Wednesday, August 8, 2018

Air Freight Growth Slows As US Blamed for Global Trade Tensions

Cargo Capacity Continues to Outstrip Demand
Shipping News Feature
WORLDWIDE – The International Air Transport Association (IATA) has released figures for global air freight markets showing that demand, measured in freight tonne kilometres (FTKs), rose 2.7% in June 2018, compared to the same period the year before. This continues the slowdown in air cargo growth that began earlier in 2018. Growth for the first half of year stands at 4.7%, less than half the growth rate in 2017, and the outlook for the rest of the year looks to follow the same trend with rising global trade tensions, initiated by the US being blamed.

Freight capacity, measured in available freight tonne kilometres (AFTKs), rose by 4.1% in June 2018. Capacity growth has now outstripped demand growth in every month since March. Alexandre de Juniac, IATA’s Director General and CEO, said:

“Air cargo continues to be a difficult business with downside risks mounting. We still expect about 4% growth over the course of the year. But the deterioration in world trade is a real concern. While air cargo is somewhat insulated from the current round of rising tariff barriers, an escalation of trade tension resulting in a ‘reshoring’ of production and consolidation of global supply chains would change the outlook significantly for the worse. Trade wars never produce winners. Governments must remember that prosperity comes from boosting their trade, not barricading economies.” IATA identified three main factors driving the slowdown:

  • The restocking cycle, during which businesses rapidly built up inventories to meet demand, ended in early 2018. There was a marked fall in air cargo volumes from March.
  • A structural slowdown in global trading conditions as indicated by the fall in the Purchasing Managers Index (PMI) to its lowest level since 2016. Factory export order books have turned negative in China, Japan and the US.
  • The temporary grounding of the entire Nippon Cargo Airlines fleet in the second half of June, after discrepancies were discovered in its maintenance records, exaggerating the slow-down by shaving up to 0.5 percentage points off June growth.

IATA expects the industry-wide FTKs to continue to grow throughout the rest of the year but this outlook will require FTKs to continue to trend upwards broadly in line with their current annualised rate, stating in its monthly report:

“All told, we judge the risks to our forecast to lie slightly on the downside. More generally, with the best of the cyclical upturn now well behind us, the key question is how strong the structural backdrop for air freight growth is, especially in the context of rising trade protectionism measures.”

For now, the direct risks to air freight from tariffs appear relatively contained, but there are clearly risks if tensions continue to escalate, particularly to the extent that firms move to ‘reshore’ production and consolidate global supply chains. IATA says that it will continue to monitor the situation closely as it develops.

Looking regionally, all areas except Africa reported a year-on-year increase in freight volumes in June 2018, but the slow growth in Asia-Pacific, which accounts for nearly 37% of the entire air cargo market, dragged the overall global growth rate down.

As the largest air freight-carrying region, accounting for around one-third of the global total, Asia Pacific is most exposed to any impact from rising trade tensions. Regional airlines saw freight demand increase by just 1.5% in June 2018 compared to the same period last year. Capacity increased by 5.2%. The international freight performance by the region fell to 1.1%, a 17-month low, although this partially reflects comparisons with the strong performance in June 2017. For the first six months of 2018 FTKs expanded by 4.6% year-on-year, and freight volumes are expected to settle at an annual 3-4% growth.

European airlines posted a 3.3% increase in freight volumes in June 2018. Capacity increased by 5.4%. Growth is being affected by a slowdown in export orders. Supply chain bottlenecks, which are often alleviated by air freight, have also eased. For the first half of 2018, the region expanded 4.1% year-on year.

North American airlines' freight volumes expanded 3.8% in June 2018 compared to the same period a year earlier. International FTK performance was 5.9%, making the region the strongest-performing market for the first time in two years. The strong dollar and robust growth in the US economy is driving inbound shipments despite tariff changes which tend to affect other transport modes, notably sea freight, more. Capacity increased by 3.4%. Growth for the first half of 2018 was 5.3%, second only to exceptional growth in Latin America.

Middle Eastern carriers' freight volumes grew 3.8% in June. This was an improvement on the May figure of 2.7% but this is well below the average five-year rate of 9.5%. Capacity increased 4.5%. Growth for first half of 2018 was 4.3% year-on-year, and the expectation is for volume growth to remain modest in the months to come.

Latin American airlines experienced growth in demand of 5.9% in June 2018, continuing the recent run of posting the largest increases of any region. Unusually, capacity decreased by 5.7%. The pick-up in demand for international freight (5.2%) slowed compared to last month, but continues to trend well above the five-year average (1.6%). Growth for the first six months of 2018 was 10.1%, comfortably the best performance of any region.

African carriers saw freight demand contract 8.5% in June 2018 compared to the same month last year. Capacity also fell, by 1.4%. It is difficult to be positive about the current picture in Africa. International FTKs fell at the fastest pace (-8.6%) for nearly nine years. Although the year-on-year growth rate for the first half of 2018 was 3%, in seasonally-adjusted terms, FTKs are trending downward at an annualised rate of almost 20% over the past six months, and demand conditions are weak on all the main markets to and from the continent