Air Freight Demand Begins Picking Up, But Experts Predict a Slow Recovery

This story appears in the Nov. 9 print edition of Transport Topics.

Air freight carriers appear to be pulling out of a steep dive caused by the global economic downturn over the past year, but company executives and industry observers said they expect the recovery to be slow and uneven.

“Demand is starting to push back up,” said George Post, director of air freight marketing for UPS Inc. “We’re seeing increases in weights for shipments in the health care and auto parts sectors.”

Whether these shipments represent a restocking of depleted inventories or a longer-term upswing in business is “the billion-dollar question,” Post said.

The global recession hit international and domestic air freight carriers especially hard, as shippers scaled back orders in response to slower sales. Many companies also transferred loads from air to ocean and ground transport to save money.

The International Air Transport Association said cargo volume reported by 230 commercial airlines in September was up about 12% from the low point in December 2008, enough to convince the Geneva, Switzerland-based group to reduce its forecast of a drop in freight tonne-kilometers in 2009 to 14% from 17%. A freight tonne-kilometer is one metric ton — 1,000 kilograms or about 2,200 pounds — of cargo carried one kilometer.

“It is far too early to call this a recovery,” said Giovanni Bisignani, IATA’s director general and CEO. “The worst may be over in terms of the fall in demand, but yields continue to be a disaster and costs are rising.”

IATA officials said the yield, or profit margin, for freight carried aboard commercial airliners is expected to decline 15% this year, as opposed to 11% in an earlier forecast, and that utilization of air cargo capacity is still only about 50%, despite the removal of 227 air freighters from global service.

Commercial airlines, which handle an estimated 80% of all air cargo, are projected to lose $11 billion this year and another $3.8 billion in 2010, according to IATA estimates.

As a consequence, airports, navigation service providers and global distribution systems all “must be prepared to cut costs and improve efficiencies,” Bisignani said.

Ted Scherck, president of The Colography Group, an Atlanta research firm that tracks the movement of air and ground expedited freight shipments, said U.S. air cargo revenue is projected to reach $7.1 billion in 2010, a 1.5% gain from 2009 levels. However, domestic air shipments are expected to fall by 1.1%, while export air shipments are expected to grow by about 6.1%.

Scherck said shippers are using lower-cost surface transportation to move packages and freight, and e-mail instead of overnight letters to transmit documents, limiting demand for domestic air freight service.

“Businesses are increasingly reluctant to pay a premium for overnight air service and continue to build their inventory and distribution models around more economical, time-definite deliveries moving in ground parcel, less-than-truckload and truckload,” Scherck said.

UPS’ Post agreed that while more freight is being shipped via ocean and ground, the dramatic shift from air to ground that began in 2008 when fuel prices spiked has moderated.

“We’re not seeing as much diversion now,” he said.

Post said UPS now uses a combination of its own “brown tail” airplanes and capacity provided by others to move goods. The company also uses a facility in Dubai to transfer goods coming by ship from Asia onto airplanes for a quick trip to destinations in Europe.

Helane Becker, a senior research analyst at Jesup & Lamont Securities Corp., New York, said she expects growth to be strongest in markets other than the United States and Western Europe.

“I don’t think the U.S. is going to lead coming out of this recession,” Becker said in a recent Wall Street Transcript roundtable. “There is a growing middle class in China and in the Indian subcontinent, and so companies will have to learn to adjust to that.”

Frank Appel, CEO of Deutsche Post DHL, said a recent study by the London School of Economics identified three major areas of potential growth for air freight carriers: rising demand for individualized health care, demand for documents transfer in international services and spare parts for equipment as more firms upgrade, and repair existing machines rather than replace them.

The study also noted the potential for growth in high-value air cargo in Brazil, China, India and Russia.

UPS continues to ramp up its use of a new 1 million-square-foot air hub in Shanghai, China, and plans to make additional investments in Turkey and Russia to handle what is expected to be a growing market for air freight, Post said.

John Hill, president of Pilot Freight Services, Lima, Pa., said the downturn in demand for air freight has accelerated efforts to broaden the company’s portfolio of freight services with the addition of warehousing and ground delivery services.

“We’re becoming a more integrated solution for customers,” Hill said. “Customers are asking for different things.”

One thing shippers want is to store goods in locations closer to customers to minimize the time and distance that goods must be transported, Hill said.

Customers also are opting for second- and third-day delivery, which enables air freight carriers to save money by moving those goods via ground carriers.

Hill said air freight now represents about 50% of the company’s revenue.