Excess supply undermines air cargo yields, analyst says

Excess supply undermines air cargo yields, analyst says

TOKYO — Air cargo is going through a period of adjustment that will keep profitability largely out of reach for the world’s carriers until more of a balance is achieved between cargo capacity and demand.

Speaking to JOC.com on the sidelines of the Association of Asia Pacific Airlines (AAPA) annual assembly of presidents gathering in this Japanese city, an aircraft leasing expert for a regional bank said this adjustment would keep a lid on air cargo yields.

“Demand for air cargo went into a trough in mid-2009 after the financial crisis, rebounded in 2010 and has basically been flat and stable since then,” the analyst said. He declined to be named as it was against the bank policy.

The air freight market has picked up this peak season and the growth is expected to extend well into December, giving many carriers in Asia-Pacific a rare chance at booking a profitable year. But the analyst said pressure on yields would continue because even though demand was rising, it was not rising fast enough to keep up with the supply entering service.

It is a scenario familiar to container shipping lines that are also burdened by a glut of excess tonnage. Attempts to drive up freight rates through a host of general rate increases on the major east-west trades have been unsuccessful.

“The issue in absolute terms is not demand, it is supply. In the last couple of years Boeing and Airbus have injected around 120 brand new freighters into the market, which is a 20 percent gross increase in capacity, or a net increase of around half that,” he said.

“For an industry registering flat numbers and basically hanging in there, that is a lot of growth for the airlines to achieve. A good sign is that the mountain of equipment that arrived in 2012 and 2013 has not been matched in 2014, and that could start to push airlines back into sustainable profit.”

Andrew Herdman, AAPA director-general, told Asia-Pacific airline CEOs at the gathering that there were too many freighters in the world.

“The freighters in service are probably 25 percent surplus to requirements,” he said. “Air cargo is in the middle of a steady recovery, but it is a tough business and incredibly competitive in the region.”

Asia-Pacific airlines carry 38 percent of global air cargo, or almost 20 million tons. But more cargo is flying via belly cargo, and as carriers add passenger planes, the available space for cargo in the bellies of these planes is ramped up. 

Widebody passenger aircraft sales from 2006 through October 2014 by Boeing and Airbus total more than 3,200 planes.  A Boeing 777 passenger plane can carry up to 30 tons of cargo on many routes.

Dragonair CEO Algernon Lau said this had led to overcapacity in the industry that the carriers were struggling to cope with. “Belly is often more efficient than sending cargo via a freighter,” he said.

The efficiency of this belly cargo has completely changed the market, said Aviation Capital Group executive vice president and head of airline marketing Andy Mansell. The aircraft leasing specialist said the large passenger planes now fly point to point, rather than to the hubs for onward distribution.

“In the past, the wide body aircraft would fly from hub to hub and smaller planes would transfer the cargo to other destinations, but now these big planes fly direct, and that has changed everything,” he said.

Competition is fierce in the air cargo market, but Mansell said airlines such as Cathay Pacific that have large freighter fleets — with the steady delivery of Boeing 747-8 freighters taking its total number to 26, Cathay is the world’s largest cargo carrier — making it difficult for them to be challenged.

“With such competition on yields, it would be a brave CEO that stood before his board saying it was time to enter the freighter market. Those already in the market will benefit, because the barrier to entry if so high. Cathay flies 26 freighters and has the world’s production centre on its doorstep — who wants to go up against that,” he said.

Whether it was cargo or passengers, Herdman said running airlines was a “lean, mean and thin margin business.” Or as Garuda Indonesia president Emirsyah Satar told delegates, “There is more money in anything that running an airline.”

Contact Greg Knowler at gknowler@joc.com and follow him on Twitter: @greg_knowler.