April traffic… and thoughts on yield

The International Air Transport Association released its air freight market analysis for April 2016, showing a 3.2% year-over-year increase in worldwide cargo traffic (in freight tonne kilometers flown). International cargo traffic, which accounts for 87% of total traffic, was up 3.1%.

For the first four months of 2016, IATA reported total traffic down 0.7% and international traffic down 1.2%.

This is very much in line with what we predicted two weeks ago, when we analyzed April results from some of the world’s biggest cargo carriers and airports. At that time, we pointed out that the impact of the labor problems at the US West Coast ocean ports and the major airbag-related auto recall in the US in early 2015 were no longer a factor in April’s year-over-year comparisons. The huge boost to air freight on the trans-Pacific trade lane in 1Q15 from those events obscured modest underlying growth in demand in the first quarter of 2016, and we believe that the 3% growth in April does not represent a marked shift in this year’s trend of traffic growth, but rather gives a more accurate picture of that growth.

But what about yield? It’s all very well to say that traffic is growing, but if yields are falling, we should still all be pessimistic, right?

A recurring theme in IATA’s analysis of the April results is that while traffic may be growing, capacity is growing far faster, undermining airlines’ pricing power and causing yields to fall. The capacity increase is almost entirely in the lower holds of passengers aircraft added to fleets worldwide to keep up with strongly growing passenger demand. However the connection between increased belly capacity and falling yields is not as simple as “more belly capacity = lower yields = bad times for the air freight industry.”

First, belly capacity in rapidly growing narrowbody fleets operated by low cost carriers is not particularly relevant. Those airlines do not carry much freight.

Second, while adding long-range widebodies like A350s and 777-300ERs does increase usable belly capacity, this is not a universally negative thing. Carriers charge less for belly freight, but carrying belly freight costs an airline less than carrying that same freight on the main deck of a freighter aircraft. This is not to say that increased belly capacity hasn’t caused problems for cargo departments at airlines around the world, but rather that the relationship among belly capacity, cargo yield, and cargo department profitability is not a simple one.

Third, the drop in yields has also been driven by falling fuel surcharges. But falling fuel surcharges are the result of falling fuel prices, and, in principle, do not impact bottom lines. So, yes, while a drop in fuel surcharge will decrease revenue, and therefore yield, it should not have any impact on profitability.

Food for thought.