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Sea change: is air cargo about to reach maturity?

Air freight has always been a high growth industry, but is it now about to reach maturity?

Air cargo will grow by an average of 6.1% a year for the next 20 years and the world freighter fleet will double in size during that time. This Boeing forecast is such a ubiquitous part of presentations at air cargo conferences that it hardly needs stating any more.

But is the outlook for air cargo really so rosy? Growth has been less robust in recent years, with IATA putting it at 3.2% in 2005 and 4.6% in 2006. In the first half of 2007 growth was 2.7%, although there was an upturn in July. Is this an indication of things to come in the longer term? Looking closely, several trends emerge that might hinder long-term growth or suggest an industry that is starting to show more mature growth curves.

Ulrich Ogiermann
"Our customers will want to be sure they will fly their goods in the most fuel efficient aircraft"
Ulrich Ogiermann, Chief executive, Cargolux
­One trend, which many carriers observed in the first half of 2007, was a shift of some types of cargo from air to sea freight. This is a concern because it does not take much of a growth in sea freight's market share to seriously dent air cargo. Using 2005 figures, Boeing calculates that once bulk products such as oil, metals and grain are discounted, there were 16.2 trillion revenue tonne kilometres of ocean freight that year, compared with 178.1 billion RTKs of air freight. That gives air freight just 1.1% of traffic.

This year, a shift to sea freight was cited by carriers as diverse as AirBridge Cargo of Russia, Air France-KLM, Lufthansa and Cathay Pacific. The effect has mainly been noted out of Asia, but that is of little comfort since it is Asian traffic that Boeing predicts will drive air cargo growth in the next 20 years.

Korean Air was one of the first to note the switch. As long ago as 2006 Korean attributed poor export performances out of its home market to manufacturers such as LG and Samsung switching business from air to sea.

While traditionally nearly all mobile telephone exports from South Korea went by air, in 2006 around a third went by ocean, Korean Air Cargo president Ken Choi said at the time. The change affected Korean's freighter flights from Seoul to Vienna, which supply the factories of South Korean manufacturers in Slovakia and Hungary. Cathay Pacific also cited increased competition from sea freight as a factor in the 8.3% fall in cargo yields in its results for the first half of 2007. And more than one carrier noted that the latest Sony Playstation was shipped by sea rather than by air in the second quarter of this year.

Spotting a Trend

So, are such changes a worrying trend, or just the usual swinging between the two modes? Certainly some of the reasons carriers cite for the change could be seen as long-term trends. One is the high oil price, which has pushed up air freight rates more sharply than sea freight rates. This has undoubtedly focused the minds of exporters and manufacturers on how they can adjust their supply chains to make less use of air.

At the same time, shipping lines seem to be improving their services. At the Air Freight Asia conference in Hong Kong in September, Jim Friedel, president of cargo at Northwest Airlines, said ocean carriers are now offering customers with more time-sensitive shipments like a "last on, first off" service. Meanwhile, faster ships have reduced transpacific transit time to as little as 10 days.

Friedel contrasts this with the air cargo industry, which is struggling with service ­improvements like the IATA e-freight initiative to remove paper from air cargo processes: "I bet everyone in this room is in favour of paperless working, but to put any cargo executive into a deep trance all I have to do is talk about the main specific areas where we need to improve processes." IATA is aiming for 100% e-freight by 2010, where viable. It expects full implementation of the initiative to result in savings of $1.2 billion a year.

Lufthansa Cargo also says container ship operators have improved their service at the final distribution point, after the cargo has arrived at its destination port. "Shippers can't cut cost by shifting production to cheaper places any longer, so logistics is the next domain of cost-cutting," says the carrier. "Better planning enables them to use the longer lead times necessary for sea freight."

Price sensitivity

Even IATA director general Giovanni Bisignani noted the trend in a speech at the Air Transport Logistic event in Munich in June. "We see the orders for new aircraft and wonder where all that capacity will go," he said. "Freight demand is showing much more price sensitivity than previously. The cargo business is still growing, but competition from other modes of transport is severe. And sea shipping is taking a greater proportion of the benefits of the economic boom."

There could be a less exciting - and perhaps more temporary - reason for the success of sea freight over the past year: the maritime sector is enjoying a boom in capacity. IATA estimates that ocean freight grew 9.5% a year from 2000 to 2005, and says capacity is now growing at 12% a year. Boeing in its World Air Cargo Forecast also says sea freight capacity has grown around 10% a year since the mid-1990s, although maritime traffic has only averaged 5.4% annual growth over that period. Boeing admits that this outstripped overall air cargo growth of 5.1% over the period, but says once domestic (primarily US) traffic is stripped out, international traffic rose by 6%, faster than sea freight.

"Furthermore, international air cargo ­traffic should continue to outpace international maritime traffic growth owing to the growth of passenger airplane belly capacity, greater market access of freighter airplanes versus ships (nearly 600 airports worldwide can be accessed by large widebody freighters) and anticipated cost reductions in air transport overall," says Boeing in its forecast.

The point about the greater market access of air cargo is also made by Arend de Jong, senior vice-president of marketing and ­networks at Air France-KLM Cargo. "There will definitely be some substitution from air to sea, and this will remain a trend, but I don't think this will fundamentally hurt the air cargo industry in the long run," he says.

