PILARSKI Says – Diverging path of passenger and cargo traffic growth rates

Cargo has become a finicky child who is hard to predict, writes Adam Pilarski, Senior
Vice-President at AVITAS.

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Diverging path of passenger and cargo traffic growth rates

As an old practitioner of traffic forecasting, I knew the simple trick of coming up with cargo traffic forecasts: spend a lot of energy to forecast passenger growth rates and then add a point to a point and a half to that rate and you have a credible cargo traffic forecast.  It worked for a few decades and all forecasters found this shortcut very useful and productive.

Cargo grew faster than passenger traffic for decades because trade also grew faster than the world economy: remember when globalisation was a positive term and expected to spread further in the future?

I recently checked on the last set of forecasts by Douglas Aircraft Company published in 1995, just before our liberation by Boeing. It expected 6% passenger and 7.4% cargo traffic for the next decade. This was in line with all the other forecasts published at the same time. Overall, world passenger growth rates have been coming down progressively as the industry matured. They amounted to more than 30% annually in the 1930s, down to about 15% in the 1950s and 1960s, 9% in the 1970s and since then about 5%.

Cargo was not a big element of traffic but exhibited similar patterns over time. On the passenger traffic side, in the past five years we witnessed a very robust and unsustainable period of growth of about 6% to 7%, way higher than the long-term forecasts accepted by the industry of below5%. During the past decade, cargo grew by only 2.5% annually. This low average was comprised of very volatile rates.

The years 2007 to 2009 were a disaster with significant declines, followed by a mild recovery in 2009/10, and then by an average growth of 2% for the next five years. There was a recovery of 10% in 2017 followed by a very weak 2018 and currently we are in negative territory again.

The International Air Transport Association director-general Alexandre de Juniac recently said: “After a decade in the doldrums, air cargo had an amazing 2017 with 9.7% growth,” but then quickly pointed out that this was a one-time event and recent expectations are for a continuation of bad numbers.

What has happened that brought cargo from the darling of forecasters to a finicky child who is hard to predict? Some of the explanatory factors are fairly straightforward. A period of very high oil prices (2007/14) punished air cargo substantially (it is an expensive way of getting products faster to consumers and with high oil prices becomes even more expensive). Low interest rates had a lot to do with it too. As the cost of capital was very low, the penalty for using slower transport was reduced so the speed of air cargo became less essential (“I do not mind that my inventory of fine dresses is taking its time on a boat from Italy to US as I do not have to pay a high price for the loan I took to buy the merchandise”).

Also, globalisation has slowed down. In part, it was because outsourcing production reduces cost but also means less control over output. An example from our industry: Boeing’s 787 development, which relied heavily on outsourcing, proved to be a disaster resulting in a change leading to keeping production under direct control. The resulting outcome was that businesses increasingly decided to keep more work in house under strict control.

The international scene also changed with some elements of the population benefiting from globalisation while others were left behind. That led to political changes in many countries where populism and nationalism became the new catch words instead of efficiency and profitability. All this had the inevitable impact on world trade, slowing it down substantially.

Also, Boeing researchers point out that of the components of economy, services are more related to the passenger and manufacturing more to cargo traffic. Services are growing faster than manufacturing around the world, hence another reason for the divergent traffic patterns we are witnessing.

So, what about the future? The latest 20-year forecasts from Airbus and Boeing show that passenger traffic is expected to grow at 4.3% to 4.6% annually while cargo will lag at 3.3% to 4.4%, conforming with existing present realities. Unless we return to the path of globalisation and trade, we should expect these trends to continue for some time.

Domestic cargo growth may finally outperform international. It is not the end of cargo but an interruption or cessation of trends we enjoyed for some time. Depending on the political and economic environment in the world, we can expect a continuation of the new reality, quite different from the one we experienced just a few years ago.

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Diverging path of passenger and cargo traffic growth rates