Executive Briefings

Airfreight Sector Digs Out From Slump; Modest Growth Predicted for This Year

The business will expand in 2006, though not approaching the record rate of 2004, analysts say. High fuel costs will place a damper on the industry.

The international airfreight and express industry is undergoing dramatic change, both in the roster of players and the composition of cargo fleets, as it continues to post steady gains in volume. Meanwhile, the U.S. airfreight industry appears to have bounced back from the market plunge of 2001, despite ever-rising fuel costs.

According to the latest report on the international airfreight sector by the Seattle-based Air Cargo Management Group (ACMG), traffic grew by 3.5 percent last year. And while that was significantly less than the 14.5-percent gain racked up in 2004, the industry's biggest year on record, it further solidified a recovery from the weak market of 2001 through 2003.
But don't expect a banner year for airfreight carriers in 2006. "It looks like the next year will be more like 2005 than 2004," says ACMG managing director Edwin C. Laird. Fuel costs and other operating expenses will hold down volumes and result in the shifting of additional freight to cheaper ocean transport, he says.

High fuel expense will continue to pose a major challenge to the airfreight industry as well as the U.S. economy as a whole, says Laird. In three previous years when oil prices doubled-1974, 1983 and 1992-the following year saw a significant drop in gross domestic product. "When you don't have economic growth, the need and desire to use expedited transportation goes down," Laird says.

The industry's stellar performance of 2004 was the result of recovery in the U.S., a slowdown in the decline of European economies and the initial impact of China's entry into the World Trade Organization, says Laird. And while airfreight carriers had a lot less to celebrate in 2005, they got a boost from the wave of Apple iPods that flowed from China into the U.S. for the holiday shopping season, as well as the December introduction of Microsoft's Xbox 360 gaming system. Those two events "saved" the industry in the second half of the year, Laird says, adding that he doesn't anticipate any similar life preservers in 2006.

Asia still represents a promising market for growth, even though it experienced a tonnage slowdown in the second half of last year. The reasons for the slump aren't fully understood, says Laird, given that the continent experienced no major outbreaks of the SARS virus and several Southeast Asian economies were booming.

Freighters are a bright spot for the industry, with interest in all-cargo planes "at an all-time high," according to the latest ACMG study. A number of airlines, mostly in Asia and Europe, have plans for major expansion in their large-capacity freight fleets. Three new models - the Airbus A380F and Boeing's 777F and 7478F-will soon enter into service, joining large numbers of new and converted 747-400s.

One unanswered question is the fate of aircraft that will be displaced by the newer models in 2006 and beyond. If the planes keep flying on other routes, the result could be severe overcapacity. Laird hopes the airfreight industry won't mirror the situation in ocean shipping, where current expansion plans by overly optimistic carriers could boost the number of marine container slots by 50 percent.

Integrated air-express carriers are steadily increasing their share of the international freight market. According to ACMG, express shipment growth averaged 10.9 percent annually between 1992 and 2005, with growth of 8.8 percent last year. Laird says the integrators currently have 25 percent of the international market by tonnage, and 50 to 60 percent of the U.S. domestic sector (90 percent when calculated by number of shipments). Guaranteed, door-to-door services such as FedEx's International Priority and UPS's Gold Priority will begin to penetrate traditional freight forwarders' business, says Laird, despite their additional cost. Other leading players in that sector include DHL and TNT.

ACMG's annual study of the U.S. airfreight industry is released at mid-year. The last report, from July 2005, showed a 7.5-percent increase in overall revenues for the domestic airfreight and express industry in 2004, a new record. The U.S. market was dominated by integrated express carriers, who collectively held a 59.9-percent share of ton miles in 2004. Trailing far behind were scheduled freight providers with 19.8 percent, scheduled mail with 15.3 percent, and charters with 4.9 percent.

Colography Group Reports
Despite higher fuel costs, the total U.S. market for exports moving by air in 2005 looks to have posted an all-time record for shipments and revenues, according to the Atlanta-based Colography Group Inc. In a recent study tracking activity for the first nine months of the year, the firm reported nearly 68 million shipments. That put the industry on track to exceed 90 million shipments, topping the previous record of 88.7 million in 2000.

