CARGO E-CHARTBOOK Q3 2011

Transcription

1 CARGO E-CHARTBOOK Q3 211 OVERVIEW The past quarter has seen cargo markets deteriorate significantly. Having been flat for more than a year cargo volumes began to decline from July. Cargo rates are also in decline, though surcharges have risen. Forward-looking indicators for demand point to further weakness in the months ahead, while falling sea freight rates and rising twin aisle capacity are intensifying the competitive environment. Coupled with still high jet fuel prices these developments are putting downward pressure on cargo profitability. HEADLINES BY SECTION Economic Outlook (page 2) Traffic Growth (page 3) The economic outlook has deteriorated in the past quarter. The European situation risks triggering another banking crisis if not handled well. Emerging markets are slowing but so far remain relatively strong. Air freight markets started to shrink in the middle of 211, after over a year of stagnation. Weakness was experienced across all major markets, particularly in Asia. Freighters have picked up a larger share. Demand Environment (page 4) Demand Drivers (page 5) Customers of the air freight industry have become gloomy and cut shipments. The confidence of purchasing managers has fallen sharply, inventory-expected sales has risen, semiconductor shipments are down. Consumers in developed economies have lost confidence, although this is not the case in emerging economies. The corporate sector has also started to reduce capital spending and world trade is now flat. Revenue and Yields (page ) Costs (page 7) Cargo rates have come under downward pressure from weak demand and falling utilization. Overall rates are 4% down on the year but rates on the SE Asia-Europe trade lane have fallen 19%. Revenues are weak. Cost pressures shouldn t be a problem given the gloomy economic environment. But they are. Jet fuel prices have not fallen very much at all. They are still 3-4% up on last year. Non-fuel costs look stable. Capacity (page ) Competition (page 9) Cargo-only airlines are trimming fleet size, and freighter utilization is still at 1 hours, but the impact on cargo capacity of the expanding twinaisle fleet has pushed load factors down 5 percentage points. The experience of other transport modes has been mixed. Bulk shipping has shown a modest revival, but ocean containers have seen volumes slow sharply and sea freight rates have fallen dramatically. Profitability (page 1) Cargo profitability began to fall in the second half of 21 and declined further this year. All cargo airlines have been doing better than others. Heads of cargo have become much less confident about the outlook. IATA Economics 1

2 Economic Outlook Cargo echartbook Q3 211 The economic outlook has deteriorated in the past quarter. The European situation risks triggering another banking crisis if not handled well. Emerging markets are slowing but so far remain relatively strong. Monetary policy either ineffective in boosting growth or being tightened Interest Rates Jul/7 Nov/7 Mar/ Jul/ Central Bank Interest Rates Source: ECB, FT, Haver, Bloomberg Nov/ Mar/9 Jul/9 Nov/9 Mar/1 US Fed Funds Rate European CB Repo Rate Australia interest Rate Jul/1 Nov/1 Mar/11 Jul/11 Nov/11 After the big monetary stimulus in 2-9, central banks had started to tighten policy, particularly in Asia- Pacific where inflation was starting to become a problem. However, in western economies renewed weakness in the face of debt problem prompted a further loosening of monetary policy, through printing money rather than cutting interest rates. The problem is that in these economies the private sector is hoarding cash, which makes monetary policy an ineffective way of boosting spending. Fiscal policy has tightened in many economies despite liquidity trap conditions Change in % of GDP over the previous year Government Cyclically Adjusted Fiscal Balance Source: IMF United States Euro Area Japan China India Russia Brazil Producing a little slower but still 2-speed economic growth in 211 % change over year Forecasts for GDP growth Source: EIU US Japan Euro Area ASPAC excl Japan Middle East North Africa Latin America World The major developed economies find themselves in an old-fashioned liquidity trap, where looser monetary policy does not work. The traditional remedy is a boost from fiscal policy. This was done in 29 but governments have become concerned about the scale of borrowing, financial markets have added to pressures with downgrades of soverign debt and so policy is being tightened. With the private sector hoarding cash rather than spending in major economies, fiscal tightening is weakening growth. Economic growth has slowed around the world as a result of policy tightening and also the continuing impact of debt. Japanese growth was also reduced by the impact of the earthquake. The Japanese economy is rebounding as reconstruction takes place but in Europe and North America economic growth has slowed to a very low pace. Recession is a clear risk in Europe. Elsewhere growth has slowed but should remain relatively strong in the emerging economies. IATA Economics: 2

