The International Air Transport Association published its mid-year “Economic Performance of the Airline Industry” report, which included both good and bad news for the cargo side of the industry.
First, though, we look at IATA’s overall prediction for the financial health of the aviation industry. In its report, IATA predicted an overall net profit for the world’s airlines of US$18 billion. As shown in the chart at right, over half of the total profit will come from carriers in North America. But interestingly, North American carriers will have the smallest increase in profitability – by a considerable margin – of all regions. While some observers have pointed out that the $18 billion is down from the $18.7 billion IATA predicted in its March report, it is still a 70% improvement on 2013, and almost triple the $6.1 billion industry profit in 2012.
Turning to cargo, IATA expects $6.8 trillion worth of goods to be delivered by air in 2014. $6.8 trillion sounds like a lot, but the industry will face some serious problems, most of which can be summed up in the simple statement that IATA expects freight rates in 2014 to be down 4% compared to 2013, after inflation. Overall, IATA believes cargo traffic will be up 3.1% in 2014. This is in line with what many in the industry now view as the likely long-term compound annual growth rate, and is certainly an improvement of what we have seen in recent years. However, it is just over half the expected rate of passenger traffic growth, and in IATA’s words, “the divergence in growth trends between cargo (slow) and passenger (robust) is creating challenges for airlines in matching capacity to demand.” Which is another way of saying that as inexpensive belly capacity floods the market, yields come under increasing pressure. The chart below shows the amount of new belly and main-deck capacity entering the market in the years from 1980 to 2014.
IATA also pointed out three other major issues facing the air freight industry. The first is “on-shoring”, the move by manufacturers – driven by rising labor costs in China and elsewhere, to bring production closer to consumption. This, of course, has a negative effect on growth in demand for air freight, as it is much cheaper to move goods by truck than by air from Eastern Europe to Germany, or Mexico to the US. The second, and more positive development is that, after what seems like forever, airlines, forwarders, shippers, and governments are making real progress on the transition to e-freight. And the third, also with positive implications, is that the industry has awoken to the fact that while the various surface modes have all made significant reductions in shipping times over the last decade, the average time for an air freight shipment is still 6.5 days. IATA has begun pushing its members to cut two full days from that time by 2020. If this happens, it will greatly improve the value proposition for air, and should help to stem modal shift.