Air-export revenue for 2005 was projected to "shatter" 2004's record of $8.5bn, with more than $6.9m reported in the first nine months of last year. Assuming activity in the final quarter of 2005 matches the same period of 2004, then the U.S. air-export sector will have surpassed $9bn in revenues for the first time in history, the report says.

The surging U.S. air-export market is dominated by six carriers: FedEx, UPS, the U.S. Postal Service, DHL, EGL Inc. and BAX Global. Together they controlled 77.3 percent of the market during the third quarter of 2005. The rest of the pack, consisting mostly of airlines and freight forwarders, saw a decline in share from 24.8 percent in the first quarter of 2004, to 22.7 percent at the end of 2005's third quarter.

On the U.S. domestic front last year, shipment volumes actually declined by more than 10 million tons from the second to the third quarter. The reason was the continued diversion of lightweight, short-haul traffic to ground transport, the Colography Group says.

When all the figures are in, the firm doesn't expect 2005 to exceed 2000's domestic air-shipping record of 2.93 billion shipments and 20.5 billion pounds. It would have taken "the most remarkable quarterly performance in the industry's history" to surpass that benchmark, the report says. The Colography Group's final figures for 2005 are due in early April.

IATA's 'Good News'
Internationally, freight traffic showed growth of 3.2 percent in 2005, according to the Geneva-based International Air Transport Association (IATA). Passenger traffic, meanwhile, grew at the rate of 7.6 percent. Overall growth in the industry was "good news," IATA director general and chief executive Giovanni Bisignani said in a statement, but activity was held down by weak demand in critical sectors such as information technology. He expects overall airline industry growth to be in the range of 6 percent this year, assuming recovery in IT and semiconductors, among other sectors.

North American passenger carriers continue to suffer, while their European and Asian counterparts are relatively healthy. In 2005, U.S. airlines lost $10bn, Bisignani said. By contrast, European carriers posted a combined profit of $1.3bn, and Asian carriers were $1.5bn in the black.
Industry experts have attributed the U.S. carriers' losses in part to pricing pressure from low-cost, short-haul carriers, who don't pose the same competitive threat in Europe or Asia. Government subsidies to carriers outside the U.S. are also a factor, as are high labor and infrastructure costs within the U.S.

"Growth and profitability are completely different concepts," Bisignani said. "Freight and passenger traffic are forecast to grow in the 5- to 6-percent range during 2006, but the industry is projected to record another loss of over $4bn for 2006. The industry will not see black ink until at least 2007."

Bisignani criticized tight restrictions imposed by bilateral air agreements between governments, as well as airport monopolies that drive up costs and dampen competition. "For the industry to turn the corner in 2006," he said, "the agenda for change must continue."

The Shippers' View
Air shippers, too, have their concerns about current industry trends. Richard Macomber, chairman of the air transportation committee of the National Industrial Transportation League (NITL), worries about the plunging fortunes of airlines, who handle 60 percent of all air cargo in the bellies of their passenger planes. Most of the major U.S. airlines have at some time filed for protection under bankruptcy laws, with United Airlines the latest to emerge from such proceedings. The business failure of any large airline could have a serious impact on shippers' ability to move freight in a timely and cost-effective manner, Macomber says.

Shippers would particularly like to see more lift capacity out of China, he says. The need for additional space on trans-Pacific aircraft is especially acute near the end of the year, when ships are full and shippers need to meet North American retailers' orders for the Christmas shopping season. Charters are available, but their high cost makes them prohibitive for all but the largest users. In addition, the rush by U.S. companies to outsource manufacturing to China has created a need for more space year-round. NITL is urging U.S. negotiators to push for expanded air rights from China when the two countries meet in the second quarter of the year.

NITL is also critical of developments related to new security measures. Macomber says "intrusive" inspections by inadequately trained personnel could seriously damage air cargo. The rate of physical inspections in that area has ranged as high as 30 percent, he says. Packages are opened in non-sterile environments, and some devices could be harmed by electrostatic discharges if improperly handled. In addition, NITL worries about calls by some legislators for inspection of all cargo traveling on passenger planes, a move that could cause severe delays and further detract from the appeal of air freight.

