Consultant Insight: Will 2020 be life changing or mean life support for air cargo?

Will 2020 begin with improving air cargo volumes? It’s possible, especially with easier year-over-year volume comparisons.

According to IATA data, December 2018 marked the beginning of international freight tonne kilometers (FTK) declines that lasted through at least October 2019 (latest data available), except for March when FTKs increased by a paltry 0.1%.

There are a few indicators that air cargo may be on the upswing. For one, China’s recent manufacturing activity bodes well for air cargo volumes. Beginning in November, the official manufacturing Purchasing Managers Index (PMI) improved to 50.2, up from 49.3 in October, for its highest score since March. Similarly, the Caixin/IHS Markit manufacturing PMI reading was 51.8, which was the sector’s fastest rate of expansion since December 2016.

China’s December’s official manufacturing PMI held at 50.2 while new export orders increased for the first time since May 2018. The Caixin/IHS Markit also noted expansion but slower than in October and November.

Meanwhile, trade tensions between China and the U.S. may be easing. This week, U.S. President Donald Trump announced plans (see tweet below) to sign a “phase one” trade deal with China on Jan. 15. Under this first piece of the agreement, the U.S. would cancel tariffs that were originally set to take effect Dec. 15. While duties of 25% on $250 billion in Chinese goods will remain in place, existing tariffs on another $120 billion in products would be reduced to 7.5%. However, considering that such announcements have often led to little in the way of actual policy changes in the past, until a deal is signed, such a statement should be taken with perhaps more than a grain of salt.

I will be signing our very large and comprehensive Phase One Trade Deal with China on January 15. The ceremony will take place at the White House. High level representatives of China will be present. At a later date I will be going to Beijing where talks will begin on Phase Two!

— Donald J. Trump (@realDonaldTrump) December 31, 2019

Still, while demand for goods remains healthy, China’s manufacturing activity and the easing of trade tensions should help strengthen a global economy that has turned uncertain due to increased trade barriers and associated political fallout.

Aside from trade policy, in the immediate short-term air cargo may see a January volume bump thanks to restocking after a successful holiday season, IMO 2020 and an early Chinese New Year.

Effective Jan. 1, United Nations shipping agency the International Maritime Organization (IMO) will prohibit ships from using fuels with a sulfur content above 0.5%, compared with 3.5% prior. As shipping lines switch to low-sulfur fuels, Drewry Shipping Consultants estimates that shipping lines will be faced with an additional $11 billion fuel bill this year due to the switch. And, as one can expect, the costs to comply with this mandate are being passed to shippers and forwarders in the form of surcharges. The lack of transparency concerning these pass-through charges has shippers and forwarders questioning if the charges are actually helping to bolster profits for shipping lines.

Still, leading up to Jan. 1, in addition to surcharges related to IMO 2020, shipping lines reduced capacity and announced general rate increases effective Jan. 1. Combined, these could lead to a short-term shift favoring air cargo.

In addition, demand for air cargo could increase leading up to the Chinese New Year, which falls on Jan. 25 in 2020, the earliest in the year it has fallen since 2012. However, the latest air rates from Freight Information Services (FIS) for the week ending Dec. 23 indicate continued softness. All major Asia lanes are down with the largest losses at 17 cents from Hong Kong to Europe, and Shanghai to the U.S.

In years past, air rates would jump and capacity would tighten ahead of the Chinese New Year. Despite seeing little evidence of this occurring this year, air volumes could still increase thanks to the easier year-over-year easy comparisons. In 2017 and 2018 when the Chinese New Year fell on Jan. 28 and Feb. 16, respectively, import air volumes* in terms of kilograms from Asia to the U.S. for the months of January and February, respectively, increased 25.7% and 19.7%, according to data from the U.S. Census Bureau’s USA Trade Online. Here, a gentle reminder is necessary that even though the Chinese New Year played a role, other factors could also have impacted the increases. The 2019 Chinese New Year, however, is a difficult one to determine. Falling on Feb. 5, January and February combined volumes indicate a 6.3% decline, which is likely due to lack of demand because of the China-U.S. tariff situation.

However, an alternative mode of transportation is emerging that could upset air and ocean freight market shares in global trade. In freight forwarder Crane Logistics’ market update for Chinese New Year 2020, the company suggested its China-Europe rail freight option as an alternative to air and ocean modes. After years of losing volumes to ocean freight because of costs and supply chain enhancements, going forward air cargo providers could possibly lose further volumes to rail.

While there are opportunities for air cargo volume growth in 2020, expectations are modest per IATA’s recent outlook. The air cargo market will need to establish a compelling unique selling point (USP) to set itself apart from not only ocean, but also, it seems now, rail. This USP drum has been beaten for years now and timing may be running out if the air cargo industry does not take action.