Shippers leverage air cargo as global sourcing extends supply
By David Hannon -- Purchasing, 4/5/2007 2:00:00 AM
Demand for global air freight continues to be strong, fueled by increased demand from Asia both on the inbound and outbound side. Carriers are rapidly increasing their investments in equipment and infrastructure to meet the increased demand of global shippers.
The Airports Council International (ACI) predicts global air freight will triple by 2025, fueled by growth in Asia. "High growth of manufacturing in Asian countries such as China and India is expected to drive this growth but cargo flows are predicted to remain imbalanced with most freight volume outbound from Asia," ACI's latest report says.
North America is likely to grow more slowly than in the other geographic regions, averaging 4.4% over the next two decades. In 2006 North America was the largest region in the world for freight (with 35% share), but it is expected to be surpassed by Asia within 20 years.
The Air Transport Association says air cargo ton miles increased 6.4% in 2006, up from 3.8% growth the year before. German airline Lufthansa is also predicting 6% growth in demand for its air cargo services. And a new report from Air Cargo Management Group puts international air cargo volume growth in the "mid-single digits" in 2006 with the outlook calling for increased demand with a global emphasis.
ACMG's International Air Freight and Express Industry Performance Analysis shows that airlines in China are increasing their interest in the air freight market, and "we are also seeing a growing interest in air freight activities by new and established airlines in India and the Middle East."
"Looking forward, ACMG believes a long-term air freight growth rate of 6% is achievable, leading to significant future growth in air freight traffic and the use of large-capacity freighter aircraft," says Robert Dahl, project manager at ACMG. He adds that while the domestic U.S. air freight market has seen a significant modal shift from air to ground as more trucking companies expand next-day service areas, the shift from air to ocean globally has not yet become a major factor for international shipments.
Giovanni Bisignani, CEO of the International Air Transport Association, disagrees and in a recent speech pointed out that from 2000–2005 ocean container freight grew by 9.5%, more than double the growth in air cargo. IATA forecasts demand for air freight will grow by 5.3% a year from 2006–2010, similar to ACMG's forecast, but adds that ocean freight will increase by 7.2%.
"New container ships are faster and cheaper to operate," Bisignani told attendees of the Cargo Symposium 2007 in Mexico last month. "And 2006 ocean container freight rates were 20% in real terms below 2000 levels. Air freight rates were only 8% lower. And ocean freight capacity is growing at 12% a year. So [air cargo carriers] can expect more intense price competition."
Globally, there is very high interest in intra-Asian air cargo shipments, as shippers look to link Asian-based suppliers and manufacturers—and even customers in some cases. IATA Points out that by 2010 intra-Asia freight will be 8.3 million tons, 26% of total international freight. Another 6 million tons will come on routes from Asia to Europe and North America.
The main concern, said Bisignani in a recent speech, is the infrastructure to support that kind of intra-Asian growth. Limited gateways in China could cause bottlenecks. China's huge market size could give advantages to niche players, particularly point-to-point startups.
The growth in international air cargo has carriers more interested in larger equipment able to handle globe-skipping flights. "We are in the midst of a period of rapid expansion of the large-capacity freighter fleet, with firm orders for 250 new and converted wide-body freighters on the books at Boeing, Airbus and third-party conversion providers," Dahl reported prior to the recent collapse of the A380 program. "New large freighters under development include Boeing's 777F and 747-8F and Airbus' A380F, and freighter-converted 747-400Fs have begun to enter the market" to meet the anticipated demand increase.
In its annual World Air Cargo Forecast, Boeing predicts a market demand over the next 20 years of 841 airplanes in the 767-size, medium wide-body category of which 244 will be new production freighters.
Boeing's 2006 report says: "A closer look at the freighter fleet shows that wide-body freighter deliveries are accelerating as aging standard-body aircraft and first-generation widebodies are retired. This trend has helped increase the wide-body freighter fleet from fewer than 250 in 1994 to nearly 900 today. Over the next 20 years, the freighter fleet size is forecast to nearly double, from 1,789 in 2005 to 3,563 in 2025. Medium wide-body and large freighter aircraft will lead fleet additions, growing from an overall share of 50% to 64% as traffic continues to build on long-haul, international trade lanes."
And given recent news, Boeing is certainly in the best seat to capitalize on this trend. In March, logistics giant UPS cancelled its order for 10 Airbus A380 freighters, putting the A380 program on hold, as UPS represented the last customer for the much-delayed jumbo freighter. In early February, UPS ordered 27 of Boeing's 767-300ER freighters, worth about $3.8 billion. In November, after canceling its A380 order, FedEx bought 15 Boeing 777 freighters worth about $3.5 billion.
And most recently, as this story was going to press, DHL announced it was ordering six 767-300ER extended range freighters from Boeing in an effort to ramp up its air freight operations.
Chris Lozier, an analyst for Chicago-based Morningstar, said the UPS cancellation is a crippling blow for the entire Airbus cargo program and a boon for Boeing.
"It almost spells the demise for [Airbus'] cargo business, because the alternative to the 380 is the (Boeing) 747," he said. "You would expect UPS to be at the negotiating table with Boeing right now, if not weeks ago, working out details for the 747."
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Organizations mentioned in this report: Airports Council International Air Transport Association Air Cargo Management Group International Air Transport Association |
Howard Rubel of Jefferies and Co. said in a note to investors that the cancellation "effectively gives Boeing complete ownership of the very large freighter market for the foreseeable future."
ACMG predicts continued consolidation in the air cargo market, beyond the aircraft maker side, most notably in the freight forwarding segment. However, ACMG reports that "Not all mergers and acquisitions have proven successful, and consolidation activity is expected to be less intense in the near term. Shippers are showing resistance to the idea of the one-stop-shop, preferring to use multiple suppliers for their global transportation and logistics needs."
The biggest limitation for shippers using air freight is often the sky-high fuel surcharges issued by carriers and forwarders in the era of volatile fuel prices. But shippers are starting to ask carriers more about their fuel buying practices in an effort to gain total cost information.
For example, Air carrier Lufthansa said recently it had hedged 88% of its fuel spend in 2007 and the average price after hedging was $65.87 a barrel, based on a forward price of $65.03 a barrel. Lufthansa is 41% hedged for 2008. Lufthansa Cargo in November cut its fuel surcharge for the second time in two months.
E-freight goes into pilot phase
The International Air Transport Association's e-freight program was launched in 2004 to "eliminate the need to produce and transport paper documents for air cargo shipments by moving to a simpler, industry-wide electronic paper-free environment."
While the program has seen its struggles, IATA has established pilot programs for 2007 with airlines in five countries (the U.S. is not one) and six of the top freight forwarders. Current air cargo process requires management of freight, paper and data flows; e-freight processes require management of freight and data flows, only e-freight helps the air cargo industry take advantage of these requirements by removing the requirement to provide paper documents as well as the electronic information.
The benefit to shippers is they will provide and retain data. IATA expects this will result in improved delivery times due to fewer discrepancies resulting from incorrect re-entry of data by forwarders or airlines, as well as reduced levels of inventory held in the supply chain.
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