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Air Cargo - Not Pulling Its Weight


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Turbocharged

THE phrase “self-loading freight” has been a favourite put-down among aviation workers for decades. The term demotes passengers to the lowly status of cargo, sardonically crediting their ability to board and disembark without assistance. Readers with personal experience of lengthy security queues, unallocated-seating scrums and lengthy tarmac delays may themselves have felt like mere boxes with legs.

 

Traditional air freight is more troublesome to shift around. It has also become more difficult to sell. And that is hitting carriers' profits just as passengers are returning and they are laying on more flights.

 

Airlines went through a rough patch after the global financial crisis. According to IATA, an industry body, 2009 was the industry’s worst year since the second world war. A slew of bankruptcies, mergers and restructuring programmes subsequently knocked parts of it into shape. Optimism is now growing that the global economy has entered a cyclical upturn. Worldwide passenger traffic grew by 5.2% last year. IATA expects it to rise another 31% by 2017. International premium traffic—those passengers who turn left when they embark—was up 4.2% last year. Such high-yielding business travellers are by far the most valuable for airlines. Overall, worldwide airline profits are forecast to reach $18.7 billion this year; not exactly eye-watering for such a huge industry, but better at least than the recent past.

 

But one subset of the airline industry had a distinctly lacklustre 2013. Ironically, it is the very market that has was once considered a bellwether of global economic fortunes. Air cargo grew by a meagre 1.4% in 2013, trailing significantly behind the 2.6% increase in freight capacity. That prompted IATA to call freight markets the “biggest worry” for the airline industry. Although freight traffic has picked up slightly in 2014, IATA warns of “trends which are not in the industry’s favour”.

 

Foremost among these is that manufacturers are moving supply chains back to the developed world. As goods are produced closer to home there is less need for airlines to fly finished products and components around. One reason why off-shoring has fallen out of favour, IATA points out, is a rise in protectionism since the crisis. This is a “major part of the reason why we are not seeing trade growth of 5-6%, which we would expect to see at the current level of domestic production,” says Tony Tyler, IATA’s director general. This has been exacerbated by the rising cost of manufacturing abroad, as well as concerns over labour exploitation and a lack of protection for intellectual property rights.

 

Other structural changes are also hitting the demand for air freight. Electronic goods are generally becoming smaller—or, worse, digitised. And storage facilities on ships are becoming more advanced, meaning fresh goods can now travel by sea. On the supply-side, the rapid growth of Gulf super-connectors Emirates, Etihad and Qatar Airways has increased capacity. These airlines have done an enviable job of funnelling inter-continental passengers through their hubs in the Middle East. But with every extra Boeing 777 they operate, space for another 25 tonnes of freight is added to the marketplace. Surplus capacity in the bellies of passenger aircraft drives down freight yields, which damages the overall health of the cargo industry.

 

In response, many global carriers are moving out of the dedicated freighter market. Next month, British Airways will stop operating its 747-8F freighters, instead relying on hold capacity in passenger planes and a new partnership with Qatar Airways. Indeed further consolidation seems logical, much as with passenger planes. Air France and Cathay Pacific are re-assessing the size of their freighter fleets, while Japan Airlines ditched its long ago. Unless fuel prices come down markedly, many carriers will deem that deploying freighters in a buyer’s market is simply too risky.

 

As risk aversion grows, a new breed of cargo operators is taking the reins. Coyne Airways describes itself as a non-asset-based airline. It is the 91st largest freight carrier in the world, yet it neither owns nor leases aircraft. Sometimes it will charter flights, but more often it simply buys space on another carrier’s freighter. Virtual airlines like Coyne Airways can market air freight transportation to global customers without setting foot near an airport. “You can buy a new freighter for $275m, use it for four or five years, and it might only be worth $60m at the end,” says Larry Coyne, the firm’s boss. Better to let other carriers deal with depreciating assets, uncertain demand and low yields. Perhaps better still to concentrate on the type of freight that loads itself.

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