The international airfreight and express industry is undergoing dramatic change, both in the roster of players and the composition of cargo fleets, as it continues to post steady gains in volume. Meanwhile, the U.S. airfreight industry appears to have bounced back from the market plunge of 2001, despite ever-rising fuel costs.

According to the latest report on the international airfreight sector by the Seattle-based Air Cargo Management Group (ACMG), traffic grew by 3.5 percent last year. And while that was significantly less than the 14.5-percent gain racked up in 2004, the industry's biggest year on record, it further solidified a recovery from the weak market of 2001 through 2003.
But don't expect a banner year for airfreight carriers in 2006. "It looks like the next year will be more like 2005 than 2004," says ACMG managing director Edwin C. Laird. Fuel costs and other operating expenses will hold down volumes and result in the shifting of additional freight to cheaper ocean transport, he says.

High fuel expense will continue to pose a major challenge to the airfreight industry as well as the U.S. economy as a whole, says Laird. In three previous years when oil prices doubled-1974, 1983 and 1992-the following year saw a significant drop in gross domestic product. "When you don't have economic growth, the need and desire to use expedited transportation goes down," Laird says.

The industry's stellar performance of 2004 was the result of recovery in the U.S., a slowdown in the decline of European economies and the initial impact of China's entry into the World Trade Organization, says Laird. And while airfreight carriers had a lot less to celebrate in 2005, they got a boost from the wave of Apple iPods that flowed from China into the U.S. for the holiday shopping season, as well as the December introduction of Microsoft's Xbox 360 gaming system. Those two events "saved" the industry in the second half of the year, Laird says, adding that he doesn't anticipate any similar life preservers in 2006.

Asia still represents a promising market for growth, even though it experienced a tonnage slowdown in the second half of last year. The reasons for the slump aren't fully understood, says Laird, given that the continent experienced no major outbreaks of the SARS virus and several Southeast Asian economies were booming.

Freighters are a bright spot for the industry, with interest in all-cargo planes "at an all-time high," according to the latest ACMG study. A number of airlines, mostly in Asia and Europe, have plans for major expansion in their large-capacity freight fleets. Three new models - the Airbus A380F and Boeing's 777F and 7478F-will soon enter into service, joining large numbers of new and converted 747-400s.

One unanswered question is the fate of aircraft that will be displaced by the newer models in 2006 and beyond. If the planes keep flying on other routes, the result could be severe overcapacity. Laird hopes the airfreight industry won't mirror the situation in ocean shipping, where current expansion plans by overly optimistic carriers could boost the number of marine container slots by 50 percent.

Integrated air-express carriers are steadily increasing their share of the international freight market. According to ACMG, express shipment growth averaged 10.9 percent annually between 1992 and 2005, with growth of 8.8 percent last year. Laird says the integrators currently have 25 percent of the international market by tonnage, and 50 to 60 percent of the U.S. domestic sector (90 percent when calculated by number of shipments). Guaranteed, door-to-door services such as FedEx's International Priority and UPS's Gold Priority will begin to penetrate traditional freight forwarders' business, says Laird, despite their additional cost. Other leading players in that sector include DHL and TNT.

ACMG's annual study of the U.S. airfreight industry is released at mid-year. The last report, from July 2005, showed a 7.5-percent increase in overall revenues for the domestic airfreight and express industry in 2004, a new record. The U.S. market was dominated by integrated express carriers, who collectively held a 59.9-percent share of ton miles in 2004. Trailing far behind were scheduled freight providers with 19.8 percent, scheduled mail with 15.3 percent, and charters with 4.9 percent.

Colography Group Reports
Despite higher fuel costs, the total U.S. market for exports moving by air in 2005 looks to have posted an all-time record for shipments and revenues, according to the Atlanta-based Colography Group Inc. In a recent study tracking activity for the first nine months of the year, the firm reported nearly 68 million shipments. That put the industry on track to exceed 90 million shipments, topping the previous record of 88.7 million in 2000.

