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Airfreight growth continues, but yields keep falling July 1998 Download PDF

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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”.

AIRFREIGHT MARKET (000s metric tonnes)
AIRFREIGHT MARKET (000s metric tonnes)
  1992 1993 1994 1995 1996 1997 1998F 1999F 2000F 2001F 2002F
US Domestic 4921 5232 5802 6090 6386 6939 7347 7849 8293 8762 9249
NAFTA 276 273 346 405 453 533 569 608 652 698 745
North America-Cent. America & Carib. 149 149 156 146 155 181 200 220 239 260 283
CAC-North America 167 171 186 198 221 244 262 280 301 323 347
North America-South America 230 237 273 299 296 349 382 399 429 465 500
South America-North America 280 305 332 353 388 432 460 487 518 546 578
North America-Southeast Asia 109 127 146 176 211 237 244 266 287 308 332
Southeast Asia-North America 139 164 204 223 245 299 342 371 399 431 466
Intra-Europe 756 774 894 978 1,100 1,137 1,202 1,267 1,336 1,407 1,477
North America-Europe 783 753 819 915 972 1,033 1,098 1,160 1,229 1,298 1,368
Europe-North America 639 723 894 949 988 1,118 1,170 1,215 1,263 1,312 1,361
Europe-South Asia 48 52 66 94 100 110 122 136 150 165 181
South Asia-Europe 116 122 127 135 163 172 187 204 222 241 263
Europe-North Asia 320 380 496 559 583 608 613 659 709 761 812
North Asia-Europe 487 461 528 613 712 741 824 891 956 1,039 1,124
Europe-Southeast Asia 118 146 190 224 234 242 244 263 281 308 322
Southeast Asia-Europe 143 156 186 218 257 269 314 343 371 403 439
Europe-South Pacific 50 51 68 76 81 87 91 95 101 103 107
South Pacific-Europe 35 34 36 39 46 48 52 55 59 62 66
Europe-Latin America 182 219 273 293 313 344 370 393 418 449 477
Latin America-Europe 214 223 239 255 320 324 348 369 392 417 444
Europe-Africa 273 288 333 396 418 445 465 487 513 543 577
Africa-Europe 101 113 136 146 150 155 166 178 191 204 219
Europe-Middle East 172 179 206 229 244 259 273 293 314 334 352
Middle East-Europe 222 241 223 188 271 281 300 319 339 360 383
Intra-Asia 1,189 1,307 1,681 2,064 2,314 2,444 2,598 2,812 3,048 3,297 3,571
Other regions 3,580 4,020 4,560 5,040 5,580 6,070 6,460 6,880 7,390 7,900 8,560
TOTAL15.7m 16.9m 19.4m 21.3m 23.2m 25.1m 26.7m 28.5m 30.4m 32.4m 34.6m

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