It took airline cargo executives several months into 2011 before they started pulling back capacity to meet the reality of reduced shipping demand. They don’t appear likely to keep aircraft in the air while waiting for demand to grow in 2012.
Air cargo planners are entering 2012 with capacity management foremost on their minds.
2011 closed on a low note. As the holiday season was drawing near, carriers abandoned hopes for a surge in traffic out of Asia to North America and Europe that would recall the abrupt upturn in 2009 that came when restocking retailers launched a sudden shipping boom.
Instead, freight volume in the Asia-Pacific region fell 8.2 percent year-over-year in October and business was all but flat from September to October at major gateways such as Hong Kong and Los Angeles. Carriers responded by quickly pulling down the planes to match their deflated markets.
“The peak season has been extremely muted. There is sufficient capacity in the market. Rates have gone down significantly,” said Heiner Murmann, president and CEO of Schenker, the U.S. arm of international logistics giant DB Schenker.
There were some bright signs in the U.S., where a rise in U.S. airborne exports gave some strength to outbound loud factors, said Shawn McWhorter, president for the Americas of Nippon Cargo Airlines. The Japanese freighter operator has registered steady and strong traffic from North America to its home market as well as to some other Asian destinations.
As a result, westbound traffic figured more prominently in negotiations between airlines and forwarders heading into the new year about space agreements and pricing across the Pacific. However, the magnitude of the imbalance in trans-Pacific flows has considerably cushioned the impact of the rise in U.S. exports to Asia. “Growth in exports has consumed excess capacity, but it is not close to the point where it would drive incremental capacity,” Murmann said.
Overall, the balance in 2011 tilted in favor of shippers.
The Drewry Air Freight Price Index, a Drewry Shipping Consultants measure of pricing out of Asia, was down year-over-year in every one of the first nine months of 2011. The index level in September was 12 percent behind the high point of the year in April.
Capacity increased as a result of new and converted freighter aircraft entering the market, which brought the global jet freighter fleet at the end of the year about 3 percent above the level it had shown at the end of 2010. Freight volume, however, slipped into negative territory in May and was expected to show a slight decline for the full year versus the previous 12 months.
“A balanced freight capacity versus demand was fundamental to air cargo’s success in 2010, but unfortunately this discipline has not carried over into 2011, United Cargo President Robbie Anderson said.
IATA, he noted, reported traffic was down 0.2 percent in the first 10 months of 2011, while capacity grew 5.7 percent.
“We are now experiencing the downward pressure on rates that inevitably results from weak demand and increased capacity. Factor in the uncertain economic recovery, political unrest and national debt crises, and the result is a very unstable environment for cargo industry profitability,” Anderson said.
Operators are bracing for continued imbalance, with more widebody freighters due to come into the picture this year. Observers predict the momentum of freighter conversions will slow, depressed by the economic outlook and concerns about high fuel prices, but new production freighters scheduled for delivery this year will add capacity, leaving carriers facing ongoing downward pressure on load factors and yields.
“Demand is weak to Europe and North America. Everybody expects this trend to continue in the first quarter, if not the first half” of 2012, said Nick Rhodes, director and general manager of cargo at Cathay Pacific.
The Hong Kong-based airline’s traffic, measured in cargo metric-ton kilometers flown, fell 4.3 percent in the first 10 months of 2011, even though capacity grew 8.1 percent year-over-year. By the fall, Cathay was racing to keep up, but October’s 15.9 percent decline in traffic was still far ahead of the 4.7 percent cut in capacity.
Rhodes and other airline executives believe demand will turn back upward in the second half of the year, but some industry observers are more pessimistic. “We don’t see growth (in 2012) overall,” said Dirk Steiger, principal of Frankfurt-based air freight research and consulting firm Aviainform, “Some trade lanes will show negative growth. “Manufacturers still have orders, so we should see traffic continue in the months ahead, but what is going to happen in the second half of the year?”
Management at Lufthansa Cargo projects demand to be flat in the first six months but expects traffic to rise by about 3 percent in the second half of the year.
Delta Cargo’s growth target for 2012 is more than twice that number. The carrier hopes to boost cargo revenue 6.1 percent in the year ahead, said Neel Shah, vice president of cargo. Over the past year, the airline has consistently shown higher growth in cargo traffic than its U.S. rivals. Shah attributes this to gains in market share and is confident Delta can keep up this momentum going into 2012.