3 Cargo echartbook Q3 211 Traffic Growth Air freight markets started to shrink in the middle of 211, after over a year of stagnation. Weakness was experienced across all major markets, particularly in Asia. Freighters have picked up a larger share. Air freight volumes started to shrink in the middle of 211 % Change Domestic Freight Volumes (ACI) Freight Traffic Growth Source: IATA, ACI International Freight Volumes (ACI) International FTKs (IATA) Most major trade lanes are weak, particularly flows within Asia YoY Growth % 5% 4% 3% 2% 1% % -1% -2% -3% -4% International Freight growth by major routes Source: IATA ODS Within Far East Europe - Far East North Atlantic North and Mid Pacific Freighter capacity picking up an increasing share of cargo traffic FTK Billion Air Freight Carried by freighter or Belly Hold (Airline Sample) Source: IATA Freighters (left scale) Belly Hold (right scale) FTK Billion Air freight markets started to shrink by the middle of this year. In fact markets peaked in the second quarter of 21. Year-on-year comparisons remained positive for the next 12 months but the level of air freight volumes made no further progress. Then from July and on into August FTKs began to shrink in absolute terms. Domestic air freight is falling at a slightly faster pace than international. Global air freight FTKs were 3.% lower than a year earlier in August. Air freight market weakness has hit most trade lanes. This is not just a developed country problem. In fact the weakest major trade lane is Within Far East, where volumes are down 1% on last year. Overall trade flows show the strongest trade lanes in Latin America and MENA. European exports have been strong. The big slowdown has been in Asian and European exports, and in imports into Europe and the US. A significant divergence has opened up between the volume of freight carried in freighters and in the belly hold of passenger aircraft. Since freight markets peaked in early 21 volumes carried by passenger aircraft have fallen and, over the past year, remained flat at best. However, the integrators and cargo-only carriers have seen an upturn in the volumes they carry. Belly-hold freight volumes are over 4% down on the 21 peak. Freighter volumes however are back up to the highs of 21. IATA Economics: 3

4 Cargo echartbook Q3 211 Demand Environment Customers of the air freight industry have become gloomy and cut shipments. The confidence of purchasing managers has fallen sharply, inventory-expected sales has risen, semi-conductor shipments are down. Purchasing managers optimism has fallen sharply pointing to air freight weakness PMI Value (5 = No-Change) Purchasing Managers confidence survey and Air Freight Demand Source: IATA, JP Morgan International FTKs JP Morgan Manufactuerers PMI (+ 2 months) % Growth, International FTKs In the second and third quarters purchasing managers in manufacturing industries in the major economies reported a sharp fall in confidence. The PMI index is consistent with no further growth in industrial output in the second half of this year. With purchasing managers cutting back on orders and shipments the outlook for air freight volume growth over the next few months is for further weakness. Inventories to actual sales stable but inventories to expected sales has risen Inventories to sales ratio Total Business inventories to sales ratio and FTKs Source: US Census Bureau and IATA Inventories to sales ratio FTKs FTKs (billion) Swings in business inventories play a major role in driving major turning points in the air freight market. The strength of the 29/early 21 recovery in FTKs was the result of business restocking their inventories. For the past year the inventory to actual sales ratio has remained stable. However, if the current economic gloom has caused business to expect significantly lower sales, then the inventory to expected sales ratio (not observable) will have risen causing a reduction in orders and a fall in FTKs. Semiconductor shipments are contracting, pulling air freight volumes down % Growth, Semi-Conductor Shipments Semi-Conductor Shipments and Air Freight Source: IATA, SIA International FTKs Semi-Conductor Shipments % growth - International FTKs Semi-conductors and other high valuelow volume componants of the electronics supply chain are key customers of air freight. In fact falling prices for semi-conductors have led to more being shipped by other, slower but cheaper, transport modes. Nevertheless, shipments are still a good coincident indicator of air freight volume growth, probably because they are a good proxy for shipments of other electronic goods. Shipments are now shrinking. IATA Economics: 4

