REPORT BY PETER CONWAY IN LONDON
The events of 11 September have created temporary turmoil in the air cargo business, But it is the state of the world economy that will be the key in the coming months
For two weeks after the events of 11 September, it was hard to get a clear sense of direction out of anyone in the air cargo industry. Although the metaphor is rather unfortunate in the circumstances, one might have said the world's cargo companies were in a tailspin. "At the moment we are in a totally unclear situation," said one senior manager at a European cargo airline on 20 September. "We don't know if we will have the insurance to fly on Monday, and security requirements are changing every day."
The confusion was understandable. The war insurance problem which hit the major passenger operators created just as much uncertainty for freighter operators, and security measures introduced by governments were in some cases contradictory. For example, while most developed countries were busy dusting off so-called "known-shipper" regulations - citing UK practice as an exemplary model - the UK itself promptly suspended its known-shipper scheme, insisting that all cargo be scanned or physically searched.
Meanwhile, for two days the USA banned belly cargo altogether. Even when that ban was lifted, many airlines insisted on keeping cargo for up to 24 or even 36 hours before boarding.
Some in the industry predicted that all cargo would need to be scanned or physically searched indefinitely, meaning the end of air cargo as we knew it. Others pointed out that practically all cargo flying from South America to North America has been x-rayed for years (to detect drugs) with no apparent ill effect on volumes in that sector.
By early October, more sober counsel was prevailing. The insurance problem had been solved - if only in the short term - for most major cargo carriers, although some from developing countries were still experiencing difficulties. A UK aid flight to Central Asia using an Ilyushin-76 registered in the former Soviet Union was held up five days due to insurance problems, for example.
| Summary Cargo Top 100-2000 | ||||||
| Region | Cargo traffic (RTK) | Cargo Revenues | Yields | Freighter | ||
| Million | Change | $ million | change | change | fleet | |
| Asia-Pacific | 48,783 | 9.8% | 11,248 | 13.1% | 3.5% | 89 |
| North America | 45,270 | 7.0% | 28,967 | 6.5% | -0.9% | 798 |
| Europe | 39,002 | 7.7% | 8,959 | 8.7% | 0.7% | 70 |
| South America | 4,438 | 19.0% | 672 | 26.4% | 9.0% | 14 |
| Middle East | 4,370 | 3.6% | 815 | 4.6% | 2.4% | 8 |
| Africa | 1,236 | -3.8% | 203 | -11.7% | -11.7% | 2 |
| Grand Total | 143,099 | 8.3% | 50,864 | 8.4% | 0.3% | 981 |
| Note: Figures are based on the lastest Airline Business Top 100 ranking. Change figures may have been rebased to account for gaps in the data between the two years. Yields = cargo revenues/RTKs Freighter fleet = only pure freighters excluding combis. RTK = revenue tonne kilometre 1 mile=1.609km. | ||||||
Known-shipper regime
Meanwhile, the UK had restored the known-shipper regime for all but North American-bound cargo, and the industry was waking up to the fact that it was actually in fairly familiar territory security-wise. The question of how to ensure bombs were not smuggled on to aircraft as cargo was first raised as long ago as the Lockerbie bombing in 1988, and was emphasised in 1996 when the TWA flight 800 disaster was initially thought to have been caused by terrorism. Following these incidents, proposals for bomb-proof cargo containers were drawn up for passenger aircraft, but these were ultimately rejected because they would have reduced cargo payloads by as much as 5%.
Lockerbie led to the creation of the known-shipper concept, whereby cargo must be scanned or physically checked unless it is from a shipper already known to the carrier or forwarding agent. In practice, most traditional air cargo is from known shippers, although express carriers have a larger percentage of ad-hoc business.
Implementation of the known-shipper policy has been slow and patchy, however. Most leading air-freight centres pay only lip service to the idea. In many countries, including the USA, it has often been little more than a matter of filling in paperwork.
The UK is generally accepted to be a model in this area: it adopted known-shipper procedures in 1995, and obliges forwarders to comply with stringent audits and annual checks of shipper procedures.
The 38-nation European Civil Aviation Conference (ECAC) agreed to a similarly robust scheme in 1998, but only a handful of countries apart from the UK (France, Denmark and Switzerland) have implemented its proposals. This is now likely to change, in the European Union at least, with transport ministers discussing making them binding.
Similar rules will doubtless be put in place in most other major air-cargo hubs. There will also be more ramp security, and fences in front of cargo terminals might become more secure (with a few exceptions, it is shockingly easy for casual visitors to wander into air cargo buildings around the world).
But despite the panicky statements airlines are making, and the security surcharges of around ó15 per kg (ó18/lb) they are imposing, there is no sign so far of truly radical changes in security regimes. Carriers are, rather, tightening up the measures already in place.
It is not clear whether the events of 11 September will, in themselves, have any immediate impact on cargo volumes either. There is certainly no anecdotal evidence of a dramatic fall.
In fact, freighter operators reported themselves busy clearing the backlog caused by the grounding of planes in the week after the attacks, and both US cargo carriers in the military reserve programme and European charter brokers skilled in relief aid flights reported a flood of new business. There is also the convenient (from a cargo point of view) removal of 10-20% of belly capacity as passenger routes are slashed.
Cause for concern
This is not to say that cargo is not in a serious condition. Well before September, it was facing its biggest downturn certainly since the 1970s. The Gulf War is often cited as having caused a similarly large cargo slump, although the outcome for 1991 was only a net fall of 0.4% in traffic - measured in freight tonne kilometres (FTKs) - and a 4.9% drop in tonnages.
Figures from the International Air Transport Association show that international tonnages dropped by 7.2% as the fighting started in February 1991 and stayed negative through the rest of the year. By comparison with these numbers, today's volumes are sharply down.
