The “Brexit” vote has emerged as a new risk to the positive momentum noted for air freight, but its effect could be countered by strong consumer confidence and low oil prices, according to a new forecast from the IATA.
Prior to the “Brexit” shock, global economic growth was weak but set for moderate improvement, banking on stronger-than-expected growth in the euro area and Japan in the first quarter, combined with policy support in China and improved confidence in Brazil and Russia in the second quarter.
But the “Brexit” vote has reversed expectations, with the global economy now poised to decelerate in 2016 compared to 2015, “with forecasts being revised downward from what was already projected to be lackluster growth,” said IATA.
Added headwinds to global growth are the continued strength of the U.S. dollar and overall weakness in the global economy. However, underlying drivers in the U.S. economy remain positive, with decreasing unemployment.
In the air cargo sector, the market had a weak first quarter but recovered and grew in the second. June levels point to year-on-year growth of 4.1% in freight tonne kilometers (FTKs). Compared to 2015, year-to-June FTK volume growth was 0.5%, as demand for air cargo last year saw a one-off boost from the U.S. west coast port backlog.
European carriers’ FTKs grew throughout the year, with traffic expanding in both quarters. The second quarter saw strong growth in trade by air on the Europe-Asia trade lane. Middle Eastern carriers explain the largest share (36%) of the Q2 growth, while Asian and European carriers also explain a significant portion of the growth seen in Q2, representing 32% and 20%, respectively. In contrast, growth has been elusive for Latin American carriers as regional trade and macroeconomic weakness has led to contraction in traffic in both quarters.
Global merchandise trade has continued to contract in 2016, the level in May was down by 1.9% compared to the January 2015 peak. In 2016, monthly trade levels have fallen perpetually every month, except for a slight month-on-month rise of 0.8% in February. The level in May was down by 1.6% compared to the 2015 year-end level.
International FTK growth has fared better, said IATA. In seasonally adjusted terms, air cargo had a weak first quarter with the market shrinking by 1.6% at the end of March compared to the 2015 year-end level. In the second quarter it recovered and grew, the level in May was up by 1.7% and 2.2% in June compared to the 2015 year-end level.
The weaker growth of total merchandise trade is in part explained by particularly poor performance of bulk commodities/heavy industry. The World Trade Outlook Indicator suggests growth will remain sluggish into the third quarter.
The global Purchasing Managers’ Index for export orders has recovered somewhat since the significant dip in February. The improving trend, although still weak, is a positive development for air freight, IATA said.
“However, these figures do not reflect the materialization of the ‘Brexit’ risk and should be treated with caution. The decrease in semi-conductor shipments points to weaker demand drivers for air freighted commodities in the short term,” continued the organization.
“The confluence of a sluggish world trade outlook, ‘Brexit’ aftermath and weak demand drivers suggest that the positive momentum observed in FTKs over the past three months may be paused,” it added.
Nonetheless, IATA has found a silver lining. “Consumer confidence has continued to improve over the last quarter and remains strong, although it remains to be seen if it will be adversely impacted in the short-term from the ‘Brexit’ shock. Strength in consumer confidence and prospects for favorable lagged impact of lower oil prices are factors that can reenergize growth in the global economy.”
On cargo profitability, IATA noted that the downward yield trajectory started to accelerate in the second half of 2014 as lower fuel prices were sustained. At an industry level, total international air cargo yields have continued to deteriorate in 2016, but the latest deterioration is likely to be particularly damaging to profitability. Yield erosion since January has been between 5% and 6%, coming at a time of increasing fuel prices over this period.
Observing these developments, the association does not foresee profitability improving. “Although rising fuel prices have abated in July, a challenging yield environment is expected to persist. Flooding-in of capacity amid a weak global trade backdrop can lead to taking a bite out of air cargo profitability,” it said.
Photo: Myself (Adrian Pingstone)
