Air freight demand is expected to improve, but prices are likely to stay flat

Most airline executives expect cargo demand to improve over the next 12 months, and reportgrowth in freight traffic in the last quarter, although prices are likely to remain largely

Almost 70% of respondents reported stronger cargo traffic in the second quarter of 2011, up fromthe 59% reported in IATA’s previous survey in April. IATA said that freight traffic had beenvolatile in the early months of 2011, but by May the level of air freight volumes, measured byfreight-tonne-kilometres flown, was 2% higher than at the start of the year, “and looks to begrowing at an annualized rate of close to 4%”.

The airline association observed that with world trade growing at around 6%, there remains scopefor an acceleration in freight traffic growth during the second half of 2011. “Respondents indicatethey think that further expansion is likely, with 66% expecting an improvement in demand over thenext 12 months,” IATA said. “At a weighted average level of 75.9, confidence in the likelihood offurther significant gains in freight volumes is lower than peaks seen leading up to the end of theinventory restocking cycle last year, but is still positive.”

While the balance of responses from across the major regions indicate expansion ahead, thosefrom the Americas are the most positive, with those in Asia slightly less so – partly a factor ofthe disruptive effects on supply chain shipments of the Japanese earthquake and tsunami.

A similar picture was reported in the passenger aviation market, which supplies much of the aircapacity for express and courier operators. By May this year, air travel (measured by revenuepassenger kilometres) was 4% higher than the level seen at the beginning of the year, and in thislatest survey, 74% of respondents reported increased passenger traffic during Q2 2011. This is upfrom the 65% reported in IATA’s April survey.

IATA commented that air travel markets are still expanding – although the annualized pace ofgrowth has halved to 4% since Q4 2010, compared to the more-rapid rebound seen earlier in thepost-recession recovery. The outlook for passenger traffic over the 12 months ahead remainspositive, with over 70% expecting increases over that period on the back of continued demand growthand capacity expansion.

Both air cargo and passenger transport businesses saw “improving yield performance” – or pricingachieved – during the second quarter of 2011, although the trend is flattening. With demand-supplyconditions weakening compared with last year, and concerns that markets may not bear further cargorate rises, prospects for pricing over the year ahead look flat, IATA believes.

Just over half of respondents to the latest survey reported further increases in cargo yieldsduring the second quarter of 2011 – a similar percentage to that reported in IATA’s April survey.The proportion reporting decreases remains at around 20%. Yields have risen – largely related torecouping additional fuel costs – although competition is also increasing as more capacity entersthe market, said IATA. The level of freight capacity utilization in May this year was 4% pointslower than the peak 12 months before, IATA said, although the May comparison figure for 2010 wasinflated by the recovery from last April’s volcanic ash crisis, CEP-Research observes.

However, cargo capacity utilization appears to be on a downward trend, IATA said. “Softeningdemand-supply conditions are limiting scope for yield increases and, in some cases, driving yieldfalls,” IATA said. “Expectations for cargo yields over the 12 months ahead point largely tostability in yields, with two thirds of respondents expecting ‘no change’. In fact the weighedaverage score for cargo yield movement over the next 12 months sits at 48.1 – more or less on the50 ‘no change’ mark.”

It added: “A boost to freight traffic from continued world trade growth in the second half ofthe year may lend support to yield rises – or at least help avoiding falls – if capacity can beutilized appropriately. IATA’s own forecast is for 4% cargo yield growth for cargo during 2011,following a 15% rebound in 2010.”

With over 80% of respondents reporting increased input costs during Q2, clearly high fuel costshave impacted financial performance. However, while cost pressures will persist, expectations oflarge further increases over the year ahead have moderated considerably, IATA said. Although fuelprices remain high, they have fallen from their April peak and airlines do not expect anothersignificant step up in the price level.

“The sharp dip in confidence seen in the April survey was driven by expectations of furtherescalation in fuel prices and the demand shocks due to events in the Middle East, North Africa andJapan also dampened sentiment,” IATA concluded. “While fuel prices remain high, expectations offurther sharp increases have dissipated and traffic demand remains strong, helping to drive thepick-up in sentiment on future profitability.”