5 Cargo echartbook Q3 211 Demand Drivers Consumers in developed economies have lost confidence, although this is not the case in emerging economies. The corporate sector has also started to reduce capital spending and world trade is now flat. Consumer confidence is stable in China but down sharply in Europe and the US Balance expecting improvement, index Consumer confidence Source: Haver Analytics Jan/4 Jan/5 Jan/ Jan/7 Jan/ Jan/9 Jan/1 Jan/11 US Europe (right scale) China Balance expecteting improvement, net % Consumers still appear to be confident in emerging economies such as China, but in the developed economies there has been a sharp fall in confidence. The biggest fall has been amongst European consumers, whose confidence is now at a 2-year low. Confidence in the US among consumers is similarly weak. Western consumers are still a major source of demand for air freighted goods and the impact of the recent fall has yet to come through fully. Cash rich corporate sector is now cutting back on its spending on capital goods Net balance intending to increase investment UK business (left scale) Capital spending intentions Source: Haver Analytics Japan business (right scale) -7 Q1-24 Q1-25 Q1-2 Q1-27 Q1-2 Q1-29 Q1-21 Q1-211 World trade recovery has stumbled Billion FTKs World trade in goods and air FTKs Source: Netherlands CPB and IATA International FTKs (left scale) World goods trade volumes (right scale) Net balance intending to increase investment index of world trade, 2=1 Capital goods or their components also get shipped by air, if they are of a high enough value relative to their weight. Unlike the consumer sector in Western economies the corporate sector has been cash rich over the past year. In the second half of 21 companies started spending this cash on investment and jobs. However, the uncertain economic environment has now prompted companies to hoard cash and cut back on capital spending. This is another negative for air freight. The underlying demand for capital and consumer goods generates flows of exports and imports, which directly impact demand for air freight. The relationship between air freight and world trade is not one-for-one as the chart shows. Having been the transport mode of choice in the post-recession period, air freight lost out to other modes in late 21 but world trade was still growing. World trade is no longer growing and has essentially moved sideways for most of 211. IATA Economics: 5

6 Cargo echartbook Q3 211 Revenues and Yields Cargo rates have come under downward pressure from weak demand and falling utilization. Overall rates are 4% down on the year but rates on the SE Asia-Europe trade lane have fallen 19%. Revenues are weak. Cargo rates are falling as conditions deteriorate but surcharges are up US$ per kilo SE Asia-Europe SE Asia-Europe (incl other charges) Global total - LHS Global (incl other charges) - LHS Air Freight Yields (US$ per kilo) Source: IATA CASS Note: Other charges include handling charges, dangerous good fees, special charges, fuel surcharges, security etc US$ per kilo Underlying cargo rates have been falling over the past year, due to weak market conditions and falling load factors. On the important SE Asia to Europe market cargo rates were 19% down on the previous year in July. Global cargo rates, based on IATA s CASS data, were down around 4%. However, surcharges have been rising sharply over the past year, reflecting the 3-4% increase in jet fuel costs. Including these surcharges suggests that yields were still rising on average up to July. The situation may have deteriorated subsequently. Revenues are now under downward pressure Revenues (US$ billion) Cargo Revenues % Growth Global Airline Industry Cargo Revenues Source: ICAO, IATA F 212F 4% 3% 2% 1% % -1% -2% -3% % Growth Cargo revenues came under downward pressure in 211 as load factors declined in a market that had already stopped growing six months earlier. The data above has already shown flat volumes and falling cargo rates. The growth in cargo revenues that there has been in 211 represents surcharges. Some of these are accounted for in other revenues but some does get included as cargo revenue. The downward pressure on revenue is set to intensify in the last quarter of this year. Air cargo share of international trade is diminishing 3% 32% 2% 24% Value of Import and Export by Air as % of Total Source: US Census bureau Export The share of air cargo as a transport mode in international trade always reaches a cyclical high early in an economic recovery. For the past year that share has been in decline, as other modes benefited from the second half trade expansion in 21, and then longer term down trends returned. 2% 1% Feb- May- Aug- Nov- Feb-7 May-7 Aug-7 Nov-7 Feb- May- Aug- Nov- Feb-9 May-9 Aug-9 Nov-9 Feb-1 May-1 Aug-1 Import Nov-1 Feb-11 May-11 Aug-11 By value of the goods shipped, air freight in the US has seen its share of exports and imports slip 4% points from post-recession highs. IATA Economics:

7 Cargo echartbook Q3 211 Costs Cost pressures shouldn t be a problem given the gloomy economic environment. But they are. Jet fuel prices have not fallen very much at all. They are still 3-4% up on last year. Non-fuel costs look stable. Fuel prices have fallen a little but remain 3-4% higher than early 21 levels Jet Fuel and Crude Oil Price ($/barrel) Source: Platts, RBS Jet fuel price Crude oil price (Brent) Stronger US dollar is sustaining high fuel prices for -based airlines Jet Fuel Price Currency Comparison per barrel $ per barrel After an intial fall from the highs reached in March, jet kerosene prices have been volatile but the downward trend has been very slow, despite the increasing economic gloom. At $129 a barrel in mid-october fuel prices were still 3-4% higher than a year ago. Fuel prices are being held up by still robust demand for energy from emerging markets, combined with constraints on supply. Financial investors in commodities, fuelled by plentiful liquidity are also a factor. For the past couple of years moves in exchanges rates have been swamped by changes in US$-based oil prices. However, in the past six months the weakening of the against the US$ - as the Eurozone crisis deepened offset the (modest) fall in US$-based fuel prices. -based airlines will have seen no fall in fuel costs as a result. Source: Platts, RBS Wage pressures mixed % Growth y-o-y in nominal wages Q1-21 Q3-21 Q1-22 Q3-22 Q1-23 Q3-23 Q1-24 Nominal Wage Growth Source: Haver Analytics USA European Union China (RHS) Q3-24 Q1-25 Q3-25 Q1-2 Q3-2 Q1-27 Q3-27 Q1-2 Q3-2 Q1-29 Q3-29 Q1-21 Q3-21 Q % Growth y-o-y in nominal wages (China) In a weak economic environment the main cost problem comes from the difficulty in maintaining asset utilization, rather than the costs of non-fuel inputs. With many costs fixed, at least over the season, lower asset utilization feeds directly through to higher unit costs. Airlines are still having problems bringing labour costs down. Economy wide labour cost pressures are easing in the US but still rising in developing economies like China. IATA Economics: 7