Tom Crabtree, director of cargo marketing at Boeing Commercial Airplanes Group estimates the worldwide fall so far this year at 4.5%, and IATA's figures show a fall of 3.6% in FTKs and 2.5% in tonnage in the first half. After a relatively stable first quarter, IATA reports a second-quarter fall of 6% in FTKs and 5.8% in tonnages.
And this is for traffic to June, when the cargo industry was still relatively optimistic. Things have since worsened. The Association of European Airlines shows traffic for its members down 10.2% year-on-year for August (see tables on page 82). North Atlantic traffic in the same month was down 18.7%, with even the supposedly less affected routes from Europe to Asia-Pacific reduced by 6% and to the Middle East down 7%. Almost every European carrier was showing sharp FTK falls by August: Air France 10.7%; KLM 9.7%; Cargolux 16%; and Lufthansa 4.1%.
In the USA, meanwhile, the Air Transport Association (ATA) reports FTKs 9.3% lower in August, with domestic traffic reduced by 10.9% and international movement down 7.7%. For the year to August, the ATA shows freight traffic down 6.1%.
The real bloodbath is on eastbound transpacific routes, however, since westbound volumes have been dire for years. In mid-August, Jim Friedel, president of Northwest Airlines Cargo - the only US carrier with a dedicated freighter fleet, which is exclusively deployed on Asian routes - was describing the falls as "somewhere between bad and horrific". One report had a Boeing 747 freighter from an unnamed carrier crossing the Pacific with only 4% of its 110t of capacity filled.
What happened?
But why this disaster? Last year was a glowing one for air cargo as witnessed by the annual Top 100 Cargo Airlines and Top 50 Cargo Airports rankings (see pages 60-64). Cargo traffic and revenues for the lead airline players was up by more than 8%, while many individual carriers and airports - particularly but not exclusively Asian - enjoyed growth in double figures. As the ranking also shows, even all-important yields rose albeit by an overall 0.3%. Boeing, in its last World Air Cargo Forecast, published in September 2000, continued to predict 6.4% annual growth and an overall trebling of cargo traffic in the next two decades.
To a large extent, the answer lies with the technology crash, which started with the end of the dot.com boom in March 2000, and has gathered pace this year, spreading to computers, mobile telecommunications and other hi-tech equipment. The downturn has hit Asian economies, the major manufacturing centre for hi-tech products, particularly hard, hence the transpacific nosedive.
Asked in August how much eastbound transpacific traffic had fallen in August, Friedel cited official figures showing exports from Japan to the USA down 25% in June, and from Taiwan down 30% in July. Kenny Tang, Cathay Pacific's general manager for cargo, reported a 20% fall in US exports out of Hong Kong, also for July. Singapore, which held up relatively well, also saw its economy shrink 10.7% in the second quarter.
That hi-tech traffic matters a lot to air cargo can easily be seen by visiting any warehouse in the world. Boxes marked Compaq, Siemens, IBM or Motorola fill almost all of them. Crabtree at Boeing reckons hi-tech accounts for around 20-25% of air cargo volumes: some carriers put the figure as high as 35%.
The fall in hi-tech traffic would have been bad enough if other major air cargo commodities had remained buoyant. But automotive parts, another mainstay of air cargo, are also suffering, and garment shipments out of southern Asia to the USA and Europe have also dropped sharply. Indeed, it is hard to think of a type of major air cargo, apart from pharmaceuticals and perishables, that is not having a depressing time.
Cargo's vulnerability
Because air cargo is at the luxury end of the shipping market - it makes up around 1% of world trade by volume and 40% by value - it is also disproportionately vulnerable to changes in output. It is telling that Boeing bases its 6.4% forecast on a predicted average world GDP growth rate of only 3% in the next 20 years. That calculation works in reverse too: shave 1% off world trade, and air cargo falls 2% or even 3%.
In the longer term, of course, none of this matters so long as the economy bounces back. Crabtree points out that after the Gulf War falls, air cargo traffic grew 3% in 1992 and 1993, but then leapt 14% in 1994. The excellent results in 2000 followed near static traffic and single percentage point falls in some markets in 1998, following the Asian crisis. On that basis, many cargo managers are discounting next year and looking forward to recovery in 2003.
Some are concerned that a more fundamental change may have occurred, however. One worry is that 11 September will mark a shift away from "just-in-time" manufacturing, minimum inventory and global sourcing of parts and components - perhaps the biggest drivers of air-cargo growth in the past decade.
One manifestation of this fear is that "floating inventories" - or inventory in transit on ships - will replace use of air cargo. Ned Laird, managing director of Seattle-based analysts, Air Cargo Management Group, says there are already signs of a preference for sea freight on westbound transpacific routes. Another worrying trend in the USA is the switch of domestic air cargo to trucks, a development that has been hitting express carriers and operators of US air networks for some time.
Crabtree says Boeing is sticking to its 6.4% forecast, however. Global manufacturing and sourcing of parts will continue to be driven by the consumer's demand for price and value, he says. "You and I buy these products, and we tend not to pay more for goods than we have to. So enterprises will still be under pressure to switch manufacturing to optimal centres, respond quickly to consumer demand and keep inventory costs down," he says.
"My gut feeling, therefore, is that unless there is a total about-face in the consumer revolution of the last two hundred years - and I doubt that very much - air cargo and its long-term prospects are in the clear."
If that sounds wildly optimistic at present, Crabtree says it is the fate of the long-term forecaster nearly always to seem wrong. "In the boom times when planes were full, we used to be told our forecasts were too low. Now people will say they are too high," he states. In fact, he says, Boeing cargo forecasts have proved remarkably accurate to date - on average, at least.
Source: Airline Business
