Japan update and industry growth trends

Yesterday, Bob Dahl was featured in a conference call on the air cargo industry hosted by investment bank BB&T Capital Markets. Bob is the Managing Director of Air Cargo Management Group (ACMG, Cargo Facts’ parent) and has an unparalleled knowledge of our industry. BB&T has graciously agreed to have some of the call’s highlights shared here on cargofacts.net in summary form. As always, we hope you will add your comments.

For a more in-depth analysis of the air cargo market we urge you to join us at our 9th annual ACMG Workshop on Air Cargo, Express, and Freighter Aircraft, which will be held this year on May 2 and 3 in Atlanta at the Grand Hyatt Buckhead. (Click here for more information or to register.)

• On the impact of the disaster in Japan: While it is still too early to grasp the full impact on the air cargo market from the earthquake and tsunami in Japan, we would note that according to IATA, there are no longer restrictions to normal air transport operations at Japan’s major airports, including both Haneda and Narita; however, we have heard about a shortage of warehousing capacity. What is different than in some of the previous disasters such as Haiti and Indonesia is the fact that Japan makes up approximately 6% of the global economy as the 3rd largest economy in the world, and Mr. Dahl estimates that approximately 10% of global air cargo is tied to Japan, primarily associated with the movement of such items as high tech goods and auto parts. The unknown for the air cargo industry is the long-term impact on the supply chain, as numerous factories are shut down, and electrical grids are operating sporadically in an attempt to conserve energy. However, as Japan rebuilds and humanitarian relief efforts increase, air cargo carriers could benefit from an increase in import activity (historically, Japan’s air cargo volumes are primarily export related).

• The latest airfreight data: Airfreight volumes are a leading indicator for world trade and economic growth and air cargo is a growth industry with traffic growing about 6% a year. International air cargo volumes were up 9.1% yr/yr in January with Asia-Pacific international freight demand up 6.4% yr/yr and North America up 14.1%. (6% and 10% above pre-recession peak, respectively). However, February volumes out of Hong Kong declined 9.1% yr/yr as a result of Chinese New Year on February 3rd, but also reflective of tougher yr/yr comparables. Mr. Dahl expects growth to remain in the mid-single digits for 2011, closer to historical levels, but believes March and April could be negatively impacted by the crisis in Japan, but it is still too early to determine the magnitude of the impact.

• Capacity trends: Airfreight capacity continues to remain tight, with global capacity about 10% lower than 2007/2008 levels. Of the global aircraft fleet, about 10% of the market is made up of freighters, with 1,623 in service as of December 2010. The more modern freighters have been returned to service (747s and MD-11s), but many of the parked freighters were older aircraft (747-200s, DC-10s, and 727s) that cannot compete effectively with high fuel costs and are unlikely to fly again (many have been cannibalized and used for parts). New capacity coming online is coming more from the production of wide-body freighters, such as the 777 and 747-8, as well as passenger conversions in the medium-sized market. The trend in the global freighter fleet is moving towards large and medium widebody freighters. In 2000, narrowbody aircraft made up over 60% of the global fleet, whereas today, the narrowbody fleet accounts for approximately 35% of the industry’s capacity.

• Ocean vs. air: Several factors are contributing to what we believe is a sustainable modal shift of freight from the ocean to the air, as we continue to hear about numerous companies increasing their airfreight spend in 2011, as airfreight is the best mode to accomplish the flexibility needed for just-in-time inventories. The impact of slow steaming (as a means for ocean carriers to save on fuel) lengthens the supply chain, particularly at a time when the inventory-to-sales ratio is at an all time low (1.23x, down from 1.48x in early 2009). Not only do we believe that this bodes well for airfreight in 2011, but we also believe we are on the cusp of a secular shift that shippers are embracing airfreight as a way to minimize warehousing and other costs (such as unplanned markdowns) associated with maintaining large inventories. We believe the growth in airfreight is a multi-year story and we are just in the early stages. A modal shift could prove to be very profitable for the air cargo industry as just 2%–3% of the world’s international freight by tonnage is carried on a plane, thus a 1% increase in airfreight is a windfall for air cargo. Given the time sensitive nature of airfreight, air cargo tends to have a high value-to-weight ratio and in fact about 30%-40% of global freight value is moved on a plane.

• Global airfreight revenue: In 2009, a year with less traffic and lower yields, international airfreight and express accounted for $66.3B (last period available), not including the U.S. domestic market, which adds about $25.3B. For 2010, Mr. Dahl believes global revenue in international airfreight and express is expected to have increased approximately 25%, to about $83B, which also does not include the U.S. domestic market. Of this amount, airlines account for ~42%, forwarders ~15%, and express ~43%. What we find interesting is that express only accounts for about 10% of the tonnage, but the revenue is higher because of the door-to-door service that express offers.