PILARSKI SAYS… The confusion over cargo
The confusion over cargo
Confused about the future of air cargo? Well it’s not as bad, and not as good, as some forecast.
A weak cargo market is bad news for the whole industry, writes Adam Pilarski, Senior Vice President at Avitas, in his monthly column.
There is a lot of uncertainty about the future of air cargo growth. Air cargo in most areas of the world is doing rather poorly. In the US more than half of the monthly cargo traffic statistics in 2011 and also in 2012 had negative growth rates. Cargo traffic in Asia (AAPA statistics) and in Europe (AEA) is clearly negative this year. So are airport statistics (ACI), which show a drop worldwide of 3.5% in October. All this leads aviation professionals to despair and draw improper long-term conclusions. The reason that a weak cargo market makes everybody very nervous is based on the theory that this sector is a bellwether of the whole industry. Businesses are the first to feel an approaching recession when they experience a slow down in their sales, and consequently reduce their purchases of inputs in their production process. As the economy weakens further businesses attempt to control costs and therefore cut business travel, which is the second element of traffic to fall. Leisure travel falls last, as people still visit friends and relatives or go on vacations. The latter seems like a religious obligation in Europe, and does not appear to fluctuate with the state of the economy. At present the European economy does not grow at all but passenger traffic grows at more than 4% versus the US, where both the economy and passenger traffic grow at about 2%. Hence, the pattern is thought to be as follows: cargo falls first, followed by business and, at the end, leisure traffic. So, the catastrophic drop experienced now in cargo traffic in the mind of many forbear a dismal future for all of aviation. According to this theory a drop of cargo traffic explained 12 of the past five recessions. But let us look at the evidence. The US has monthly system cargo traffic growth data and quarterly economic (GDP growth) data. Starting with March 1975 we have 449 observations. The economy exhibited in that period 52 months’ negative growth rates, while cargo declined 134 times. So, cargo predicted more than two-and-a-half recessions. Every period of recession was accompanied by some months of decline in cargo traffic but there were periods of significant cargo traffic decline (such as the 10 consecutive months in 1985) that occurred during fairly decent economic growth. Cargo just seems to be more volatile than the economy and even passenger traffic growth, having turned negative 134 times to 77 negatives for passenger growth and 52 gross domestic product (GDP) declines. Interestingly, for the whole period discussed, cargo grew in the US at about the same average rate as passenger traffic (5.4% versus 5.3%). The above leads us to the obvious question as to what can be expected in the future? For years the standard accepted by almost all forecasters was that cargo traffic would grow in the long term at passenger growth rates plus one percent. Clearly, it was well understood that both forms of transportation are subject to different factors. While passenger traffic is mainly determined by the consumption element of GDP, cargo was more dependent on trade and investment growth. The realities of present growth rates have sunk in, and the latest Airbus and Boeing forecasts show cargo growing on average only 0.2% higher than forecast passenger growth. So, how about the future? People are fairly depressed by the current reality and assume that it will extend into the future. One of the major reasons mentioned are structural changes, mainly the emergence of fast ships. This seems to be incorporated in the abovementioned forecasts, which assume a different pattern than historical forecasts. I want to propose three reasons for an alternative explanation of the current weakness in cargo. One obvious reason is the economic weakness in the world, making the customer less willing to pay extra for speedy delivery of products. Two, shipping overall is more fuelefficient and with the current high oil prices is more favoured than in years past. Three, fast delivery of products generally cuts inventory costs but since interest rates are so low that aspect of business is not as critical as in the past. How about the future? All the three reasons are temporary in nature. The world economy will eventually improve, interest rates will rise and I truly believe oil prices will fall. All this will bring us eventually back to healthy cargo growth.