ANALYSIS: US cargo carriers face low yields amid trade jump

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Story updated to include IATA's most recent cargo data, from July, and comments from American Airlines executive Jim Butler.

The US air cargo market continues to show signs of a turnaround, with US carriers reporting notable cargo volume gains in recent months and executives noting positive world economic trends.

Still, executives say a glut of capacity and stubbornly low yields continue to dog the industry, factors that could drive further industry consolidation.

David Harris, an industry watcher and editor of monthly newsletter Cargo Facts, notes that after years of languishing, worldwide air cargo traffic "has slowly gathered steam" in the past 12 to 14 months.

"For once, there is not much negative to say" about the market, Harris, who is also an associate director at Seattle-based cargo consulting company Air Cargo Management Group, tells Flightglobal.

Harris’ observations are mirrored in the International Air Transport Association’s (IATA’s) most-recent Air Freight Market Analysis, which shows that North American carriers hauled 5.2% more freight in July than during the same month last year.

“Latest data show a rebound in trade volumes and [that] underlying growth trends in business activity are positive, which could provide some support for stronger growth in trade and air freight demand ahead,” says IATA of the North American market in its report.

Bryan Terry, director of PricewaterhouseCoopers’ transportation and logistics division, tells Flightglobal that the air cargo industry, overall, remains optimistic that cargo traffic will continue its upward swing.

Terry says air cargo growth historically correlates with global economic and import-export trade trends, both of which have improved in recent years and are predicted to continue improving during the next 12 months.

The air cargo industry has benefitted recently from robust trade of specialty products like pharmaceuticals, perishable goods and items that are temperature-sensitive or require special handling, Terry says.

Also, a resurgence of the automobile and aerospace industries and other sectors that involve complex manufacturing should benefit air cargo companies, he adds.

But news is not all positive.

Trade of certain products like consumer electronics has slowed recently, notes Terry.

“These sectors are unlikely to be the reliable source of traffic and growth as they were in the past,” he says.

Perhaps more troubling are air cargo yields, which have remained tight despite gains in volume.

“While we are pleased with the increase in volumes, cargo yields are still under pressure in most markets due to overcapacity,” United Airlines tells Flightglobal. “The air cargo industry needs a prolonged period of strong demand growth coupled with capacity discipline to fix the long-standing supply-demand imbalance.”

A number of factors are keeping yields tight, including improvements in manufacturers’ supply chain practices, says Terry.

But also, passenger airlines have recently been taking delivery of new aircraft with greater cargo space, dumping capacity into the market.

In recent months, the big three US passenger airlines — Delta Air Lines, United and the combined American Airlines-US Airways — all reported notable jumps in cargo carried in July.

United reported that its revenue cargo ton miles (CTMs) reached 212 million in July, up 29% from July 2013.

The airline attributes the jump to greater demand, an upswing in world trade and business activity, a new “sales approach” and a “new cargo technology system”.

Likewise, Delta Air Lines’ CTMs jumped 8.4% to about 218 million in July, while American-US Airways reported 199 million CTMs during the month, up 9.5%.

Still, Delta’s and United’s cargo revenue declined by several million dollars in the second quarter, which United attributed in its quarterly report to lower freight yields in the Asia-Pacific region.

Jim Butler, president of American Airlines Cargo, notes that American’s cargo volumes have been improving monthly for about one year, though certain areas of the globe remain stronger than others.

For instance, American’s transatlantic cargo business has been gaining momentum recently, and the company is “seeing some uptick” out of the Pacific.

Although cargo business on many routes to Latin America has been stable recently, Butler says volume to Brazil and Argentina continues to be “challenged.”

He adds that American’s cargo yields continue to be tight, but says the company sees improvement, with yields increased 1.6% in the second quarter of 2014.

Low yields have also affected express shipping companies like UPS and FedEx.

Operating profit from FedEx’ Express division jumped 3% to $475 million in the fourth quarter of the company’s 2014 fiscal year, which ended 31 May.

Still, FedEx said freight yields declined 7% last fiscal year due to lower fuel surcharges, lower shipping rates and a shift to lower-yielding economy shipping services.

FedEx officials told investors during a conference call that they expect financial results will improve in fiscal year 2015 due to better domestic and international yields.

Likewise, UPS citied lower yields as one reason its operating profit in the first half of 2014 declined by roughly one third to $2.3 billion, according to the company’s second quarter report.

Terry with PricewaterhouseCoopers says international cargo yields have recently been weaker than domestic US yields.

That is partly because domestic capacity growth has been “more constrained and better managed following a decade of consolidation in the US airline market.”

But also, Terry says international cargo capacity has increased due to “a disproportionate growth in passenger flights offered by foreign carriers.”

Examples of new competitors include Emirates SkyCargo, a division of the Dubai-based airline, which in August launched once weekly flights to Los Angeles using a Boeing 777 freighter.

Emirates SkyCargo also flies to Chicago, Atlanta and Houston, and the company carries cargo in the bellies of its passenger aircraft flying to Los Angeles, Chicago, Houston, New York JFK, San Francisco, Seattle, Washington Dulles, Boston and Dallas.

Terry predicts over-capacity will force changes in the air freight market, including continued consolidation.

But, he adds, consolidation will likely be slower than in other industries due to regulations governing mergers and acquisitions between foreign companies.

Also, he predicts demand for pure-freighter aircraft will decrease as passenger airlines take deliver of more “cargo-friendly” aircraft.

As a result, those airlines will reduce the number of freighters in their fleets, he says.

The US air cargo market has already consolidated, and is now dominated by a few large players, including UPS, FedEx and the passenger airlines, notes Harris.

In recent years a number of cargo airlines have folded, victims of factors that include efficiency improvements made by the US trucking industry, Harris says.

“[Trucking companies] have eaten most of the business that used to be going to any number of small freighter operators that have since disappeared,” he says.

In August 2014, the active US-owned jet cargo fleet included 737 aircraft, including 237 aircraft owned by UPS, 331 owned by FedEx and 169 owned by 26 other operators, according to the Ascend Fleets database.

By comparison, in August 2007— before the recession — the active US cargo jet fleet included 940 aircraft. Of those, UPS owned 241, FedEx owned 350 and another 34 companies owned the remaining 349 aircraft, according to Ascend.

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Source: Ascend Fleets database

Brands to have vanished in that time include Kitty Hawk Air Cargo, Arrow Cargo, Astar Air Cargo, Capital Cargo International Airlines, Gemini Air Cargo and others.

Harris notes that only a handful of independent operators remain, including companies like Florida-based AmeriJet International, Honolulu-based Aloha Air Cargo, Michigan-based Kallita Air and some smaller Alaska-based carriers.

Others companies like Atlas Air and Southern Air still fly cargo, but operate many their aircraft for other carriers under aircraft, crew, maintenance and insurance (ACMI) agreements.

For instance, Kentucky-based Southern Air flies for DHL, as does New York-based Atlas, which also flies for Qantas, Etihad Airways and others.