Navigating Turbulence: Allied’s Insights from IATA Report
The air freight industry has experienced volatility, with uncertainty becoming the new norm worldwide after the pandemic. Despite a hopeful start to 2023, the imbalance between supply and demand quickly dashed expectations of recovery.
It remains uncertain whether this is a modest improvement trend or a reflection of ongoing market volatility. Regardless, International Air Transport Association (IATA) reported a negative performance in March, with a decline of 8.1% compared to pre-COVID levels.
Regarding demand, the year began with a 17% decrease in cargo volumes year over year, accompanied by a shortage of export orders. Carriers increased flight frequency in all regions to meet passenger demand, further exacerbating the supply-demand imbalance.
So, what is affecting the demand and supply?
Factors Affecting Demand and Supply:
The growth of the air freight industry has been impacted by various factors, including economic and operational challenges that have hindered global trade. One potential reason for this distress is the prevailing global economic uncertainties, such as trade tensions between the USA and China, as well as the ongoing conflict between Russia and Ukraine. These factors have contributed to the volatility observed in recent months.
The economic and geopolitical environment plays a significant role in shaping supply chain trends. The pandemic-induced decline in demand for passenger travel has resulted in an over-capacity situation for airlines in 2023.
Additionally, the war in Europe has driven up energy and food prices, leading to policy tightening by central banks. These developments have further strengthened the safe-haven status of the US dollar, posing important challenges to the global economy and the aviation sector.
Other factors affecting the growth of the air freight industry include a decline in global economic growth, high inflation, higher interest rates, increased costs of living, overcapacity, and an increase in energy prices.
As of March, the industry-wide air cargo tonne-kilometers (CTKs) have experienced a continuous annual decline for 13 consecutive months. Global trade has also been on a downward trend since November 2022, which has diminished support for the air cargo industry.
On a positive note, there are indications of some level of stabilization. The rate of annual decline in air cargo CTKs has moderated over the past two months, suggesting a potential slowdown in the decline. This trend aligns with the fact that global goods trade has been holding steady just below the level achieved a year ago.
Challenges Plaguing Air Cargo:
The air cargo industry is currently grappling with a major challenge: the shortage of global air cargo capacity. The reduction in passenger flights during the pandemic has significantly reduced the available cargo space, leading to congestion at airports and causing delays in shipments.
This shortage of air cargo capacity is further compounded by disruptions in global supply chains, resulting from border closures and movement restrictions imposed due to the pandemic. These obstacles have impeded the smooth movement of cargo, leading to shortages of essential goods in certain regions.
In addition, the surge in e-commerce deliveries presents another hurdle for air cargo. The exponential growth of online shopping has increased the volume of small packages being shipped. Handling these smaller packages can be more intricate and time-consuming compared to larger, palletized cargo, adding complexity to the logistics operations of air cargo providers.
The shortage of global air cargo capacity, compounded by supply chain disruptions and the rise in e-commerce deliveries, represents the most significant challenge currently faced by the air cargo industry.
Why did the Growth in capacity persist, despite the fall in CTKs?
Despite the decline in cargo tonne-kilometers (CTKs), the growth in air cargo capacity persisted. In March, the industry’s available cargo tonne-kilometers (ACTKs) continued to expand by 9.9% year over year. This growth was primarily driven by the return of belly-hold cargo capacity offered by passenger carriers. The annual increase in international capacity was slightly lower at 8.3%, but still contributed to the overall growth in industry-wide capacity.
However, due to the broad-based fall in CTKs, the increase in ACTKs from the passenger segment of the industry resulted in a decline in cargo load factors. In March, the cargo load factors reached 46.2%, which was 8.8 percentage points lower than the previous period.
The growth in air cargo capacity persisted despite the decline in cargo tonne-kilometers, mainly due to the reintroduction of belly-hold cargo capacity provided by passenger carriers. This led to a decrease in cargo load factors during the same period.
What will be the key growth drivers this year?
To comprehend a market, a variety of factors must be evaluated. These include demographics, business cycles, and microeconomic needs. The sector is driven by growth factors, including investments, a dedicated consumer base, automobile, telecom, pharma, and heavy industries.
The key growth drivers for this year revolve around digitalization, innovation, collaboration, and the adoption of an omnichannel approach. Organizations are leveraging digital technologies such as machine learning, IoT, robot process automation, and augmented reality to drive supply chain advancements. These tools enable real-time identification of patterns, error detection, and enhanced management of supply chain data.
The rapid growth of e-commerce presents a significant growth opportunity. International e-commerce is projected to expand by 78% by 2030, indicating its importance in driving air cargo industry growth. To meet the demands of e-commerce, companies are integrating last-mile delivery technologies into their logistics operations.
To ensure seamless delivery and end-to-end services, companies are transforming their operations into an omnichannel approach. Amazon Air Services is an example of expanding service offerings to provide comprehensive solutions to customers.
Efficient management of Unit Load Devices (ULDs), such as containers and pallets, is another area of focus for enhancing operational efficiency.
The road ahead for 2023
Despite the global distress and uncertainty, the air cargo industry is showing promising signs of growth. Investments are being made to increase freight capacity, global cargo volumes are gradually picking up, and there are ongoing technological and infrastructural developments worldwide. Industry experts are optimistic about the future, anticipating sustained growth in the coming years.
Willie Walsh, Director General of International Air Transport Association (IATA), emphasized the resilience of the aviation industry during the COVID-19 pandemic. Looking ahead to 2023, there is a positive outlook for financial recovery, with expectations of the industry generating its first profit since 2019. However, considering the significant economic damage caused by pandemic restrictions, the projected profit of $4.7 billion on industry revenues of $779 billion indicates that there is still progress to be made in putting the industry on a solid financial footing.