Sad State of Air Cargo
A version of this article appears in the July 28 edition of Aviation Week & Space Technology.
Air cargo historically has been a strong aviation growth market and a key enabler of global commerce. Fueled by trade liberalization, the emergence of global supply chains and the growth of time-definite services, it grew at an annual rate of 8% in the 1980s and 6.6% in the 1990s—faster than the growth of global trade. Air cargo could reliably absorb roughly 80 new and converted freighter aircraft per year and generous amounts of infrastructure investment.
The freighter fleet doubled in the 1990s; not surprisingly most long-term forecasts at the end of the decade predicted the torrid pace of growth would be extended through 2020 and beyond. Then the air cargo industry fundamentally changed in the new millennium, as demand unexpectedly decelerated and became uncoupled from global trade.
While global trade in nominal terms galloped at an annual growth rate of 9% in 2000-10, air cargo expanded at a paltry 3.3% rate. Even more troubling is that air cargo demand has been flat since 2010. What happened to this pillar of air transportation? And what caused the uncoupling from global trade activity?
For one, other transportation modes—including trucking, shipping and rail—became more competitive as they adopted the technologies that made time-definite air cargo so popular, such as “track and trace” and containerization. Major air cargo integrators such as FedEx,and DHL expanded their ground transportation capacity and became transportation-mode agnostic as they broadened their global reach. In the U.S., “air trucking” became more popular as ground vehicles carried envelopes and packages once destined for flight.
Escalating aviation fuel prices didn’t help, making air cargo less competitive with slower but less expensive modes of transportation. At the same time, a glut of global shipping capacity led to a collapse in pricing. The Baltic Dry Goods Index, an industry benchmark for shipping costs, sits near historic lows. Central banks also played a role, as easy money policies reduced the cost of capital—and inventory. Some retailers decided their inventory could move by ground rather than air. One recent study concluded that the share of total global containerized cargo transported by air declined to 1.7% in 2013 from 3.1% in 2000. About one-third of that loss is attributed to “modal shift,” in which a product that used to be shipped by air now goes by boat or truck.
Whether this unprecedented slowdown is ephemeral or structural has important implications for market participants. Network airlines once counted on cargo for 10% or more of their revenue. Today a dwindling number of carriers focus on airfreight as a growth opportunity, despite the fact that the surge in twin-aisle capacity will significantly expand space for belly cargo., for example, recently chose not to replace its retiring chief cargo officer and effectively pushed the role lower in its organization. In Europe, - is contemplating selling Martinair, its airfreight subsidiary.
What about Fedex, UPS and DHL? They appear to be more interested in beefing up their “ground game” and creating new services such as FedEx Office than investing in dedicated freighters and infrastructure. This is especially true with the projected increase in belly capacity.
On the equipment front, the airfreight slowdown coupled with increasing belly capacity creates headwinds for newer freighter types such as theand -800F. The same is true for passenger-to-freighter modifications, which traditionally supply two-thirds of the cargo fleet. This bleak near-term outlook challenges the credibility of industry forecasts, which call for more than 2,500 additions to the freighter fleet over the next 20 years.
Will air cargo emerge from its doldrums? The answer depends, in part, on macroeconomic factors such as aviation fuel prices, the cost of capital and global trade patterns. The’s former global head of cargo recently urged the industry to cut average end-to-end transit times for non-express shipments by 48 hr. by the end of the decade. Today’s average is 6-7 days, the same since the 1960s. And clearly the industry must continue to push down unit costs.
With the days of easy growth in the past, the air cargo industry must innovate and hope for some breaks to return to its growth trajectory. Until then, it will likely remain stuck in neutral.
Contributing Columnist Kevin Michaels is global managing director of aviation consulting and services for ICF International, Ann Arbor, Michigan.