There is growing evidence the air cargo industry is heading for a state of overcapacity that threatens to ground more all-cargo carriers and pull down rates further.
The industry is on track to have 9 percent too much widebody freighter capacity by 2016 if volume doesn't expand 4.9 percent annually as forecast. If growth ticks up only 3 percent, causing overcapacity, carriers can “spread the pain” by deferring delivery of aircraft, according to a new report by the Air Cargo Management Group. Capacity of widebody freighters, most often used for international lifts, is on track to expand 5.3 percent annually, research director Alan Hedge said.
“There is a significant although not critical risk of near-term main deck freighter overcapacity,” he said. “The status quo is unacceptable.”
The demand projections, based off International Air Transport Association estimates, assume the eurozone crisis will be contained and fuel prices don’t jump again. Both assumptions are far from certain. The warning of overcapacity comes as global volume in April fell 4.4 percent year-over-year and more freight is shifted to slower but cheaper ocean shipping.
If more capacity keeps entering the market and demand doesn’t spike, there will likely be even more closings of all-cargo carriers like that of Jade Cargo International. The joint venture between Lufthansa Cargo and Shenzhen Airlines is being liquidated after the Chinese carrier grounded its freighters in early January. Tianjin-based Grandstar Air Cargo has also reportedly grounded their fleets, Singapore Air cut freighter capacity by 20 percent and Cathay Pacific Airways plans to trim cargo capacity by 4 percent.
The eurozone debt crisis has dragged down demand for air cargo imports from Asia, and a surge of belly capacity on new passenger flight services has also helped to further depress rates. That compounds the difficulty of freight forwarders, such as DHL Freight Forwarding and Team Worldwide, to tell when or even if there will be demand for charter service during the peak season.
The turmoil could provide shippers with slightly cheaper rates, but because fuel prices account for 50 percent to 60 percent of operation costs, rates can’t fall much further. Plus, if capacity gets tighter on certain lanes, shippers might have to shift freight from all-cargo carriers to passenger aircraft, giving the latter more pricing power.
As of May 1, there were 213 widebody freighters on order, accounting for about 21 percent of the widebody freighter fleet, according to ACMG’s “The Freighter Overcapacity Threat” report. About 62 percent, or 1,016 freighters, of the 1,646 total freighters are widebody aircraft.
If demand doesn’t surge, Hedge said carriers could best curb capacity by deferring deliveries and keeping passenger aircraft to freighter conversions to a minimum. The alternative is taking on delivery of new freighters, sharply reducing aircraft conversions and speeding up the retirement of existing freighters. This riskier path could prove to be the undoing of all-cargo carriers already feeling the pain of sluggish demand and low rates.
“If you start to see deferrals in deliveries and retirements suddenly crank up in a few years, then it is too late,” Hedge said.