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Home » After Weak Demand, Global Airfreight Market to Take Off

After Weak Demand, Global Airfreight Market to Take Off

March 1, 2017
SupplyChainBrain

Transportation service markets took a dive during the global recession, and have struggled to recover since. Though crashing crude oil prices in late 2014 have pressured gasoline, diesel fuel, bunker fuel and jet fuel prices down in the years since, declining fuel costs have harmed rather than helped cargo transporters, despite falling purchase expenses. This is mostly because shippers have been forced to reduce service prices to maintain market share, often straining their financial health and impeding their ability to invest in new assets to foster revenue growth.

Still, lackluster growth in international trade has been the primary spoiler for air cargo transporters in recent years. Although some signs of economic recovery have boosted market outlooks, many businesses have been spending cautiously, causing nearly flat demand for international cargo shipping. Historically, global trade has grown roughly twice as fast as industrial production output for developed countries. However, a recent shift toward protectionist politics has caused several major importing countries to turn away from foreign inputs, reducing the amount of cargo that is flown across borders.

While airline financial risk has been high since the onset of the global recession, IBISWorld estimates that bankruptcy risk is slowly easing for many airlines, particularly as mergers weaken competitive pressure. Additionally, passenger airlines with cargo operations benefit from an uptick in international travel, which has increased ticket sales and given these carriers more opportunities to upsell and pad their profit margins. On the other hand, cargo-only airlines have limited revenue streams and have been facing low capacity utilization due to stunted regional and international trade, causing several cargo carriers to go bankrupt in recent years.

Domestic air cargo shippers have fared slightly better than international providers due to stronger, though tempered, demand growth. Consumer spending has been rising during the past three years, and e-commerce has increased to an estimated 8.2 percent of all retail sales in 2016. As such, demand for domestic air cargo transportation has been pressured upward because many consumers now expect their online purchases to be delivered promptly, forcing retail companies to ship their purchases via airfreight instead of ground transportation.

Still, domestic shippers have been unable to boost their cargo prices due to a current overcapacity of cargo hold space. While passenger airlines have been more successful as U.S. citizens travel more, domestic aircraft cargo holds have flown with about one-third of their capacity unused on average thus far in 2016, according to the International Air Transportation Association. Ultimately, though, passenger airlines with freight operations have fared better than specialized operators and door-to-door carriers, because passenger airlines rarely fly with less than 80 percent of their seats filled, and can profit more easily from passenger transport and upsold amenities.

The Outlook

Rising oil prices in the coming years will force freight service prices upward, requiring airlines to retire old aircraft and invest in newer, more fuel-efficient planes. Continued uncertainty regarding international trade will keep businesses cautious about importing, especially as the likelihood of passing free-trade agreements, such as the Trans-Pacific Partnership, fade. Still, domestic airlines with freight operations will continue benefiting from the swell in e-commerce sales, keeping market sales strong and improving airlines’ financial health.

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KEYWORDS Air Cargo Global Logistics Global Supply Chain Management Global Trade Management Industrial Manufacturing Logistics Transportation & Distribution Transportation Management
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