"When the market is weaker, and given the high fuel cost, there is some tendency to sea freight, but when it strengthens, the reverse will happen. And you can't play this game just anywhere - only from places like Hong Kong, Shanghai, Seoul and Dubai which have easy access to the sea."

Ron Mathison, director and general manager cargo at Cathay Pacific, adds the observation that North American and European ports are struggling to keep up with the rapid rise in container traffic, most of it emanating from Asia. "I think it is just a matter of time before congestion and labour disputes cause a swing back to air," he says, in reference to the US West Coast port strike in 2004, which was a bonanza for air freight.

The commodity factor

But what if there was another trend behind the switch to sea freight? What if the problem was that the kind of hi-tech products such as mobile telephones, laptops and LCD screens, which have favoured air cargo in the past, were becoming commodities - lower priced everyday products that don't need to be rushed to market?

Several airlines believe this is a factor in the switch to sea freight in the past year. "A lot of classical air cargo products are more and more mass articles," says Lufthansa Cargo. "There have been no technical ­innovations recently, no hot items that everybody wanted, like flat screens, digicams, or a new generation of laptops."

Set against this, there are a number of positive long-term trends for air cargo that carriers like Atlas Air relied on in deciding to invest in 12 new Boeing 747-8 freighters in September 2006. Atlas chief executive William Flynn points to the growing consumer demand for fresh vegetables year round the growing sophistication, value and shorter shelf lives of pharmaceuticals, which continue to be manufactured at single sites and then distributed globally and the seemingly insatiable demand for high fashion clothing and accessories. All these trends, he says, will continue to drive air cargo growth.

Ulrich Ogiermann, chief executive of ­Cargolux, also painted a bullish picture in a speech at the Air Freight Asia conference. Air cargo is vital to the global economy, he said, giving companies everywhere access to a global market, helping developing countries to create industries that would not otherwise exist, and moving part manufactured goods between factories situated around the globe.

However, there is one possible future threat to this vision of globalised manufacturing and markets: the concern about climate change. Consumers are becoming increasingly aware of their "carbon footprint", and there could be a move towards buying products that have not been air-freighted as a way of reducing that footprint. With big corporations keen to increase their green credentials and reduce carbon emissions, will there soon be a backlash against manufacturing in far corners of the world, or indeed flying the latest mobile telephone to eager consumers?

One worry here for air freight might be that while it is hard to envisage a world in which people no longer travel by air for business or pleasure, it is possible to conceive of a world in which the newest laptop is shipped by sea to market rather than flown. Indeed, as has been already noted, some companies have already responded to high aviation fuel prices by making just that adjustment.

Environmental concerns

Boeing does not dismiss this worry, but insists it is taken into account in its forecasts. However, Thomas Crabtree, regional director of airline market analysis, also admits that it regards the risk as somewhat unquantifiable. "It is hard to develop an econometric model for this that will go into the Boeing supercomputer," he says.

Evidence of growing green concerns among major companies is everywhere. Not surprisingly it has started with retailers, who are most sensitive to consumer moods. UK supermarket chain Tesco announced in January that it wanted to label all its products with their carbon dioxide emissions, and reduce its use of air freight. However, Tesco chief executive Terry Leahy later admitted that in some cases air freighting vegetables from Africa could be more environmentally friendly than sourcing them from energy intensive European farmers.

William Flynn
"Corporations will want to be as green as possible"
William Flynn, Chief executive, Atlas
Meanwhile, in the USA, Wal-Mart is also implementing a whole raft of environmental measures, and more importantly pressurising its suppliers and their logistics partners to do the same. Like Tesco, it is looking at using electrical power in its trucks.

Those pioneers of so many trends in air freight - the big express carriers - are also taking environmental issues seriously, with FedEx for example, using ground power supplies for its freighters to cut the use of auxiliary units. It is also exploring alternative technologies for its truck fleet, as is UPS, which will add 50 hybrid electric vehicles to its US fleet in the next year.

And in August TNT announced a comprehensive programme called Planet Meto to cut CO2 emissions, promising action in areas such as aviation, buildings, business travel, company cars and even urging its employees to cut emissions at home. Given such trends, it is hard to imagine that the use of air freight in supply chains will escape scrutiny for much longer, and air freight managers, who were until very recently in complete denial, are now waking up to this threat.

Ogiermann at Cargolux says it became the launch customer for the 747-8 with one eye on increased environmental pressure from its customers in the future. "They will want to be sure that if they have to fly goods, they fly them in the most fuel efficient aircraft, and that aircraft is the 747-8," he says.

Atlas offers the same reason for its decision to buy new 747-8s instead of converting 747-400 passenger aircraft to freighters. "Corporations will want to be as green as possible," says Flynn. "So we don't want to be ­flying 10 year-old aircraft with yesterday's engines. We want aircraft with next-generation engines, the largest payload and the best fuel efficiency."

Both men are at least considering the possibility of a world in which shippers may start to be self conscious about using air freight rather than ground alternatives. At Air France-KLM, de Jong says he already gets enquiries from pharmaceutical customers wanting to know the carbon emissions generated by their use of air freight.

Whether this will stunt air freight growth or not is still an open question, however. Looking at China, India and other developing countries, and the interconnected nature of global trade and manufacturing, it is hard to imagine things any other way.

Most air cargo managers would still back the Boeing forecast, and most airlines invest in freighters on the basis that it will come true. So far, it has to be said, Boeing has a pretty good record of getting it right.

 




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