Tuesday, June 12, 2012

Problems in Air Cargo Contrast with Those of Container Freight

Capacity the Key to Maintain Profitability
Shipping News Feature

WORLDWIDE – Along with the ‘State of IATA’ speech given by Tony Tyler, the International Air Transport Association’s Director General and CEO at the 68th IATA Annual General Meeting and World Air Transport Summit held in Beijing, China this week comes a set of predictions, including those for air freight following a sharp fall in air cargo in 2011. The forecasts make an interesting comparison with those of many major analysts in other areas of logistics such as the container shipping sector.

IATA figures are always primarily concerned with returns from passenger traffic but many of the factors involved are relevant to air cargo including the cost of fuel which, as oil prices slipped below $100/barrel (Brent), as the Eurozone crisis generated fears of recession, having been above $120/barrel earlier this year, have impacted on the cost of running an airline. Even with this price softening, fuel is still expected to account for 33% of airline operating costs, the same as in 2008 when oil prices spiked.

IATA point out that, in a complete reversal of the situation in container shipping, one of the notable features of this business cycle has been the limited expansion of capacity by airlines, and the resulting success in sustaining high levels of asset utilization confirming that, as in any capital-intensive business, this is a key factor behind profitability. Anyone in the industry knows the problems dogging the box carriers is principally caused by their over exuberance in investing in new build vessels prior to the latest fall in traffic levels.

IATA says on passenger markets, load factors reached record levels in the second quarter, and during the same period, freight load factors began to recover from their lows. Over the rest of the year the IATA forecast anticipates that, although demand is slowing, airlines will add capacity at an even slower pace. Growth in available tonnes kilometres (a combined measure for the passenger and cargo capacity) is forecast to be limited to 3.3% this year, compared with growth in both passenger and cargo traffic of 3.5%. Load factors and aircraft utilization are expected to be kept close to current high levels, limiting the reduction in airline profitability.

As with all predictions for any section of the world’s biggest industry the accuracy of IATA forecasts are always dependent on a myriad of factors which often reduce them to mere guesswork and, at a time of economic turmoil, this is truer than ever. IATA points out that ‘the risks to this forecast are primarily on the downside’ in other words this is likely to be an optimistic forecast and those who choose to study it in full should bear this in mind. The IATA statement reads:

“The risks to the forecast are primarily on the downside. While the forecast is built on the market’s expectation that the sovereign debt crisis in the Eurozone will intensify, the risk of more severe economic weakness in the event of a broader Eurozone banking crisis could easily wipe out industry profits. Similarly, the recent softening in oil prices could easily reverse should the ongoing dispute with Iran deteriorate, causing fears of a disruption in oil supply to resurface.

“The main upside risk would be a calming of the Eurozone crisis. There is no scenario for an immediate solution to the crisis, but actions to provide further liquidity on a large scale and steps towards closer integration for Europe would give a modest boost to industry profitability.”