April 14, 2016
transportation report | Air Freight

Airfreight's "belly" ache

Airfreight's "belly" ache

Strong passenger demand puts more planes and belly lift in air, suppressing freight yields for carriers and freight forwarders.

By Mark B. Solomon

Worldwide passenger traffic is at five-year highs. Aircraft orders hit a record in 2014. Jet fuel prices are at multiyear lows. For the airline business, which has lived a feast-or-famine existence for nearly 40 years, it is belly-up-to-the-table time.

But what puts smiles on the faces of airline executives is the stuff of headaches for the airfreight sector. That's because those trends have contributed to putting additional belly capacity in the air, which, in turn, suppresses freight yields, the revenue generated for flying one ton of freight one mile.

Global yields are expected to fall 6 percent in 2016, continuing a downward pattern that began in 2012, the trade group International Air Transport Association (IATA) said recently. Chicago-based plane maker Boeing Co., which publishes a biennial global cargo forecast that will be next updated in the fall, estimates the yield on so-called general freight, which doesn't include the higher-yielding express consignments moved by companies like Memphis-based FedEx Corp., Atlanta-based UPS Inc., and Bonn, Germany-based DHL Express, is today around $1.90 a kilo, down 15 to 20 percent from a year ago.

Belly freight is unique because it is priced as a byproduct of another form of transportation, namely passenger service. Belly rates are traditionally cheap because the plane has to fly anyway, and passenger revenues absorb much of the allocable crew, fuel, and maintenance expense. The large injection of belly capacity in the past two years has further driven down prices. This benefits forwarders in their dealings with carriers but hurts them on the selling side with price-conscious shippers.

Air forwarders of all sizes are pushing to add value to their portfolios in an effort to boost margins. One way is to convince less-than-containerload (LCL) ocean shippers to shift some of their freight to faster air transport, especially if they can do so at a price point not notably higher than what they currently pay. Yet the air industry has been woefully slow to adopt digital processes to expedite the input and exchange of data between airlines and forwarders. This delays the release of airfreighted goods, effectively neutering the speed advantages of the linehaul. The old maxim that the typical airfreight shipment spends 80 percent of its time on the ground, unfortunately, still holds.

Tony Tyler, IATA's director-general, said in a speech earlier this year that shippers give the industry, on average, a "satisfaction rating" of seven out of a possible 10. This is an unacceptable percentage for a premium-priced service, Tyler said. In a sign of progress, 15 airlines switched on March 1 from paper to a digital platform for exchanging air waybill information with forwarders. Currently, e-air waybills are used on 37 percent of "feasible trade lanes," according to IATA. The group projects the adoption rate to rise to 56 percent by the end of the year.

FUEL PRICE DROP A NEGATIVE

The stone-dropping decline in jet fuel prices, while a boon to the bottom line of passenger revenues, is a negative for the airfreight sector. Low prices further buttress capacity by keeping many older, large wide-bodied aircraft, the long-time workhorses for moving air cargo, aloft when they otherwise might have been grounded. They also depress yields by reducing the revenue captured by jet fuel surcharges. According to Tom Crabtree, Boeing's regional director, airline market analysis-air cargo, about 40 percent of kilo pricing is directly tied to fuel surcharges. As surcharges have dropped since mid-2014 with the steep declines in fuel prices, so have yields, Crabtree said.

Newer fuel-efficient passenger planes can help operators achieve better capacity utilization, which translates into higher availability of belly lift and keeps a lid on yields. The planes also come with sizable amounts of cargo space, even accounting for baggage and airmail. Boeing's 777-300 ER (extended-range) aircraft typically fills eight pallet positions, equivalent to 10 metric tons, per flight. However, the plane has been known to carry far more cargo depending on the number of passengers and amount of luggage, according to Crabtree. Several variables influence lower-hold capacity, among them the length of the flight, the dimensions of the freight, and an airline's policies governing cargo acceptance. For example, a long flight means greater fuel burn, which adds weight to the plane and restricts the amount of freight that can be loaded.

Modern-day aircraft will allow more freight to be loaded on longer stage lengths that required a lot more fuel in the past. This will allow regional-type carriers with heretofore scant freight exposure to now viably compete for business, said Jannie Davel, head of airfreight for the Americas at DHL Global Forwarding, the air and ocean forwarding giant and a unit of Deutsche Post DHL. "Every smaller operator potentially becomes a mid-sized operator," he said. With the scales tipped so heavily right now toward capacity, it will take 18 months to two years for the overall market to move into alignment and belly rates to begin to firm, Davel predicted.