8 Cargo echartbook Q3 211 Capacity Cargo-only airlines are trimming fleet size, and freighter utilization is still at 1 hours, but the impact on cargo capacity of the expanding twin-aisle fleet has pushed load factors down 5 percentage points. Freighter fleet has fallen by 43 in past year but twin aisle fleet is up 7 Number of aircraft Cargo fleet composition Source: IATA, Ascend Freighter fleet in service Widebody pax fleet in service Seasonally adjusted load factor Dec- Dec-1 Dec-2 Dec-3 Dec-4 Dec-5 Dec Dec 7 Dec Dec 9 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 End of year totals End of month totals % 5% 5% 54% 52% 5% 4% 4% 44% 42% 4% Freight load factor The integrators and all-cargo airlines are taking a greater share of the air freight market. Airlines have also cut the size of the freighter fleet by 43 aircraft over the past 12 months. Yet the freight load factor has fallen by over 5 percentage points compared to its early 21 peak. The reduction of freighter capacity has been more than offset by a rise in the twin-aisle fleet by 7 aircraft, with its associated belly capacity. New freighter deliveries being offset by retirements Aircraft per month Monthly Average Aircraft Retirements and Deliveries Source: Ascend Deliveries Retirements Storage Higher fuel prices, and expectations that they will continue, have helped boost aircraft retirements in recent months. However, that has been more than offset by an increased rate of aircraft deliveries and aircraft being taken out of storage and returned to the in-service fleet. Many of these aircraft entering the fleet are narrow body and so will have little impact on cargo capacity. However, as the chart above shows there has been a significant rise in the twin aisle fleet. Twin aisle deliveries to rise significantly this year and next Number of Aircraft Other Middle East North America Europe Asia Pacific Twin Aisle Aircraft Deliveries by Airline Region Source: Ascend Delivery of new twin aisle capacity fell in 21 but has risen sharply in 211 with 25% more or an extra 4 aircraft delivered. Next year deliveries are scheduled to be 5% higher than 21, with over 25 new aircraft representing an additional 7% of the fleet. For most of 211 airlines kept twinaisle passenger and freighter utilization high. However, in the middle of the year the utilization of passenger twinaisle aircraft fell sharply as capacity ran ahead of demand. IATA Economics:

9 Cargo echartbook Q3 211 Competition The experience of other transport modes has been mixed. Bulk shipping has shown a modest revival, but ocean containers have seen volumes slow sharply and sea freight rates have fallen dramatically. Recent rise in bulk shipping costs shows that there are some areas of demand growth Index Jan 195 = Baltic Dry Index Source: Bloomberg The recent rise in the cost of bulk transport by ocean, measured by the Baltic Dry Index, appears to reflect Asian demand for iron ore. For much of the past two years bulk transport costs have been fallening, not because of lower demand but as a significant number of new ships came into service. The rise in this cost despite plentiful capacity suggests that the world economy still has some areas of strength left. In the past year ocean container rates have gone from % growth to 2% declines % change over year 1% % % 4% 2% % -2% -4% Ocean container and air freight rate growth Source: Drewry, CASS Ocean container -% Air freight Shipping volume growth is still up but has slowed substantially % Growth, Year-on-Year Container Shipping Volume Growth by Region Source: Drewry North America North Europe Far East Middle East Latin America Jul-1 Jun-11 Jul-11 With air freight rates per kilo some 15 times higher than sea freight, small changes in the price of one does little to incentivize shippers to switch from one mode to the other. However, the change in ocean container freight rates over the past year has been dramatic, falling from growth of % in 21 to falls of minus 2% by the middle of this year. Sea freight has been getting even cheaper compared to air, which may account for some of the recent decline in air freight. In the middle of 21 the volume of cargo carried by ocean containers was growing at rate of 1-2% on most major trade lanes. That carried on to the end of the year as shippers had less need of the speed provided by air freight. However, growth slowed sharply during this year as world trade stopped growing. The sharpest slowdowns have been for North and South American markets. North European trade lanes have been quite robust, reflecting the growth of exports from this region. IATA Economics: 9

