Is cargo about to lead the airline sector back from the nightmare of the past 18 months? Despite mixed economic news, recent strong growth in Asia gives some hope for a cargo bounce back
Last year was a nightmare for air cargo by any measure. It stands as the worst year since the 1970s, even outstripping the experience during the Gulf War. During the 1991 crisis, air freight fell by under 5% worldwide. A decade later the 2001 figures show a traffic decline of more than 7% as demonstrated by the ranking of the Top 50 cargo airlines.
Unlike the passenger business, however, it was not the terrorist attacks on the USA that triggered the big slide. The rot had already set in as by the end of 2000. According to Thomas Hoang, regional marketing director cargo at Boeing, the cargo market was already 6.5% down prior to 11 September and may even have started to turn up in the final quarter of 2001.
The real cause of last year's slump was the end of the hi-tech boom. "It was an economic crisis, the burst of the IT bubble," says Pascal Touin-Stratigeas, fleet forecast analyst for Airbus. "IT spending decreased at the end of 2000, and at the same time air cargo began to slide."
Nevertheless, minds are focused on whether this recession will again be followed by a sharp bounce back of the kind experienced after the 1991 conflict. This time last year many were confidently predicting that such a recovery would happen in the second or third quarter of 2002. Now some expect it in the first or second quarter of 2003.
There are signs that the recovery may already have started. Asia is traditionally the first market to bounce back from a slump, and it has not disappointed, with a tentative first quarter of 2002 revival turning much stronger in the normally rather quiet months of May, June and July.
Hong Kong, still the most important Asian hub, has recovered especially sharply. HACTL, its leading cargo handler, saw volumes up by over 10% in the first quarter and 24% in the second, while Cathay Pacific saw volumes up more than 13% for the first half. Mid-year figures from the Airports Council International (ACI) put the airport as a whole ahead by 25% in June, while Bangkok, Taipei and Tokyo Narita were all up by around 20%.
This spurt of growth contrasts oddly with the global economic picture, however. With stockmarkets falling and the business pages full of gloom, all the signs are that a double-dip recession is on the way rather than a sharp recovery. Does air cargo know something that the markets and pundits do not, or will the recovery run out of steam?
There are plenty of reasons to be cautious. One is that June and July were the months in 2001 when the slump really began to bite, particularly on the transpacific routes that are the main engine of Asian growth, so it is perhaps not surprising that year-on-year comparisons started to look good in the same months this year.
"A year ago, Taipei air cargo exports were down something like 40%," says Jim Friedel, president for cargo at Northwest Airlines, the only US major with a transpacific freighter fleet. "If they couldn't show positive growth over that this year, something would be pretty wrong." He also points out that while tonnage may be matching 2000 levels in places, yields are not. "It is when yields come back that we will know the market is back," he says.
Another caveat is that special circumstances could be at work. A labour dispute at 27 US West Coast seaports has panicked many Asian exporters, causing them to rush to secure air cargo capacity. This may have boosted not only transpacific figures, but also Asia-to-Europe volumes, as exporters sought alternative routes to the USA. Qatar Airways certainly says this was the case, with its London flights booked three weeks ahead in July. The demand was coming from the Indian subcontinent and further east, with exporters seeking to interline cargo to the USA via London.
A third and final factor is the rise of China, which is fast becoming the world's manufacturer, and whose World Trade Organization accession is accelerating inward investment. Ned Laird, managing director of Seattle-based consultancy the Air Cargo Management Group, says the Asian recovery is largely a Chinese recovery.
Certainly China seemed to be roaring ahead in the first half of 2002, with exports up 14% and its economy growing 7.8%. There are also signs that China is driving a revival in intra-Asian air cargo, both through the import of materials for its industries and growing consumer demand. Hoang at Boeing points out that while intra-Asian traffic was down 7.1% in the first quarter of 2002, that had slimmed to a 0.9% decline over the first half. HACTL figures also show intra-Asia traffic rising sharply in the second quarter.
Even if the Asian recovery does prove sustained, will it spread? There are some signs that process might have started, but they are only tentative. Latest ACI figures for June give no clear lead in Europe, with Amsterdam, Frankfurt and Paris a few percent up on a year ago, but with London and Milan still down. US hubs such as New York or Los Angeles again post declines, though less deep than those of a few months ago.
The US figures may be better than they appear, however. One area of air cargo that was definitely hit hard by 11 September was the US domestic market. The problem was the banning of mail over 450g (16oz) in passenger bellies for security reasons. Friedel says this measure cost Northwest $40m in revenue, 5% of overall volumes, and 20% of domestic volumes. Other carriers did worse. The USAir Transport Association (ATA)shows domestic mail down by over 67% in 2001 and 53% in the eight months to August.
Without the mail factor, however, ATA figures show the US airlines actually saw an 11.8% rise in freight for the the year to August. Including a 4%fall in international freight figures, that leaves US freight up 3.3% for the first eight months. And the trend is upwards, with August traffic alone showing a 7.9% rise.
Similarly, although the Association of European Airlines figures indicate that its members saw a fall of 4.4% in freight traffic through to August, the summer months have seen 3-4%growth. North Atlantic traffic, which had been showing double-digit declines was also back close to breakeven.
Whether these tentative signs of growth will continue is the big question for the coming months. A poll of attendees in September at the Air Cargo Forum - the air freight industry's biannual bash - found 65% optimistic about the coming year, and forecasters generally agree.
Touin-Stratigeas at Airbus, while warning that a double dip is still possible and that war with Iraq could change everything, otherwise sees a comeback over the next year or two, but warns it will be gradual. "It won't be a sudden rise as it was after the Gulf War because it is more linked to consumer confidence, and the current world problems are eroding confidence," he says.
Boeing is more bullish. One factor on which Hoang bases his prediction of 8.5% growth next year is a recovery in the hi-tech sector, which accounts for up to a quarter of air cargo volumes. "Computers were last upgraded in 1999 ahead of Y2K and they tend to become obsolete in two to three years, so I think next year we will see improved demand from both consumers and business," he says. He admits that currently "the economy is not coming back as strongly as we hoped".
Laird at Air Cargo Management Group also sees "normal" growth rates of 6-7% next year, but says Europe might go backwards. Lufthansa Cargo, which in April launched its own AirDex index of four leading economies, predicts a recovery from the first quarter of 2003 onwards.
Douglas Harned, principal at McKinsey & Co in Hartford, Connecticut, offers a warning, however. Having studied aviation cycles, he concludes that 2003 will be rough for cargo, in profitability if not in volumes, with a recovery only at the end of the year. In the longer term, he thinks that while passenger markets will do no more than shadow growth in the world economy, cargo should remain two or three points higher, driven by globalising manufacturing and sourcing trends.
But this advantage will not last. Unlike Boeing, whose new 2002/3 World Air Cargo Forecast continues to predict 6.4% annual growth for the next 20 years, Harned reckons that in five to 10 years the cargo market will mature and face the same problems the passenger business is facing now.
Whether this will mean low-cost competition, more niche players or more vertical integration between cargo carriers and ground services, Harned says he is not yet sure. But even if the good times return, the cargo business might be wise not to get too complacent as it watches the travails of its passenger counterpart.
PETER CONWAY LONDON
Source: Airline Business