The chronic oversupply situation threatens to eliminate the traditional seasonality that has influenced the supply-demand scales. Keith Andrey, UPS's vice president of forwarding, said that while the upcoming summer travel season will still bring with it additional belly lift as more planes are deployed, belly lift will not dry up when the season ends. "What used to be a cyclical trend in the summer months is now secular in nature," Andrey said in describing the belly capacity phenomenon.

The impact of the downshift in yields would be mitigated if freight demand were stronger. But that has yet to consistently occur since the recession ended in mid- to late-2009. Freight traffic bounced in 2010 and 2011 off historically low levels, fell back in 2012 and 2013, and recovered in 2014. However, volumes posted an anemic 1.9 percent year-over-year rise in 2015, IATA said. The group forecasts a 3-percent volume increase in 2016.

It's hard to see the current landscape changing, at least over the near term. Helmut Kaspers, chief operating officer, global air and ocean freight for Dutch forwarding giant Ceva Logistics, said there is "continuous" carrier demand for passenger planes, notably from Middle Eastern carriers that account for 45 percent of the wide-bodied belly space ordered by the top 15 airlines. The steady flow of demand could keep the lower-deck market oversupplied for years, he said.

OVERBLOWN CONCERNS?

Crabtree of Boeing said the hand wringing over excess capacity is a red herring of sorts. According to Boeing data, about 65 percent of the 23,000 jets in all fleets today are narrow-bodied aircraft that lack the below-deck space to accommodate the 96- by 125-inch pallets that are standard equipment for big airfreight users. About 8,000 are the pallet-friendly wide-body aircraft of various configurations, and about 1,700 of those are freighters. Narrow-bodies will account for much of the future plane supply, meaning a large chunk of lift entering the market will be mostly irrelevant to shippers and forwarders, Crabtree said.

Though belly space will grow at a faster clip than freighter capacity, freighters will still handle about 55 to 60 percent of global air trade for years to come, according to Boeing projections. While big cargo users appreciate the flexibility that comes with access to hundreds of passenger flights a day, they are aware that flight operations are driven by the needs of the passenger segment and that any change based on that priority could adversely affect them.

Freighter services are more expensive than belly space because passenger revenue isn't available to offset operating expenses. However, freighters provide users with the reliability and control they can never get when utilizing belly lift. Freighters can handle outsized cargo and hazardous materials shipments that can't be fitted in, or aren't allowed on, passenger aircraft. They also have a huge capacity advantage critical in the highly concentrated industrial markets where much of global air commerce moves. For example, in the Asia-to-North America trade lane, it would take 150 passenger flights to provide lift equal to 10 freighter flights, according to Boeing estimates. "Freighters aren't going away, no matter what a lot of people may think," Crabtree said.

Neither seemingly is air freight, which continually takes a licking and keeps on ticking. In the past 16 years, the trade has suffered through two recessions, a financial meltdown, the near-collapse of the euro, a terrorist attack using the tools of its trade, and a persistently sluggish global economy that has pushed shippers to convert some of their air business to cheaper ocean freight. Still, global airfreight traffic is expected to grow by about 4.7 percent a year through 2034, Boeing said in the most recent forecast. There will always be the next hot product that, for various reasons, needs to be in customers' hands right away. The latest might be lithium-ion batteries, which have found a potentially lucrative second life as the power behind the battery-powered automobile. And far-flung markets away from the traditional global trade lanes will open for production and consumption. For businesses and consumers that don't have the patience to wait for weeks for a ship to make the haul, air is the only answer.

Ironically, Kaspers of Ceva said it could be a challenge to find appropriate and consistent capacity to support emerging markets because they are not the industry's typical origin-destination traffic lanes. Given the expansion of belly space, those might be the only places on earth where freight capacity might not be in abundance.

About the Author

Mark B. Solomon
Executive Editor - News
Mark Solomon joined DC VELOCITY as senior editor in August 2008, and was promoted to his current position on January 1, 2015. He has spent more than 30 years in the transportation, logistics and supply chain management fields as a journalist and public relations professional. From 1989 to 1994, he worked in Washington as a reporter for the Journal of Commerce, covering the aviation and trucking industries, the Department of Transportation, Congress and the U.S. Supreme Court. Prior to that, he worked for Traffic World for seven years in a similar role. From 1994 to 2008, Mr. Solomon ran Media-Based Solutions, a public relations firm based in Atlanta. He graduated in 1978 with a B.A. in journalism from The American University in Washington, D.C.

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