10 Cargo echartbook Q3 211 Profitability Cargo profitability began to fall in the second half of 21 and declined further this year. All cargo airlines have been doing better than others. Heads of cargo have become much less confident about the outlook. Profit margins squeezed by falling utilization and rising fuel costs % of Revenues 12% 1% % % 4% 2% % -2% -4% Profitability of US Cargo Only Airlines Source: US BTS Operating Profit Margin Net Profit Margin The US cargo only airlines have seen their profit margins squeezed over the past year, as utlization declined and fuel costs rose. However, these airlines did relatively well. Passenger airlines have been reporting sharp falls of cargo revenues and substantially lower load factors and unit revenues. Overall cargo profitability is likely to be lower than suggested in the chart. Second quarter profitability boosted by seasonal factors but down on last year % of Airline Revenues 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % 15.2% 3.% Airline Operating Profit Margin - Q2 211 (Passenger and Cargo) Source: Ascend,bloomberg, Airline report Returns below the Cost of Capital 1.3% 14.% 34.% 7.9% 12.% Returns above the Cost of Capital.9% 1.1% This distribution of second quarter profits includes passenger as well as cargo only airlines, but the picture is clear. The majority of airlines were profitable in the second quarter. However, the second quarter is strong for seasonal reasons, particularly for passenger airlines. Compared to last year aggregate second quarter profits were down by about a half. Revenue growth expectations falling sharply Weighted Score Mar 2 Sep 2 Apr 27 IATA survey of heads of cargo Volumes - next 12 months Oct 27 Apr 2 Oct 2 Apr 29 Yields - next 12 months Oct 29 Apr 21 Oct 21 Apr 211 Oct 211 Heads of cargo became significantly less confident about the outlook, when surveyed in October. Expectations for yields turned negative and there was a big fall in the previously positive outlook for cargo volumes. IATA Economics: 1

11 Air Freight Routes and Direction Cargo echartbook Q3 211 International Freight Volume Growth by Route Area (Source: IATA ODS statistics) Route Area % Growth in Freight Tonnes, year-on-year Mar 11 Apr 11 May 11 Jun 11 Jul-11 Aug-11 Africa - Middle East 2.7% 3.9% -.2% -.3% 11.4% 7.2% Europe - Far East 1.% 11.% -7.% -3.5% -3.% -.% Europe - Middle East -.3% 3.3% -11.% -9.3% -7.1% -13.7% Within Far East -.1% -14.2% -1.2% -15.5% -13.3% -12.5% Within Middle East -.9% -4.% 1.9%.% 11.% 3.1% Within South America -9.2% -.7% -3.4% -19.% -19.4% -2.3% Mid Atlantic 7.% 27.7% 5.% 5.1% 1.2% 5.3% Middle East - Far East -2.% 1.5% -4.4% -1.5% -4.3% -4.7% North Atlantic 5.3% 14.3% -3.2% -2.7% -3.% -7.2% North America- Central America 19.1% 37.4% 2.2% 5.7% -1.% -14.% Europe - Africa.5% 14.7%.7%.%.%.% North America South America -1.5% -9.2% -2.4% -4.3%.% -1.3% Far East - Southwest Pacific.1% -1.9% -5.5% -.5% 1.2% -.3% North and Mid Pacific 1.4% -4.5% -9.3% -7.3% -7.4% -3.9% South Atlantic.% -.4% -2.5% -13.5% -3.% -13.3% Within Europe -4.4% 2.1% 1.9% 1.4% -1.% -2.7% Outbound CASS Market Revenues (excl. fuel surcharges) Origin Region US$m % Growth in Air Freight Revenues, Year-on- Year Q2 211 Q1 21 Q2 21 Q3 21 Q4 21 Q1 211 Q2 211 Africa Caribbean Central America Europe Japan & Korea Middle East North America South America South East Asia South West Pacific Inbound CASS Market Revenues (excl. fuel surcharges) Destination Region US$m % Growth in Air Freight Revenues, year-on-year Q2 211 Q1 21 Q2 21 Q3 21 Q4 21 Q1 211 Q2 211 Africa Caribbean Central America Europe Japan & Korea Middle East North America South America South Asia South East Asia South West Pacific IATA Economics: 11

12 Cargo echartbook Q3 211 Glossary ACI: Airport Council International AFTK: Available Freight Tonne Kilometers European CB: European Central Bank EIU: Economist Intelligence Unit CASS: Cargo Accounts Settlement System FT: Financial Times FTK: Freight Tonne Kilometers PMI: Purchasing Managers Index Netherlands CPB: Netherlands Bureau for Economic Policy Analysis ODS: Origin-Destination Statistics SIA: Semiconductors Industry Association US BTS: US Bureau of Transportation Statistics M-o-m Month over month percentage change Y-o-y Year over year percentage change IATA Economics 2 th October 211 IATA Economics: 12