global basis, at 58.8%, according to IATA. This is 12.3 ppts above the global average of 46.5%, with global load factors seeing a continued decline since its early 2010 peak. The comparable load factor strength in the Asia Pacific is a result of strong outward flows of freight from Asia which dominates the air cargo business.

IATA freight load factor by market: Oct-2010 to Oct-2011

IATA freight load factor on total market (seasonally adjusted): 2006 to Oct-2011

Cargo rates come under downward pressure

Cargo rates, meanwhile, have come under downward pressure from weak demand and falling utilisation, IATA noted in the 3Q2011 cargo e-chartbook, adding that overall rates are down 4% and rates between Southeast Asia and Europe have slumped 19%. However, surcharges have been rising sharply over the past year, reflecting the 30-40% increase in jet fuel costs. Including these surcharges suggests that yields were still rising on average up to Jul-2011, although the situation subsequently deteriorated. Overall, cargo profitability, which began to fall in 2H2010, has declined further this year, and revenues are weak.

Airfreight yields (USD per kilo)

Global airline industry cargo revenues

Cathay Pacific - current cyclical 'slump' in cargo is 'very real'

Cathay Pacific CEO John Slosar, in the Nov-2011 edition of CXWorld, stated the current cyclical "slump" in cargo is "very real". However, he noted, "We've faced these downturns before and always come out stronger".

He added in a good year, cargo would account for nearly a third of the carrier's turnover. The carrier was the largest international cargo airline in 2010, in what was a "golden year" for its air cargo business. Cathay's cargo throughput in 2011 is expected to be lower than 2010 levels, although 2010 was characterised as an exceptionally good year boosted by strong demand post the economic downturn. Cathay Pacific general manager cargo sales and marketing James Woodrow has also previously noted that "it looks unlikely that we will see the usual year-end peak".

Cathay Pacific cargo director Nick Rhodes separately stated the carrier may consider parking older jet as it looks to reduce frequency on long-haul sectors. He, however, stated the carrier expects its cargo volume to return to growth in 2012 as it adds new services and capacity grows in the 15-18% range following the delivery of new aircraft.

"We expect an increase in the tonnage (in 2012) but there is plenty of competition, so when there is a lot of competition, if you increase your volume, increase your tonnage, the hardest to forecast is what will happen to the price? What will happen to the yield?," he said. Cathay Pacific has seen year-on-year reductions in cargo volumes in all but two months in 2011, with declines from 2009 levels in the past two months (Sep-2011 and Oct-2011).

Cathay Pacific cargo volume (mill tonnes): 2009 to 2011

ANA to miss cargo sales target for current fiscal year

All Nippon Airways (ANA) cargo head Kiyoshi Tonomoto, as quoted by Bloomberg on 25-Nov-2011, stated the carrier will miss its cargo sales target for the current fiscal year, due to the impact of the 11-Mar-2011 earthquake and tsunami and the global economic slowdown. The airline had expected to report JPY135 billion (USD1.75 billion) of revenue.

The carrier expects to report its first annual profit at its cargo unit in the 12 months ended 31-Mar-2014, aided by increased connections with China, Japan and Southeast Asia through its Okinawa hub. "Asia is going to grow as a consumer market, not just a manufacturing base. We want cargo to become a core business for ANA, along with passenger flights," Mr Tonomoto said.

ANA reported a 3.3% increase in domestic cargo volumes (three consecutive months of growth) but a 3% reduction in international cargo volumes in Oct-2011. International cargo volumes have been weaker on a year-on-year basis in all but three months in 2011.

Domestic cargo volumes have benefited from demand to carry goods on air routes instead of land transport increased after the earthquake, especially to Hokkaido. The carrier also benefited from an increase in maximum takeoff weight to on-par with ANA takeoff weight, on codeshare services with Hokkaido International Airlines since Jul-2011. This negated a reduced supply of cargo bellyhold space as a result of reduced domestic capacity.

All Nippon Airways cargo volume (domestic tonnes, 000s): 2009 to 2011

ANA stated international cargo volumes saw "good growth" in the first half of FY2011 (six months to Sep-2011) of around 1.9% despite the impact of the earthquake affecting the supply chain for automotive components, in particular, and reduced demand from Japan to the US and Europe as domestic companies curbed exports amid disrupted production. However, a quicker than expected recovery in production and increased air freight capacity at Tokyo Haneda Airport has had a positive impact on international freight volumes.

