Political unrest slows growth, Japan worrisome

The political unrest in the Middle East and North Africa and the impact of Japan's devastating earthquake, tsunami and resultant nuclear radiation leaks have all conspired to cast a dark cloud over air cargo and passenger demand, says the International Air Transport Association (IATA). By Donald Urquhart.

The latest IATA figures for scheduled international traffic for February 2011 show increases of 2.3 and 6 per cent respectively for cargo and passenger demand compared to February 2010. February demand growth was down significantly from the revised 8.7 and 8.4 per cent expansion recorded in January for cargo and passenger traffic respectively. The political unrest in the Middle East and North Africa during February is estimated to have cut international traffic by about one per cent. The more dramatic fall in cargo growth (from 8.7 per cent in January 2011 to 2.3 per cent in February) was impacted in part by factory shutdowns due to the Chinese New Year period which fell in the first part of February in 2011. “Another series of shocks is denting the industry’s recovery from the recession. As the unrest in Egypt and Tunisia spreads across the Middle East and North Africa, demand growth across the region is taking a step back. “The tragic earthquake and its aftermath in Japan will most certainly see a further dampening of demand from March. The industry fundamentals are good. But extraordinary circumstances have made the first quarter of 2011 very difficult,” said Giovanni Bisignani, IATA’s director general and CEO. February marked a decline in load factors in both the cargo and the passenger business. February freight load factors have deteriorated rapidly to 51.6 per cent – four percentage points below their peak in May 2010, on a seasonally adjusted basis. February air freight volumes stood at the same level as the pre-recession cycle peak in early 2008. But it was down almost 7 per cent on the high reached in May 2010 at the peak of business re-stocking. The industry’s fundamentals are strong and business confidence, as measured by the purchasing managers’ index, reached its second highest level ever in February, IATA noted. Regional variations Air freight carried by Asia-Pacific carriers fell by 4.5 per cent in February. This reflects plant closures associated with Chinese New Year as well as the impact of inflation-fighting measures in the Chinese economy. In terms of volumes, this had the largest impact in slowing global growth to 2.3 per cent – the weakest growth since the beginning of the third quarter in 2009 when annual growth rates turned positive again out of the recession. Compared to January, freight carried by the region’s carriers fell by 6.6 per cent. On the back of unrest in Egypt and Tunisia, cargo carried by African carriers fell by 5.7 per cent. In absolute terms, the freight carried by the region’s carriers fell by 8.4 per cent in February compared to January. North American carriers saw freight expand by 11.8 per cent, second only to the robust 12.1 per cent expansion by Latin American carriers. European carriers showed weak growth of 6.3 per cent, reflecting the region’s proximity and trade connections with North Africa and the continuing weakness in the European economy. “The industry situation is volatile and we are watching higher fuel prices carefully. Capacity increases ahead of demand are bringing down load factors for both passenger and cargo operations. Demand is still supported by strong economic fundamentals. But with looser supply and demand conditions, it will be a challenge for airlines to recover the added costs of fuel. Our pathetic 1.4 per cent expected margin for 2011 is under considerable pressure,” added Bisignani. Potential Japan impact The impact of Japan’s ongoing crisis will likely not be obvious until the March figures are compiled, but with a number of carriers scaling back services because of weakening demand and disrupted production and domestic transport, there is an expectation of an adverse effect. “As the situation in Japan continues, disruptions are showing up in supply chains for different sectors,” notes Simon Tay chairman of the Singapore Institute of International Affairs. “This reminds us how much Japan is integrated into the Asian and global economies and indeed has been instrumental in that integration. It is not certain when Japan will recover and indeed if it will be politically stronger but what is clear that Asia needs Japan, more than most would have previously thought.” Supply chains that are expected to be hit include the technology sector, automotive and even the aerospace sector, with Boeing warning recently of the “potential for future parts shortages”. Nearly 35 per cent of the B787 and 20 per cent of the B777 are manufactured in Japan. Technology is an area with significant potential for impact, in part because Japan not only makes electronics products for direct sale to consumers, but is also a major hub for manufacturing components for other electronics manufacturers the world over. These include silicon wafers, microcontroller ICs and other components for products from laptops to cars, washing machines, mobile phones, MP3 players, etc. Japan supplies about one-fifth of the global semiconductor market and is a major producer of global supplies of NAND and DRAM chips. Production of NAND flash memory chips – used in memory cards, USB flash drives and MP3 players – is likely to slow in the short term of one to two months say analysts. Although the vast majority of the major electronics manufacturers are not located directly in the earthquake stricken zone, a number suspended production at some factories due to the delicate nature of electronics production, which is particularly susceptible to tremors and power fluctuations. Sony, Japan’s largest exporter of consumer electronics, halted operations at 12 factories making products including blu-ray discs, semiconductor lasers, camcorders, cameras and headphones.