Turbulence in US Air Cargo Market
Cargo Trends March-April 2009
By Satish Jindel
The global and US economic crisis is not sparing the air cargo sector though the industry might not make news headlines. The US national unemployment rate is at a recent high of 8.1 percent and companies in the air cargo sector have contributed to this high rate with 15,000 job losses at DHL Express, 1,250 at Uti Worldwide, and similar small numbers at UPS and FedEx. Additional jobs would have been lost if UPS and FedEx had not implemented a salary freeze and reduction respectively.
Just as countries are faced with taking bold and immediate actions to deal with worsening local economy, the air cargo industry needs to do the same to manage the unprecedented decline in demand. Companies are reducing the workforce to control cost but industry capacity continues to exceed demand, causing rapid price erosion and decline in operating profits for strong carriers, losses for weak ones, and bankruptcy for the weakest.
While global economic malaise is reducing air cargo demand, industry pricing and margin problems are compounded by the inability of companies to reduce capacity at the same or faster pace. In the US, all transportation industry segments are operating at excess capacity. Airfreight operators and passenger airlines with fixed assets are in a more difficult situation.
According to IATA, the drop in demand (freight ton kilometers) continues to outpace the decline in capacity (available ton kilometers). In 2008, North American capacity grew by 3.4 percent while demand fell 1.9 percent. The imbalance was worse in December. While the North American air cargo capacity declined by 3.4 percent compared to December 2007, the demand plummeted by 22.2 percent. The situation persisted in January 2009 when North American airlines responded by cutting capacity by 3.6 percent from January 2008 levels, only to see the demand drop more than five times that with a decline of 19.3 percent.
For international lanes, airfreight revenues for shipments exported from North America declined 15.1 percent while imports into North America declined by 31 percent during the fourth quarter of 2008. Again, in January 2009, cargo at major world airports dropped 22 percent compared to same month in 2008. The recently published earnings by large freight forwarders confirm such industry-wide trends.
Expeditors International saw a 16.8 percent drop in airfreight revenue in the fourth quarter while it was up 5.6 percent for the full year 2008. The volume in Asia lanes was the worst with an 11 percent year-over-year decline. Yet, the company protected its gross profit margin as a result of its non-asset based operating model. Similarly, Kuehne and Nagel achieved a 2.1 percent increase in air cargo volumes in 2008 even with reduction in third quarter and negative growth in fourth quarter. EXPD and K+N performance in a declining market suggests that large freight forwarders could be gaining market share from competitors.
The demand is dropping each month with no sign of improvement, suggesting that these are extra ordinary times for the industry requiring extra ordinary effort for survival and profitability. The economic collapse is occurring across the globe. The GDP rate of change in the fourth quarter of 2008 compared to same period a year ago is alarming. For the US, it was negative 6.2 percent compared to negative 0.2 percent, for China it dropped to a growth rate of 6.8 percent vs. 11.2 percent, and for India GDP was 5.3 percent vs. 8.9 percent.
Furthermore, the projected growth rates for U.S. GDP in the four quarters of 2009 are continually revised downward every month. As such, all industry segments will face further decline in tonnage and shipment count for foreseeable future. Such a drop in demand has raised expectations among shippers for further decline in pricing which will lead to lower margins for airfreight capacity providers.
On the government front, the transportation industry is getting minimal support to address its problems. In 2008, the US federal government gave the industry $100 million to deploy explosive detection equipment to meet the expanded air cargo-screening mandate from five to fifty percent that went into effect on February 1, 2009. Since this applies only to air cargo moved on passenger aircraft, such a mandate could shift shipments to DHL, FedEx, TNT and UPS.
The global express and parcel market has not escaped such challenges. UPS results for Q4, 2008 provide a grim assessment. Even with DHL's withdrawal from the US domestic market that caused a market share shift of about 1.2 million parcels per day, UPS and FedEx experienced a decline in average daily volume across all domestic and international services.
The solution to carriers' profitability lies in the basics - keep capacity in balance with demand. With executives of large publicly held companies unable to provide guidance for 2009, the industry needs to reduce capacity at a pace faster than the drop in demand to survive.
Satish Jindel is president of SJ Consulting Group, with offices in Pennsylvania, North Carolina and India.