All Nippon Airways cargo volume (international): 2009 to 2011

Korean Air sees 13% slump in outbound cargo shipments in 3Q2011

Korean Air is also seeing a weakness in its cargo levels. Outbound cargo shipments slumped 13% and overall cargo traffic recorded a year-on-year weakened 5.9% in the third quarter "due to sluggish demand for IT products such as display monitors and cellphones", the airline said.

Korean Air, the world's second largest international cargo carrier and South Korea's largest cargo operator, stated European freight demand was missing expectations as an economic slowdown resulted in a reduced demand for mobile phones and consumer electronics. "There should have been more demand from Europe this time of the year," senior vice president Cho Won Tae said in an interview with Bloomberg. Cargo has been "weak" network wide all year, while passenger demand has risen steadily, he said. The carrier has reported year-on-year reduction in freight traffic this year except for Jan-2011.

Korean Air Cargo has stated it intends to "pay keen attention on strengthening market competitiveness by promoting aggressively on the existing key markets and to look for sustainable growth by developing emerging markets such as Central and South America and Central Asia". The carrier also noted that "both Europe and America are showing similar patterns and are not showing good performance". The Americas contributed 37% of total cargo revenue in 3Q2011 (down from 44% in 3Q2010), with Europe contributing 31% of revenues (up from 27%).

Korean Air Line cargo revenue breakdown: 3Q2011 vs 3Q2011

The company has also expressed optimism that a free trade agreement with the European Union will improve its prospects. Korean Air could be a major beneficiary of a USD71 billion increase in commerce between the European Union and South Korea expected to flow from a 01-Jul-2011 free trade agreement. It may even help Korean Air reclaim the rank of the world's largest international air cargo company that it lost to Cathay Pacific in 2010.

Korean Air, and its peer in the South Korean market, Asiana Airlines, are highly exposed to weakness in the freight market and have noted that cargo has been weak in 2011, with freight demand failing to meet expectations. Korean Air has stated it expects the situation in 2012 "to be worse and it has "been very profitable". Cargo contributed 26% of Korean Air revenues in 3Q2011.

Taiwanese carriers see cargo declines with further declines expected

EVA Air president Chang Kuo-wei in late Oct-2011 warned that the carrier expects a continued decline in air cargo shipments from Taiwan in 2012 as the air cargo business experiences its worst period in over a decade. Mr Chang said the fourth quarter is traditionally the busiest quarter for cargo due to the Christmas peak period, but as at the end of Oct-2011, there had yet to be any sizable surge in volume.

"This year has been the worst year since I entered the trade," Mr Chang said, adding: "Previously, demand from the US and Europe continued more or less until New Year's Eve, even with a slowing global economy, but I have not seen any [demand] this year." In light of the declining demand for air cargo, EVA Air has already sold two MD-11 freighter aircraft, with plans to sell another by the end of the year. "It is appropriate to get rid of cargo planes because of the economic changes, and the move conforms with actual operations in the market," he said.

EVA Air has seen year-on-year cargo reductions for the past seven months and in all but two months in 2011. Cargo yields have also been down on a year-on-year basis in the past seven months, as have cargo revenues.

EVA Air cargo volume: 2009 to 2011

EVA Air operating revenue (cargo revenue): 2009 to 2011

EVA Air yield (cargo yield): 2009 to 2011

China Airlines Hong Kong general manager Tong Huai Ming stated new freighter capacity has worsened the situation and has put freight rates under great pressure. Previously quoted in the South China Morning Post, the Hong Kong GM noted the declines in its cargo business: "I can't see a recovery in cargo demand in the fourth quarter".

China Airlines, meanwhile, has witnessed 12 consecutive months of freight traffic (RFTKs) declines, with traffic levels over the past two months lower than 2009 levels. Like the situation at EVA Air, cargo yields have declined on a year-on-year basis for the past seven months, with cargo revenues weaker on a year-on-year basis for the past eight months.