Air-export revenue for 2005 was projected to "shatter" 2004's record of $8.5bn, with more than $6.9m reported in the first nine months of last year. Assuming activity in the final quarter of 2005 matches the same period of 2004, then the U.S. air-export sector will have surpassed $9bn in revenues for the first time in history, the report says.

The surging U.S. air-export market is dominated by six carriers: FedEx, UPS, the U.S. Postal Service, DHL, EGL Inc. and BAX Global. Together they controlled 77.3 percent of the market during the third quarter of 2005. The rest of the pack, consisting mostly of airlines and freight forwarders, saw a decline in share from 24.8 percent in the first quarter of 2004, to 22.7 percent at the end of 2005's third quarter.

On the U.S. domestic front last year, shipment volumes actually declined by more than 10 million tons from the second to the third quarter. The reason was the continued diversion of lightweight, short-haul traffic to ground transport, the Colography Group says.

When all the figures are in, the firm doesn't expect 2005 to exceed 2000's domestic air-shipping record of 2.93 billion shipments and 20.5 billion pounds. It would have taken "the most remarkable quarterly performance in the industry's history" to surpass that benchmark, the report says. The Colography Group's final figures for 2005 are due in early April.

IATA's 'Good News'
Internationally, freight traffic showed growth of 3.2 percent in 2005, according to the Geneva-based International Air Transport Association (IATA). Passenger traffic, meanwhile, grew at the rate of 7.6 percent. Overall growth in the industry was "good news," IATA director general and chief executive Giovanni Bisignani said in a statement, but activity was held down by weak demand in critical sectors such as information technology. He expects overall airline industry growth to be in the range of 6 percent this year, assuming recovery in IT and semiconductors, among other sectors.

North American passenger carriers continue to suffer, while their European and Asian counterparts are relatively healthy. In 2005, U.S. airlines lost $10bn, Bisignani said. By contrast, European carriers posted a combined profit of $1.3bn, and Asian carriers were $1.5bn in the black.
Industry experts have attributed the U.S. carriers' losses in part to pricing pressure from low-cost, short-haul carriers, who don't pose the same competitive threat in Europe or Asia. Government subsidies to carriers outside the U.S. are also a factor, as are high labor and infrastructure costs within the U.S.

"Growth and profitability are completely different concepts," Bisignani said. "Freight and passenger traffic are forecast to grow in the 5- to 6-percent range during 2006, but the industry is projected to record another loss of over $4bn for 2006. The industry will not see black ink until at least 2007."

Bisignani criticized tight restrictions imposed by bilateral air agreements between governments, as well as airport monopolies that drive up costs and dampen competition. "For the industry to turn the corner in 2006," he said, "the agenda for change must continue."

The Shippers' View
Air shippers, too, have their concerns about current industry trends. Richard Macomber, chairman of the air transportation committee of the National Industrial Transportation League (NITL), worries about the plunging fortunes of airlines, who handle 60 percent of all air cargo in the bellies of their passenger planes. Most of the major U.S. airlines have at some time filed for protection under bankruptcy laws, with United Airlines the latest to emerge from such proceedings. The business failure of any large airline could have a serious impact on shippers' ability to move freight in a timely and cost-effective manner, Macomber says.

Shippers would particularly like to see more lift capacity out of China, he says. The need for additional space on trans-Pacific aircraft is especially acute near the end of the year, when ships are full and shippers need to meet North American retailers' orders for the Christmas shopping season. Charters are available, but their high cost makes them prohibitive for all but the largest users. In addition, the rush by U.S. companies to outsource manufacturing to China has created a need for more space year-round. NITL is urging U.S. negotiators to push for expanded air rights from China when the two countries meet in the second quarter of the year.

NITL is also critical of developments related to new security measures. Macomber says "intrusive" inspections by inadequately trained personnel could seriously damage air cargo. The rate of physical inspections in that area has ranged as high as 30 percent, he says. Packages are opened in non-sterile environments, and some devices could be harmed by electrostatic discharges if improperly handled. In addition, NITL worries about calls by some legislators for inspection of all cargo traveling on passenger planes, a move that could cause severe delays and further detract from the appeal of air freight.