Delta will launch some new intercontinental routes, but its overall capacity will be down, with most cuts planned for the trans-Atlantic. “We are not going to fly unprofitable routes,” Shah said, emphasizing the need for disciplined capacity deployment.
Delta is operating from a U.S. market where combination airlines are still struggling through what could be the last stage of major consolidation, for a while at least.
American Airlines’ move into Chapter 11 bankruptcy protection won’t have an immediate impact on capacity, particularly in the cargo markets. But the move to restructure could push American to reduce its operations more than the minor cutbacks it has described. And the bankruptcy could set up further consolidation among the passenger airlines. US Airways is the most likely partner for American in a merger scenario.
American’s move certainly signals that discipline is on the agenda. “Looking forward to 2012, industry forecasts are highlighting Asia-Pacific, the Middle East and Africa exceeding 5 percent annual air cargo growth,” said Tony Randgaard, United’s manager of cargo marketing. “I think the tide will turn based on capacity. If those areas are deluged with new freighter service as we have seen in China, we’ll all end up with coal in our stockings.”
Much of the concern about freighter capacity is centered around Boeing’s 747-8, which finally entered service in the last quarter of 2011 and is due to hit the market in larger numbers this year. A large chunk of this capacity will be aimed at North America. Nippon Cargo, Cathay Pacific and Cargolux are among 747-8 operators who look to deploy the aircraft on U.S. routes in the coming months.
The first few 747-8s at Cargolux will replace leased-in freighters that will be taken out of service upon the larger plane’s arrival, said Robert van der Weg, the European cargo airline’s vice president of sales and marketing. Likewise, Cathay will see some 747 freighters exit its fleet. Still, the 747-8 has 20 to 25 percent more payload than the older 747s it replaces.
Lufthansa Cargo is looking to trim its freighter lift in the market. It was due to reduce its main-deck lift by some 25 percent between mid-December and mid-January for the holiday break but could extend the timeframe and possibly increase the extent to 30 percent of its freighter fleet, according to Andreas Otto, head of sales and marketing.
Cargolux also is considering capacity reductions, van der Weg said, emphasizing no decisions have been made but that management wants to be prepared. At Cathay, Rhodes won’t rule out parking freighters altogether, but described such a step as a last resort. For now, the carrier is adding points to its network to boost loads. It started scheduled freighter flights to Zaragoza, Spain, and Chongqing and Chengdu, China, and increased the frequency on the Miami route to step up its exposure to Latin American traffic. More points in China and India and possibly eastern Europe are on the drawing board.
Rather than park freighters outright, Cathay also may reduce utilization, try to lease some out or combine points in the network to boost load factors, Rhodes said.
Besides market development, oil prices will be a major factor determining the deployment or elimination of capacity. “The biggest concern is still the fuel cost,” McWhorter said.
Alot of traffic migrated from air to slower modes, notably to ocean vessels or to sea-air routes, during the 2008-09 downturn. The absence of a peak season kept ocean capacity available, reducing the need for air freight, Murmann said. “Sea-air is growing for us,” he said. Schenker operates hubs for this traffic in Vancouver, British Columbia, and Dubai.
Van der Weg is bracing for some twists. “I don’t think 2012 will be just an extrapolation of 2011. I think there will be surprises,” he said. He sees two factors in particular that could cause rapid changes in demand: swings in the economic situation in North America and Europe, and inventory levels, which are close to where they were in 2009.
Faced with uncertainty about the economic outlook, airlines and their clientele are showing little appetite for long-term capacity agreements. Forwarders may be tempted to try to lock in capacity at current, depressed price levels, but they are not going to gamble on future capacity needs. “We do space commitments when we have solid customer commitments,” Murmann said. In mid-November, DB Schenker started dedicated 777 freighter flights from Luxembourg to Toronto and Chicago.
Airlines are decidedly unenthusiastic about block space agreements at late-2011 rate levels. “In many markets, pricing is at levels that are not sustainable long term. There is no point for us to lock in at these rates,” van der Weg said.
Moreover, Cargolux’s own planning horizon has contracted. Besides the question marks over future demand developments, the situation on the supply side also makes it difficult for operators to develop longer-term capacity strategies. Van der Weg sees uncertainty over how many freighters will be in action in 2012.
For Cargolux, this means the emphasis is on flexibility in order to be able to react quickly to market developments. Likewise, flexibility is a key element in Murmann’s approach to 2012. “We have to remain agile,” he said. “We have to get our customers secure capacity at appropriate prices, so we have to watch the market very carefully.”
Contact Ian Putzger at email@example.com.