No sector of transportation has been immune to the effects of the global economic downturn. But perhaps no industry has taken it on the chin with greater ferocity than has air freight.
The worldwide collapse of air traffic, which began late last year and has extended into 2009, is unprecedented in the industry's 60-plus years of existence. December 2008 volumes reported by the International Air Transport Association (IATA) fell by 22.3 percent over December 2007. Year-over-year volumes dropped by more than 20 percent in each of the next four months before showing a slight improvement in May and June, when they declined 17.4 percent and 16.5 percent, respectively.
The consensus is that the market has stabilized at current levels. But that is little solace for an industry long accustomed to annual growth in the high single digits to low double digits. And while things may improve somewhat as the year progresses, there isn't much hope for a recovery before 2010.
Earlier this year, IATA predicted 2009 volume declines of 13 percent, and in June, the group revised its forecast downward to 17 percent. That may be a little optimistic: Swiss freight forwarding giant Panalpina predicts a 19-percent year-over-year contraction, noting that its forecast includes data from freighter operators that aren't included in IATA's tabulations.
Stiff headwinds
It doesn't take a Harvard M.B.A. to understand what's going on. The recession has been global in
scope, and air freight's primary value is in connecting global supply chains. Companies are not only
shipping less, but many also now have a viable alternative to air in the form of
less-than-containerload (LCL) ocean services that are cheaper, faster, and more reliable than
ever before. Today, companies ranging from parcel carriers UPS and DHL to traditional truckers
like Con-way, Old Dominion Freight Lines, and Averitt Express are playing in the LCL market or
plan to soon enter the fray.
What's more, last summer's massive spike in oil prices forced businesses to re-examine their offshore production strategies and the just-in-time inventory management model that relied on air to rush goods to market over long distances. And ever-increasing security regulations have layered additional costs onto an already premium-priced service.
While there may be multiple reasons for the weakness in air freight, there appears to be just one remedy: a global economic rebound. But opinion is divided on whether an economic upturn could turn the industry's fortunes around.
The Boeing Co., for instance, remains confident in air freight's long-term prospects, projecting that global air-cargo traffic will grow by 5.4 percent a year over the next 20 years. "The air cargo industry is supported by sound fundamentals—the imperative for speed, consumer product innovation, and global industrial interdependence are key drivers—and new air trade routes will expand service coverage," said Randy Tinseth, vice president, marketing of Boeing's commercial airplanes unit, in a statement.
Others beg to differ. As they see it, a global economic recovery will not alter the structural changes taking place that will work against air-freight's growth.
For one thing, lower production costs spurred by globalization and improved information technology have led to reductions in the average value of many commodities. "The impact of generalized price deflation will continue to depress the rate of air cargo growth," said Brian P. Clancy, managing director of Arlington, Va.-based consultancy MergeGlobal Inc., in a report.
Price deflation typically forces managers to cut transportation costs to stay competitive. As the most expensive transport mode, air is at a disadvantage to lower-cost alternatives like ocean on international trade lanes, and to truck and intermodal services in the domestic U.S. trades.
"Our customers are asking why they should pay five times more for air freight than for ocean just to save 10 days," says Julian Keeling, a 35-year industry veteran and founder of Los Angeles-based Consolidators International. Consolidators' business was built around negotiating cargo space aboard aircraft for small to mid-sized freight forwarders. Today, ocean shipping is the fastest-growing part of Consolidators' business, Keeling says. Those bookings represent 12 percent of its traffic, more than double the levels at the start of 2009.
Another factor slowing the growth of air freight is the proliferation of sophisticated forecasting tools that allow businesses to order, ship, warehouse, and distribute with longer lead times while still meeting their customers' fulfillment requirements. Through better inventory planning, companies can now divert more shipments to sea freight and use air only for the most urgent deliveries.
Consider the example of Pacific Sunwear, a maker of trendy apparel geared to the teenage and young adult markets. The company typically used air freight to ensure that the latest styles were always in front of its fickle and impatient customer base. However, it has cut its air shipping by 35 percent, according to Alex Albertini, director of logistics and trade compliance.
"We are only moving by air those products that we have a guaranteed sale for without a markdown," Albertini told attendees at the eyefortransport third-party logistics summit in June.
A third factor is the mix of fuel-price volatility, tougher security laws, and a general fear of supply chain disruptions that is pushing businesses to consider nearshoring—a regionalization of manufacturing and distribution. As the distance shrinks between the various supply chain points, air freight's value proposition becomes less relevant.
Dell Inc., long a proponent of the intercontinental inventory and shipping model, is "looking harder at regionalizing our sourcing than we have in the past," said John Lebowitz, director, global trade management, during a panel discussion following the release of the annual "State of Logistics Report" in June. Lebowitz added that his company is "doing a much better job" of managing its manufacturing, inventory, and production flows to take advantage of modes other than air. "We are definitely looking at diversifying our transportation options," he said.
Will air freight fully recover?
Many fret about globalization and its impact on intercontinental supply chains. But the air-freight
business has proved itself to be a resilient animal, and it's a safe bet that businesses that
continue to scour the globe for low-cost sourcing options will still turn to air to whisk their
goods to far-flung markets.
Some air-freight markets, of course, will do better than others. Traffic in the intra-Asia region, where production and consumption are expected to remain strong for years to come, will grow by 8.1 percent annually through 2027, according to Boeing's biennial cargo forecast. That will significantly outpace the predicted 5.4 percent baseline global growth rate.
Clancy of MergeGlobal says air-freight demand will gradually recover as companies replenish d epleted inventory and the continued compression of product life cycles drives demand for fast delivery. He doesn't see the global market returning to 2007 levels—the last full pre-recession year—until 2012. IATA Chief Economist Brian Pearce, too, says that even if traffic rebounds along with the global economy, it will take several years to return to the industry's historical growth rates.
Keeling, though, believes air freight is in "permanent decline." He contends that the improvement in speed and reliability of competing ocean services will raise the bar to heights that the air sector can't fly over.
"At one time, if you booked a shipment by ocean originating in St. Louis and bound for Wellington, New Zealand, the importer would budget 90 days for the cargo to reach its customer," he says. "Now you have daily ship calls from Shanghai to Los Angeles, and the all-water transit times are 12 days. How does air compete with that?"
