Airfreight growth continues, but yields keep falling July 1998

Despite the Asian crisis, 1997 was a record year for airfreight. According to US–based cargo specialists MergeGlobal, 25.1m metric tonnes of airfreight was carried in 1997 — 8% up on 1996.

And the airfreight market will continue expanding, according to MergeGlobal’s 1998 forecast (see table, below). It will reach 34.6m metric tonnes in 2002, although the annual average growth will slow to 6.6% in 1997–2002 compared with 9.8% in 1992- 1997. Growth will vary widely in individual markets (see chart, right), but even the slowest- growing markets — such as from Europe to North America — will still see demand increase by at least 4% per year over 1998- 2002.

Yet rising airfreight demand will be accompanied by the continuation of another key trend in the industry — falling yields. Inflation–adjusted freight yields have been falling since the 1970s, primarily due to three reasons:

1) The structural increase in world trade (particularly from Asia to Europe and the US) has led to an increase in the average haul length; in turn this results in a reduction in yield per tonne–kilometre.

2) The introduction of widebody aircraft in the 1960s created large amounts of belly space for freight. Airlines often price this space incrementally, as they (wrongly) perceive belly space as having little or no marginal cost.

3) Deregulation has reduced controls on airfreight pricing.

And yields will keep falling. David Hoppin, principal of MergeGlobal, says:

Industry trends

“Average yields will fall in 1998 and beyond as the Asian crisis puts inbound Asian yields under severe pressure, and also affects pricing in non–Asian markets as passenger air–lines shift aircraft (and belly capacity) to more attractive regions.” As well as falling yields, several other trends are apparent in the airfreight industry, according to MergeGlobal:

• Integrator expansion

• Increasing freighter aircraft costs

The integrators face problems with falling yields on their core document business. This has persuaded the large US integrators — UPS and FedEx — to expand into international markets such as Europe and Asia. However, once integrators build up a regional network it takes a while for express volume to build up on international routes. Therefore the integrators often seek so–called filler traffic — airport–to–airport freight — which tends to depress yields. Airlines face increasing costs as they upgrade fleets in order to comply with Chapter 3 noise rules. Theoretically, this should encourage airlines to push up airfreight prices. However, when airlines renew fleets of non–compliant narrowbodies they are sometimes tempted to trade–up to converted widebodies, thus increasing capacity.

This is likely to decrease freight prices still further.

• Rising demand for new freighter aircraft

As intercontinental airfreight demand has increased, the supply of high–quality used aircraft (primarily 747–200s converted from passenger aircraft) has tightened, leading to higher aircraft prices, claims MergeGlobal.

Although the Asian crisis may temporarily send prices downwards, in the long–term demand will exceed the supply of high–quality converted passenger aircraft. But once the total unit costs of a converted aircraft exceeds that of a new aircraft, airlines may turn instead to ordering new freighters.

• Falling profits?

As yields continue to fall and costs rise, profits will be squeezed. Operators will therefore have to become more creative strategically if they want to maintain profit levels. For example, KLM is developing customised logistics products and Lufthansa Cargo is planning to redefine airport–to–airport services in terms of delivery times rather than flight numbers. But will strategies such as speciality cargoes, smaller shipments or time–defined prices really be able to offset the structural trends to higher costs and lower yields?

Airfreight in the new millennium

Despite rising demand for airfreight, traffic growth simply does not translate automatically into profits for cargo airlines. If airlines cannot keep costs down or improve yields, there may be a shake–out in the industry. Hoppin says: “Some of the recent entrants into the freighter business will probably become disillusioned and either revert to a pure belly strategy, or exit the industry entirely. The survivors are likely to be those airlines with strong home markets and well–functioning cargo sales organisations. And those carriers that effectively combine frequent, low–cost belly lift with strategically–deployed freighters will enjoy a significant competitive advantage”.