Cargo Doesn't Care – The 2003 MergeGlobal World Air Freight Forecast
is no secret that the world airline industry has been plunged into its deepest crisis yet. To be sure, the industry has always been highly cyclical, and past downturns have claimed some of the most storied names in commercial aviation. But most of those carriers clearly were among the weakest members of the herd. This time, some of the largest airlines in the world face the very real prospect of bankruptcy, followed by liquidation, if they cannot persuade creditors and unions to restructure costs before the cash runs out.
After the disastrous 2001 and the leveling off of last year, 2003 is turning out to be a year of painful lessons for many people.
Aircraft owners and lessors are facing the harsh reality that the value of their assets has fallen sharply, and perhaps permanently. Union workers – especially pilots and mechanics – are learning that working for the world’s largest airlines does not automatically confer job security, much less a guaranteed pension. Meanwhile, passengers are discovering that service can, in fact, get worse.
Against this grim background, the good news is that cargo demand has been, and likely will continue to be, far more resilient than passenger traffic. Cargo doesn’t care about the possibility of terrorist attacks, or the SARS virus, or the host of other reasons that passenger airlines face such a dismal revenue environment.
Rather, cargo cares about economic growth, trade and investment – the drivers of freight demand for which prospects appear to be brightening in most parts of the world despite the disruption and uncertainty caused by the war in Iraq. Indeed, output and corporate profits continue to rise in the United States and most parts of the developed world.
Moreover, the painful changes being forced on the large passenger carriers bode well for the long-term profitability of freighter operators.
Passenger flights generate roughly half of intercontinental airlift capacity, and passenger carriers generally price their belly cargo based on marginal cost, exerting downward pressure on air freight rates.
Ironically, 2002 (and, so far, 2003) have been good times for most freighter operators, which have enjoyed rising load factors and rates largely because the passenger airlines’ travails have forced them to cut flights and thus belly capacity.
Additionally, the large number of U.S. and British military charters to the Middle East absorbed a lot of excess freighter capacity, further tightening the supply/demand balance. Over the longer term, the painful reminders now being administered to the financial markets should reduce the future flow of capital to passenger airlines, imposing greater discipline on future belly capacity growth.
This is not to say that established freighter operators have it made. Price competition from passenger carriers may diminish, but that from new-entrant freighter operators – taking advantage of depressed aircraft prices and out-of-work pilots – will likely increase. Cargo cares very much about rates.
Of course, both passenger and cargo traffic depend on commercial activity and trade. Prolonged weakness in the passenger revenue environment would reflect, and ultimately exacerbate, underlying weakness in the world economy that would affect cargo demand.
Global economic growth is increasingly, and worryingly, dependent on the U.S. and specifically on free-spending, heavily indebted U.S. consumers. Sooner or later, American consumers will grow tired of laying out cash and credit. And if big European and Asian economies (including Japan’s) have not resumed significant growth by then, cargo traffic will suffer.
Our view is that this unhappy outcome is unlikely, but it cannot be dismissed – especially by asset owners who would suffer the most.
Overall, we estimate that in the 2003-2007 period covered in this year’s forecast, cargo traffic in terms of daily tonnage will grow at a rate of 5.8 percent per year.
This growth f
