Hong Kong's cargo traffic provides revealing insight into the course of the economic recovery, write David Pralong and Mathieu Weber from McKinsey & Company

In times of uncertainty, businesses look for market performance indicators to track and anticipate market moves and trends. Cargo is usually one such indicator, especially in and around crises.

As many carriers and forwarders consider their capacity planning, yield management, and commercial strategies for the next three to six months, the question is: what, if anything, can be inferred from recent volume developments in cargo?

We found it beneficial to track Hong Kong airport's total cargo tonnage against IATA freight tonne kilometre monthly statistics.

We complemented this analysis with Hong Kong Air Terminals data for three reasons: they are among the first volume statistics released each month; secondly, Hong Kong is the world's busiest air cargo airport measured by international throughput; and finally, as the gateway for Chinese imports and exports, Hong Kong serves as a bellwether for the strength of the Chinese economy, and what that implies for supply chains worldwide.

Tracking HACTL has given us cause for guarded optimism about traffic levels in 2010. Reviewing monthly throughput over the past three years suggests that the worst of the downturn might be behind us. Looking back to 2008, we see that, by July, volumes were no longer growing compared with 2007, and they flat-lined through to October.

A steep decline followed from November through to January 2009, a period during which the effects of a global slowdown negated the usual end-of-year ramp-up in Hong Kong volumes. Volume decreased less than one would expect in January and February 2009 and picked up in March, signifying a return to normal seasonality, despite volumes being down by 21% on 2008.

The gap to 2008 kept on narrowing from May, eventually yielding year-on-year growth by October 2009. It is, however, tricky to precisely separate real, underlying trend and seasonal effects or intra-monthly shifts, the latter caused by holidays, backlog, inventory effects and so on.

Nevertheless, traffic during the last two months of 2009 was only 3-4% down on 2007, the peak year of the last cycle. Imports from North America and Europe have fully recovered, indicating that Asia now contributes as much to Western economies as it did at the peak of the cycle.

Export volumes from Hong Kong seem to hint that other markets are on the mend, with a steadily closing gap for markets to Japan/South Korea, Europe and North America.

Furthermore, import and export volumes between Hong Kong and South-East Asia have fully recovered, which, according to Akamatsu's flying geese paradigm, would suggest that production of the most commoditised goods to replenish supply chains is picking up again at base level and is moving up the formation. This premise is further confirmed by the narrowing gap in exports to Japan/South Korea.

In conclusion, uncertainty remains, and intermodal effects as well as random events could yet further delay a recovery. But the return to normal seasonal traffic patterns, the strong finish of the final two months of 2009, and clear recovery signs in imports and exports are cause for guarded optimism - the worst might be over. If the sector's past resilience is anything to go by, we believe that 2010 should be a year of rebounding traffic levels.

David Pralong is a partner in McKinsey and Company's Auckland office and Mathieu Weber a consultant in the Amsterdam office

Source: Airline Business