High volatility in demand has become the new norm in the air express and air cargo markets, andthe challenge of managing this is now a key element of an express company’s ability to compete,
according to Fred Smith, chairman, president and CEO of FedEx.Speaking yesterday at the announcement of the group’s interim results, Smith said it was unclearwhether the weaker demand for capacity from Asia over the last year from heavy air freight, andmore recently for international priority packages, was part of a structural change in which thelongstanding relationship between GDP growth and air freight and express growth had altered.
“This is a big question that is being debated by a lot of people in the industry,” said Smith. “For many years, the growth in air freight – meaning the aggregate market place, whether it’s smallpackages or big consignments of heavy skids – has grown at about twice the rate of GDP.
“That connection over the last two or three years seems to have been broken to some degree.” Hesaid whether this was a long-term trend was difficult to say, because of the “meltdown” that manyindustries and economies – and the air freight sector – experienced in 2008 and 2009.
“But our overall belief is that the movement of goods by air internationally is changing in thefollowing ways,” he said. “Firstly, the market place has devolved, so there are a lot more smallershipments going from door to door. That is why the long-range capabilities of aircraft like theBoeing 777, and the super-express freighters as we call them, are so important, because they giveyou more time to serve the small and medium customers at the origin markets.
“The second thing that is marked by the air freight business today is that it seems to be muchmore ‘episodial’. We think that is because such a high percentage of the business these days iscomposed of electronic goods – around 25% of the entire air freight market in its broadest sense iselectronics – and this is now built around product launches and new devices. And that’s why havingthis big fleet, and the ability to flex up and down, is very helpful. We can put on an extra 50flights per month, if needed, our fleet is so big.
“And then I think the third thing is that the information systems in logistics chains have gotmuch better. So people are using more ocean, with better visibility, for the commodity-type moves,and it is just a trade-off between carrying cost and obsolescence. That is why, several years ago,we put such an effort in building our FedEx Trade Networks out. So we now have a whole product linefrom ocean freight, commodity air freight, economy package, economy international freight, tointernational priority package and international priority freight.
“So it is not clear whether the relationship through the last 20-25 years between air freightand GDP will stay, but from our perspective, we think we can still take market share from withinthat overall air freight market.”
The International Air Transport Association (IATA) recently downgraded its air cargo forecastfor 2012, in response to worsening global GDP expectations. IATA now believes air cargo volumes in2012 will be flat, down from the previous forecast of a 4.2% expansion in traffic.
This follows a downward trend in air cargo since the middle of this year, “which means thatcargo likely will finish the year with a 0.5% contraction in volumes, and flat yields”, theorganisation said.
IATA said that even if government intervention averts a banking crisis, it is unlikely thatEurope will avoid a brief recession in 2012, because business and consumer confidence has alreadyfallen too far. It observed that global GDP growth forecasts for 2012 have been revised downwardsto 2.1%, and said that, historically, the airline industry has seen profit turn into loss wheneverglobal GDP growth falls below 2%.
FedEx yesterday reported that its international priority package volumes were down 3% in thelast quarter, year on year, driven by declines from Asia. The company confirmed it had beenreducing its overall intercontinental capacity during the last few months, to better match capacitywith demand, reflecting the recent decline in overall international parcel volumes. These volumedeclines, and capacity reductions, were mainly focused on its services from Asia, which it saidwere subject to the greatest levels of volatility.
The company said it expected its international express parcel volumes to be flat in the next twoquarters, domestic express volumes to be flat or slightly down, and that it expected to seecontinued growth in its Ground services.
