Sunday, July 2, 2017

Freight demand remains robust, profit margins move upward

Industry-wide freight tonne kilometres (FTK) growth has continued its strong start to 2017, with volumes up 10.6 per cent year-on-year in the three months ended April.

Once again, European and Asian carriers accounted for more than two-thirds of the annual growth rate, said a recent report released by The International Air Transport Association (Iata).

On a route basis, FTK growth over the period was fastest on the international segments within Asia and between Europe and Asia (16.5 per cent and 14.5 per cent year on-year respectively).

Despite numerous complicating factors at the start of 2017 – not least the fact that 2016 was a leap year – the quarterly seasonally adjusted (SA) pace of FTK growth looks to have slowed from the pace seen during the second half of 2016.

Global economic conditions have improved since mid-2016, including on the consumer side. The trade backdrop has strengthened too, particularly in so-called emerging economies.

The new export orders component of the global manufacturing PMI has slipped slightly since February, but remains consistent with year-on-year FTK growth of around 8 per cent in Q3 2017.

More than 5,200 tonnes of additional payload capacity were added to the fleet in H1 2017, mostly in the form of wide-body passenger belly capacity. That said, this was around 8 per cent lower than the 5,700 tonnes of payload capacity added in H1 2016.

Cargo yields (including fuel and other surcharges) have risen by 4.5 per cent in SA terms since bottoming out in mid-2016. With crude oil prices currently some 10 per cent below where they stood a year ago, the breakeven cargo load factor has fallen. At the same time, the achieved load factor has recovered, consistent with a widening in profit margins.

The current upward trend in freighter utilisation will help to lower unit costs further, and to reinforce the stronger backdrop for profitability.

When surveyed in early-April, airline heads of cargo were increasingly confident about the demand outlook over the year ahead. Moreover, respondents were also notably more positive about the outlook for yields; the weighted score jumped above the 50-mark for the first time in nearly three years.

Market developments

Air freight volumes continued to trend upwards on a quarterly seasonally-adjusted basis over the three months ended April 2017. That said, the quarterly pace of growth slowed from that seen during the second half of 2016.

Year-on-year growth in FTKs rose to 10.6 per cent during the three months to April – the fastest pace on a rolling three-month basis since late-2010. However, around two-thirds of such annual growth relates to gains made in late-2016.

Air freight has gained market share relative to wider world trade volumes since the middle of 2016. This has tended to occur in the past at the start of upturns in the economic cycle, as firms turn to the speed afforded by air freight to restock.

Airlines based in Asia Pacific and Europe accounted for around 70 per cent of the annual growth in FTKs over the three months to April. By contrast, Latin American carriers made another modest negative contribution to growth.

Traffic increased in seasonally-adjusted terms on all four major segment-based trade lanes over the past three months. Year-on-year growth in the three months ended April was fastest on the within Asia and Europe-Asia markets.

Cargo throughput increased at double-digit annual paces at a number of key freight airports in May 2017, particularly outbound traffic from Asia. Conditions in the Middle East remain softer, however, with Abu Dhabi a notable outlier.

Market drivers

The recovery in business confidence has levelled off in advanced economies since start-2017, but has continued to trend upwards in emerging markets. The key point is that the economic backdrop remains much stronger than a year ago.

Consumer confidence in particular has continued its strong upward trend that began in early-2016. This is translating into increased consumer spending and is helping to support demand for air freighted goods.

The trade backdrop has also improved, most notably for emerging economies. This has helped to stabilise the trend decline in the trade/industrial production ratio for these economies that has been a feature since 2008.

The new export orders component of the global PMI has slid back slightly since February, but exporters’ order books remain healthy. Based on past performance, the measure is consistent with year-on-year FTK growth of 8.1 per cent in Q3 2017.

The traditional demand drivers for air freight volumes have also been solid. Indeed, the quantity of silicon material shipments increased by 12.6 per cent year-on-year in Q1 2017 – the fastest pace since Q4 2014.

A fall in the (US) inventory-sales ratio has been a key driver of the pick-up in FTK growth, consistent with the rise in FTK market share. However, there are tentative signs that we may have reached the cyclical growth peak.

Capacity, costs, and yields

A total of 712 additional tonnes of capacity were added to the freighter fleet in H1 2017 – 22 per cent lower than in the same period of 2016. Additional payload from widebody belly capacity has continued to exceed that from freighters only.

Having started to trend upwards in late-2016, large widebody freighter aircraft utilization has continued to increase so far in 2017 (latest data up to April). This has come alongside a recovery in the freight load factor.

Oil prices have slid backwards since the start of the year, and at the time of writing are at a six-month low around $45/bbl. Oil price futures are consistent with prices increasing just modestly over the years ahead.

The upward trend in the load factor has helped to underpin a recovery in cargo yields. The cargo yield including fuel and other surcharges has risen by 4.5 per cent in seasonally adjusted terms since its low-point in mid-2016. - TradeArabia News Service

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