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  • ANALYSIS: Trade tensions slow air freight demand

ANALYSIS: Trade tensions slow air freight demand

Demand for air cargo deliveries declined in June for an eighth consecutive month, according to IATA's latest report, which cites US-China trade tension as a contributing factor.

Air freight demand, measured in freight tonne kilometers (FTKs), decreased by 4.8% year-on-year in June, says the trade group's report, published 7 August.

“Global trade continues to suffer as trade tensions, particularly between the US and China, deepen," says IATA director general Alexandre de Juniac. "Nobody wins a trade war. Borders that are open to trade spread sustained prosperity. That’s what our political leaders must focus on."

In May, IATA decreased its full-year 2019 air cargo demand growth forecast from 3.7% to 2% year-on-year, reflecting what de Juniac called trade protectionism and anti-globalisation rhetoric. Demand for air freight stopped growing in November 2018, marking the first month since March 2016 that it did not increase.

The worst FTK declines during June occurred in the Asia-Pacific and Middle East markets. Asia-Pacific markets, which represented 35% of FTKs in 2018, saw freight volume decrease 5.4% year-on-year in part due to the trade war with the USA and in part because of decreasing demand within Asia. Freight volume for Middle East airlines decreased 7% year-over-year on weak demand for air shipments to Europe and Asia-Pacific markets.

Airlines in North America saw demand shrink 4.6% year-on-year as FTKs to Asia-Pacific markets declined 5% amid the trade tensions between Beijing and Washington, DC. Europe-based airlines reported a 3.6% decline in FTKs for the period, while Latin American carriers faced a 1% decline in demand for air shipments in June.

Only airlines in Africa reported cargo growth during June, as demand increased 3.8% year-on-year amid rising traffic with Asia, making Africa the strongest air cargo market for the fourth consecutive month.

Global air cargo capacity grew faster than demand in 2018, rising 5.2%, while freight load factors fell by nearly 1%, according to an annual IATA report published on 31 July. During 2018, FTKs expanded 3.4%, slower than a 9.7% expansion for the full year of 2017.

GEOPOLITICAL TENSIONS

A contributing source of political uncertainty that is slowing trade growth during the past year has been President Donald Trump's on-and-off trade negotiations with China, punctuated by threats of tariffs on goods imported from that nation, say financial analysts.

On 1 August Trump announced, via Twitter, a 10% tariff on $300 billion in goods and products coming from China to begin 1 September. This would add to a 25% tariff on $250 billion worth of goods.

China on 5 August responded by allowing its yuan currency to weaken, which could offset some costs they would face under rising tariffs. The People's Bank of China has blamed the currency shift on “unilateralism and trade protectionism measures and the imposition of increased tariffs on China”.

The US Treasury Department responded later that day by labeling China a currency manipulator. These moves sent stocks falling, resulting in the worst day of 2019 on 5 August for the S&P 500 index.

Uncertainty about the UK plan to exit the European Union has not had the same disruptive effect on global air freight as tensions between the USA and China, says analyst Helane Becker of Cowen Equity Research.

"Goods are still moving between the UK and the rest of the world," Becker says. "Most goods consumed in England are actually imported, so there hasn’t been too much disruption there. We aren’t seeing much disruption between the US and Europe now."

Tensions with China are causing the most disruption because of low cost for manufacturing labor, Becker says in an interview.

"We are seeing wage rates and higher transportation costs pressure margins in the Asia–US trade lane, so we have actually been seeing manufacturing shift to Taiwan, Vietnam, Indonesia, Sri Lanka and India," Becker says. "It is difficult to build new facilities quickly, so we haven’t seen that yet. We are seeing a slowdown in capital spending and companies are concerned about over-investing heading into a possible recession. Finally, we believe a lot of shippers shipped ahead of tariffs, and every time there is talk of more tariffs, goods get rerouted and sped up to avoid the latest group of tariffs."

Constantly shifting policies have "caused uncertainty for producers but also has caused them to shift supply chains", says Robert Eisenbeis, chief monetary economist at Cumberland Advisors investment firm.

The slowdown in air cargo "will likely continue for some time" amid signs that global growth is slowing and the Trump administration's trade standoff with China, Eisenbeis says.

"The Trump trade war is finally beginning to have an impact on exports and imports of the kinds of goods most likely to ship by air cargo, like flowers, medicines, electronics, certain auto parts, for example," he says. "Early on, the tariff impacts were on products like steel and aluminum, refrigerators and washers, which are not likely to ship via air cargo."

AIRLINES ENDURE

Second quarter earnings for US-based airlines reflected the declining demand for air freight.

United Airlines reported a 6% year-on-year decrease in cargo revenue during its second quarter ending 30 June. Likewise, Delta Air Lines reported a 17% revenue decline, while American Airlines' cargo revenue slipped 15%.

All-cargo airlines are expressing optimism about long-term demand for air freight owing to growth of e-commerce, but caution that trade tensions could damage broader air freight traffic during the coming quarters.

Atlas Air Worldwide Holdings chief executive William Flynn during an earnings call on 1 August adjusted the company's forecast for adjusted annual net income for 2019 to be 80% of last year's $204 million amid "near-term headwinds" for the air cargo industry.

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Atlas Air operates a fleet of Boeing 767 Freighters for online shipping giant Amazon under the Prime Air banner

Atlas Air

The business of leasing aircraft to cargo carriers remains stable amid global trade uncertainty, Air Transport Services Group chief executive Joe Hete said during an earnings call on 6 August.

"Compared with air carriers with more payload-sensitive business models, the outlook for the e-commerce-driven regional air networks that drive our cash flow remains very bright," Hete says.

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