Demand for Air Cargo Still Strong, Though Slowing

The International Air Transport Association (IATA) has reported international scheduled traffic statistics for July which showed continued strengthening of demand for both passenger and cargo traffic. Compared to July 2009, international passenger demand was up 9.2% while international scheduled freight traffic showed a 22.7% improvement.

These year-on-year comparisons for July were less than the June growth data showing 11.6% and 26.6% increases for passenger and cargo traffic, respectively. The apparent slowdown was due to the fact that by July 2009 traffic was already starting to recover. After adjusting for seasonality, the improvement in demand was faster month-to-month in July than it was in June.

According to IATA, the recovery has entered a slower phase. During the second half of 2009, demand was rebounding at an annualized rate of 12% for passenger and 28% for cargo. In the year to July, the annualized growth rates had dropped to 8% for passenger and 17% for air freight. However, this is still considerably above the industry’s traditional 6% growth trend.

“The recovery in demand has been faster than anticipated. But, as we look towards the end of the year, the pace of the recovery will likely slow,” says Giovanni Bisignani, IATA’s director general and CEO. “The jobless economic recovery is keeping consumer confidence fragile, particularly in North America and Europe. This is affecting leisure markets and cargo traffic. Following the boost of cargo demand from inventory re-stocking, further growth will be largely determined by consumer spending which remains weak.”

July global cargo demand was 4% higher than pre-recession levels in early 2008. A slowdown in air freight markets is expected in the second half of the year as the economic cycle moves into a new phase.

Extraordinary freight growth rates in late 2009 and early 2010 were supported by businesses restocking their inventories. With the re-stocking cycle completed, air freight demand will be driven by consumer spending and business capital expenditure, IATA predicts. Weak consumer confidence in Europe and North America will be a negative factor. But strengthening corporate profits are supporting an increase in capital expenditure that could continue to drive robust freight growth.

The two-speed recovery continues to see weak growth by European carriers of 12.1% in July, less than half the 25.3% increase by Asia-Pacific carriers or the 27.1% growth recorded by North American carriers.

“Improving demand is an important component of the recovery. But it must translate to the bottom line,” says Bisignani. “The anticipated 2010 profit of $2.5 billion is only a 0.5% return on revenues. Hence, the financial situation of the industry remains fragile. We must go beyond recovery to secure sustainable profitability at levels exceeding the 7-8% cost of capital. For this, we need a change in the industry’s structure,” he asserts.

Bisignani also notes the need for a regulatory structure that facilitates consolidation across political borders. “The business realities of the industry are changing. It is critical that governments find a modern regulatory structure that is free of outdated ownership restrictions and able to facilitate opportunities for consolidation globally—something that other industries take for granted,” he says.

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