Air freight market analysis June 2016

Air freight market analysis June 2016

IATA’s latest air cargo report finds that global air freight tonne kilometres grew by 4.3% year-on-year in June 2016, the fastest pace in 14 months. Conditions have improved since early-2016, but the underlying demand backdrop remains weak and with risks.

Middle East airlines have posted the fastest growth once again, alongside solid gains for Europe and Asia Pacific carriers. Capacity growth has continued to outstrip that of demand, however, keeping downward pressure on revenues and yields.

Annual air freight growth accelerated in June…

Annual growth in global air freight tonne kilometres (FTK) accelerated to 4.3% year-on-year in June 2016, up from a revised 1.5% in May and the fastest pace since April 2015. All regions with the exception of Latin America registered positive annual growth in the month.

The latest data point to an improvement from the weak conditions seen earlier this year. (Note that Q1 2016 was weak even after allowing for the distortions associated with the timing of Chinese New Year, as well as from the one-off boost to air freight in early-2015 from seaport disruption on the US west coast.)

Indeed, there are welcome signs that the modest upward trend in seasonally-adjusted FTK has finally resumed. Industrywide FTK have grown at an annualised rate of around 3.5% since the start of 2016. (See Chart 1.)

IATA June 2016 1

…but outlook continues to face headwinds

That said, the outlook for air freight continues to face significant headwinds, including ongoing sluggish economic growth and heightened risks in the aftermath of ‘Brexit’, as well as broader weakness in global trade.

According to data compiled by the Netherlands CPB, global trade volumes have trended downwards sharply in month-on-month terms in recent months. In annual terms, growth has slowed to a halt. (See Chart 2.) To be clear, the relationship between global trade growth and air freight is not mechanistic – in part because air freight carries just a small subset of global trade volumes.

IATA June 2016 2

Nonetheless, the structural change in the relationship between global output and trade in recent years clearly presents a challenging backdrop for air freight.

The weakness of global trade is borne out in global business surveys as well, which continue to offer little encouragement for an immediate turnaround in fortunes for industry-wide air freight either. The new export orders component of the global Purchasing Managers’ Index (PMI) – a closely-watched survey which has a longstanding relationship with growth in air freight volumes – has been in contractionary territory during most of 2016 so far.

All told, despite the tentative recovery in seasonally adjusted terms in recent months, 2016 is shaping up to be another subdued year for air freight. IATA forecast FTK (including mail) to increase by 2.1% in 2016 – an outcome that will require the recent upward trend in seasonally-adjusted FTK to continue throughout the second half of the year.

Capacity growth continues to outpace demand

Industry-wide freight capacity increased by 6.0% year-on-year in the first half of 2016 – twelve times faster than demand. The result mainly reflects increased belly capacity from ongoing additions to the wide-body passenger fleet. As a result, the industry-wide freight load factor fell to 42.5% in H1 as a whole – a record low for the period and 2.3 percentage points lower than in H1 2015. This is continuing to exert downward pressure on freight yields and revenues.

Performance at a route level is a mixed bag

Demand conditions across the Pacific – the largest market in terms of FTK flown – look to have improved somewhat in recent months. That said, after the weakness earlier in the year, volumes on the route were down 9.5% year-on-year in H1 as a whole. The next two largest freight markets – those between Europe and Asia, and across the Atlantic – have seen much more modest annual declines over the same period (0.6% and 1.6% respectively). In fact, the former has registered robust growth in the most recent months.

Middle East posts the fastest growth again in June

Growth in international FTK increased to 4.1% year-on-year in June, up from 1.3% in May.

Middle Eastern airlines posted the fastest growth of all regions (+8.1% year-on-year) for the 16th consecutive month in June. This was nearly twice the rate in May, although the bigger picture is that demand growth for Middle Eastern airlines has stepped down a gear over the past year or so: international FTK flown by Middle Eastern carriers grew by 6.5% year-on-year in H1 2016 compared to 14.3% in the same period in 2015. Around half of this slowdown is accounted for by slower (albeit still rapid) growth on the North America–Middle East route. But slower growth on the routes between the Middle East and Asia and Europe appears to be more a function of broader weakness in the global demand backdrop.

Solid annual growth for Europe and Asia Pac airlines

European and Asia Pacific airlines both registered growth of 4.2% year-on-year in international FTK in June – broadly in line with the industry as a whole.

June’s result rounds out a robust quarter for European airline freight performance and corresponds with a strong tick-up in the new export orders component of the Germany PMI in recent months. Seasonally-adjusted European FTKs have continued to trend upwards, and the latest results offer further encouragement that have now broken out of the corridor that they have occupied since mid-2010.

Freight is an integral part of airline business models in Asia Pacific; carriers based in the region fly almost two-fifths of total international FTK. Following the weak patch earlier in the year, demand conditions have improved in the region in recent months, notably on the large international ‘Within Asia’ air cargo market (in which volumes were up 4.1% year-on-year in May). Nonetheless, wider goods trade volumes from Emerging Asia remain under pressure, with total volumes in May 2016 coming in at the same level as those seen at the end of 2013. By way of context, total air freight tonnes handled at Shanghai airport grew by just 2.3% year-on-year in the first half of 2016, compared to 10.9% in the same period in 2015.

International FTK flown by North American airlines grew by a modest 2.8% year-on-year in June. The strength of the US dollar has kept US outbound air freight under pressure for some time. Based on US trade data, 16 of the top-20 air cargo markets for the US have seen air export volumes from the US decline in annual terms so far in 2016. In seasonally adjusted terms, the bigger picture is that FTK are still more than 2.5% below the peak reached in early 2015 and broadly in line with the level seen in early-2008 before the global financial crisis.

 

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