China Airlines revenue freight tonne kilometres: 2009 to 2011

China Airlines yield (cargo yield): 2009 to 2011

China Airlines operating revenue (cargo revenue): 2009 to 2011

Singapore Airlines (SIA), upon the release of its 3Q2011 financial results, noted that Global Purchasing Manager Indices have fallen, pointing to weaker demand for air freight. The carrier added that freight yields are therefore expected to remain under pressure.

Lufthansa to reduce 1H2010 cargo capacity by 20-30%

In Europe, Lufthansa Cargo sales chief Andreas Otto has also stated the company will withdraw 20-30% of its cargo capacity in 1H2012 to counter an anticipated slowdown in demand. The carrier plans to ground at least four MD-11Fs during the first half. Lufthansa Cargo is looking to extend capacity reductions usually implemented after the Christmas peak as it anticipates "a first half with growth around zero, maybe slightly in the minus," Mr Otto, said, adding: "We would reduce capacity available to customers by 20, 25, maybe even 30 percent." A 25% capacity cut would be equivalent to withdrawing four aircraft from service, Mr Otto said.

Looking further ahead, Mr Otto stated the company expects 2H2012 to be "smooth and successful", with overall growth of around 3% in FY2012. "Next year will be another difficult year for our industry, but we don't expect there to be a recession. We might see zero growth in the first quarter or first half, but the second half should be better. We don't see a recession," Mr Otto commented.

Lufthansa Cargo CEO Karl Ulrich Garnadt, as quoted by Bloomberg on 28-Nov-2011, stated freight traffic would likely see a "softer start" to 2012, noting shipments from China have "slowed significantly, whereas German exports are still impressively stable". Lufthansa and Lufthansa Cargo have seen cargo volume reductions over the past three months, with all regions except the Americas witnessing reductions in Oct-2011.

Lufthansa cargo volume: 2009 to 2011

Deutsche Post expecting late rush in Christmas shipments; upgrades 2011 outlook

Deutsche Post DHL, meanwhile, stated a late rush in shipments ahead of Christmas may boost demand, reflecting trends by companies to let inventories run down.

The company, earlier this month, also raised its 2011 outlook after robust Asian demand helped the company exceed its third-quarter (to Sep-2011) expectations. "We still see good growth, especially in emerging countries of Asia, but also in Latin America and in the Middle East and in Africa, albeit at a slower pace than in 2012," CEO Frank Appel said.

Deutsche Post affirmed that it expected its EBIT to continue to rise in 2012 despite the uncertain economic climate. The carrier expects an EBIT result of EUR2.4 billion in 2011, following a EUR646 million EBIT result in the third quarter (+18.5% year-on-year).

"We are less pessimistic now," Mr Appel said upon the release of the company's third quarter results, adding there was no indication that Deutsche Post's business could face a slowdown. "The past three years showed that what the majority expects never happens because everyone is prepared for it. We will not see what we saw in 2008, when there was massive overproduction," he said.

TNT Express, almost 30% owned by Post NL, stated it would reduce its fleet on routes between Asia and Europe due to economic uncertainty. PostNL, meanwhile, reported better-than-anticipated Sep-2011 quarter results and has raised its full-year outlook.

Air France 'looking into fog'

Air France-KLM spokesman Jean-Claude Raynaud similarly noted that "Western countries are importing and consuming less due to debt issues and so on. People have a conservative philosophy that, since they don't know what's coming, they'll be prudent and reduce orders, make economies. That hurts global trade, making problems for us." He continued: "The big problem is that we don't really have any visibility. We are looking into fog."

During 3Q2011, the carrier reported a 2.1% year-on-year reduction in freight volumes, on a 1.5% increase in capacity (cargo traffic (RFTKs) has decreased for the past six months while capacity (AFTKs) has increased for the past three months). However, total revenue for Air France-KLM's cargo group rose slightly in the third quarter increasing 2.1% to EUR6.79 billion, despite the negative currency impact of 2.8%. "The current economic climate continues to impact international trade as well as business confidence, leading to volatility in both traffic and revenues," the carrier said.

Air France revenue freight tonne kilometres: 2009 to 2011

Air France available freight tonne kilometres: 2009 to 2011

UPS and FedEx Express pre-Christmas boost in freight levels; Atlas Air notes impact of
weak global economy on airfreight market

In the US, United Parcel Service (UPS), in a 07-Nov-2011 statement, stated it is hoping for an increase in online purchases and shipments closer to Christmas, with the company predicting 120 million packages will be delivered in the week before 25-Dec-2011, a 6% year-on-year increase.

