Air freight demand weakness continues

air freight forwarding

There is no doubt that global air freight through the first half of 2019 has been weak when compared against the beginning of 2018. Figures produced by IATA, WorldACD and Hong Kong International Airport (HKIA) make for grim reading.

IATA’s latest Air Freight Monthly Analysis publication shows that international FTKs flown over January-May 2019 are 3.9% lower than at the same time one year ago. These declines are broad-based, although Asia Pacific (-8.5%) and the Middle East (-2.7%) are the worst affected. Europe and North America, at -1.2% and -0.7% respectively, have also both seen declines (the data here can be viewed on Ti’s Dashboard).

WorldACD figures paint a similarly bleak picture. Chargeable weight for worldwide cargo was 5.0% lower year-on-year in May 2019, marking a sixth straight month of year-over-year declines.

Meanwhile, at HKIA, the world’s largest cargo airport, freight volumes fell 6.7% year-over-year in H1. It claims that “Cargo throughput to Southeast Asia and Europe decreased most significantly.”

It is important to view this performance in context though. The air freight market witnessed a cyclical boom throughout 2017 and early 2018. The process, known as an inventory re-stocking cycle, occurred as an economic upturn induced a strong surge in air freight demand. Firms raced to stock inventories to account for the sudden increase in demand. The result was a boom for air freight volumes.

As inventory levels normalised, growth has naturally subsided. In “normal times”, firms are able to forecast sales better and sea, road and rail represent cheaper and more attractive options. So, compared against the lofty heights of early 2018, a drop off in growth is perhaps not too surprising. Given that the cycle broadly finished in early 2018, it suggests year-on-year slides would not be as significant in the second half of 2019.

However, these events have also coincided with trade weakness which threatens to prolong this dour period. The escalating trade war has already had a significant impact on global volumes but more disruption is expected. A tariff increase from 10% to 25% on Chinese imports worth $200bn was enacted on May 10, whilst additional Chinese tariffs on $60bn of US imports began on June 1. The effects of this might be felt more harshly in the coming months. For eastbound traffic, a 25% tariff is potentially too much to take for those who diligently swallowed the 10% tariffs enacted on goods last year. The tariffs will hit approximately one third of eastbound air freight tonnage. Manufacturers in both countries are looking for alternative export destinations but finding countries with the desire to import the same quantity of goods at short notice is challenging to say the least. It will undoubtedly take time to nurture the same levels of demand.

Outside of the trade war, some of Europe’s major economies are showing weak economic growth so far this year, whilst troubles in various emerging markets such as Turkey and Argentina are also hurting demand.

There are some significant bright spots though for air freight, but these are more structural and don’t necessarily point to a short-term uptick. Cross-border e-commerce is growing at 20%-30% according to reports, although this still accounts for a relatively small proportion of air freight. Pharma is another sector showing significant growth opportunities. Evaluate, which provides market research for the industry, forecasts a compound annual growth rate (CAGR) of 6.4% for prescription drug sales between 2018 and 2024.

Whilst over the medium term, the outlook is potentially quite bright, the current headwinds facing the air freight market are strong. Given that the rise and fall following the inventory restocking cycle appears to be nearing the end of its path, trade growth is now a more reasonable predictor of how air freight will look over the short term. However, with the global economy late into its economic cycle, and with pains of the trade war being felt more acutely, it seems that pessimism around the market may continue for some time.

Source: Transport Intelligence, July 16, 2019

Author: Andy Ralls

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