"That growth demonstrates anew the recent trend of people delaying online shopping until just before Christmas. Before the explosion of e-commerce, the holiday peak season stretched from Thanksgiving to Christmas; now, it's been compressed to the last two weeks before Christmas," UPS said.

FedEx Corp, in a 24-Oct-2011 release, stated it expects to move more than 17 million shipments through its global networks on 12-Dec-2011 - the projected busiest day in the company's history. The amount is almost double its daily average volume and a 10% increase from 2010. Between Thanksgiving and Christmas, FedEx forecasts more than 260 million shipments to move through its worldwide shipping networks, a 12% year-on-year increase. Retail inventory such as apparel, personal consumer electronics and luxury goods as well as books and other items from large, internet retailers will account for a large portion of FedEx holiday volumes, it said.

Atlas Air Worldwide president and CEO William J Flynn earlier this month stated that "while the weak global economy has affected the airfreight market and our business during the third quarter, we expect substantial improvement in our fourth-quarter results driven by increased customer utilisation of our ACMI aircraft; introduction of our 747-8F aircraft into service; increased Commercial Charter demand; substantially lower maintenance expense; and continued productivity improvement and cost controls." The carrier stated its 3Q2011 results "benefited from the global scale of our time-definite operations, with growing airfreight demand in the Middle East, Africa and South America".

Mid-East and Africa regions faring best

Similarly, Boeing World Air Cargo forecaster Tom Crabtree, as quoted by Bloomberg, noted that the Mid- East and Africa are also among regions faring best, "or not so bad". However, Dubai Airport, upon the release of Oct-2011 traffic, noted that while passenger numbers "showed no ill-effects, global economic conditions continue to put a drag on air freight traffic growth". Freight levels contracted 2.5% year-on-year in Oct-2011, with year to date freight contractions of 1.8% year-on-year.

World's largest freight airports seeing cargo volume declines in Oct-2011

Unsurprisingly, the world's largest freight airports are also seeing declines. Of the world's 15 largest freight airports in 2010, all but Singapore Changi and Miami have seen cargo volume contractions in Oct-2011 (although Memphis, Anchorage and Paris CDG are yet to report their Oct-2011 data).

Commenting on the freight weakness, Hong Kong noted its cargo performance is "consistent with the worldwide negative growth trend". The cargo decline in Oct-2011 was mainly attributed to the 8% year-on-year drop in exports. Imports and transshipments decreased by 8% and 10%, respectively, compared to Oct-2010. Europe, North America, Mainland China and Taiwan all experienced double-digit year-on-year declines in overall cargo traffic, the airport said.

Fraport, in its 3Q2011 financial release, also noted the "overall downward trend" in the cargo sector and now expects a slight decline in cargo throughput at Frankfurt Airport for the entire fiscal year 2011. Freight declined 9.3% in the quarter.

Cargo volume year-on-year changes in Oct-2011 for world's 15 largest airports (2010 data)

	Airport	Oct-2011 air cargo volumes (tonnes)	Oct-2011 year-on-year change
1	Hong Kong	342,000	-8.3%
2	Memphis	334,530	-1.5%
3	Shanghai Pudong	258,900	-9.4%
4	Seoul Incheon	217,921	-7.8%
5	Anchorage	227,800	-5.9%
6	Paris CDG	181,000	-8.1%
7	Frankfurt	190,927	-9.0%
8	Dubai	197,841	-2.5%
9	Tokyo Narita	164,233	-11.4%
10	Louisville	178,441	-5.0%
11	Singapore Changi	163,114	+0.4%
12	Miami	178,006	+9.1%
13	Los Angeles	152,273	-10.1%
14	Taipei Taoyuan	136,838	-10.1%
15	London Heathrow	138,301	-7.2%

Further weakness expected into 2012

Forward-looking indicators for freight demand point to further weakness in the months ahead. Declining sea freight rates and an increased company preference for cheaper (and slower) freight transportation options, combined with increased bellyhold capacity are further pressuring the competitive environment.