Air cargo in the ‘new mediocre’ of global economic growth

The outlook for the air cargo sector is mixed, with a new reality in the global economy and short term worrying trends including the entrance of new belly capacity, aircraft coming out of storage due to low oil prices and worrying indications from the Purchasing Managers’ Index (PMI) up against a medium-term view of buoyant consumer confidence, according to IATA economists.

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The global economy is growing, but growing at a lower rate than anticipated, said George Anjaparidze, senior economist, IATA who went on to cite International Monetary Fund (IMF) CEO
Christine Lagarde who recently warned that the world was on the threat of entering a new phase of mediocre growth becoming the new reality. “And that’s exactly what we’re seeing,” added Anjaparidze.

The advanced economies are still growing, but very slowly he noted with emerging economies growing far below their potential and major economies like China, decelerating. “That is having an adverse impact on commodity exporters,” he said. For Latin Amercia this has translated to negative growth, or recession techically, largely driven by the Brazilian economy which is in strong contraction and expected to contract by as much as three per cent this year.

The bad news is that the IMF is expected to revise its global growth forecast downwards in April, and that’s really what we’ve seen in and out over last four years,  Anjaparidze said.

Noting the difficulties in predicting what will generate economic growth going forward, he noted that “the conventional wisdom of how stimulus packages would have benefitted the global economy are not really materialising, so we are in difficult times.”

pic6Macro-economic view
Focusing on the Eurozone Anjaparidze said it has been the worst performing advanced economy since global financial crisis. It did have a turning point last year when there was broad based growth, moderate, but still growth. And that growth continued through early this year and is expected to continue.

“And this is important because Europe is not just a large economy, but a large open economy that trades significantly with rest of world. So a recovery in Europe would bode well not just for Europe, but for the countries that also trade with Europe,” he said.

The US economy meanwhile, has slowed somewhat at the end of last year and preliminary data indicates it is slowing into 2016. As a headline figure it’s worrying, he notes, but looking deeper at what is driving the slowdown reveals that the cutting back of investment in the energy sector is driving much of this.

Looking at the core drivers behind the US economy there are some very favourable indicators – for example the unemployment rate has come down a point similar to that before the global financial crisis. And although growth has been muted, it can be explained by the fact inflation has been fairly low and a lot of the baby boomers have been coming out of the labour force with new entrants coming in at a lower wage – so the low wage growth is less of a concern given those factors, Anjaparidze said. “So overall, we’re quite comfortable with what we see in the drivers of the US economy.”

Of larger concern is China, “with the rebalancing and slowing in the Chinese economy and impact that it’s having across the world.” In principle the rebalance of the Chinese economy away from export driven growth, to consumer driven growth at more sustainable levels, is actually a positive development, but it’s the pace at which this is happening that has created shocks in the world economy, he says.

This is particularly the case in commodity exports, which were hit the hardest, he notes. They have been driven down not so much by the demand side, or the slowing in China and other economies, but more so by supply side issues.

Because a lot of oil production has come online, prices have come down and under conventional thinking that should be a major stimulus to the global economy, but that has failed materialise, but could be on the horizon, he adds.

Risk factors
An uptick in financial market volatility around the world, in terms of both equities and currency has also meant that investors are less likely to put up capital in emerging markets and channel it to safer markets and investments. That creates a particular concern for developing markets, Anjaparidze said, because they are trying to realise their growth potential but it may become more difficult for them to access this capital, or it may become more expensive to do so and that creates headwinds.

These headwinds come in the form of deflationary pressures, particularly in advanced economies with the Eurozone being a good example. “The danger is when deflationary expectations set in, consumers and businesses may choose to postpone their consumption and investments and that can create drag on the economy.” While there are policy options to mitigate this, it is still a potential risk factor, he added.

Air cargo specifics
While world trade has grown again in 2015, growth has been very weak with December 2015 figures only 0.6 per cent higher than 2014. So world trade has really struggled, particularly in the last few months, but in comparison the FTKs have continued their growth momentum since the second half of last year. “So that is a positive thing, but the one thing that has been bringing down the general growth in trade has been the fall in commodities and heavy industry trade.”

While FTK growth hasn’t been “fantastic”, Anjaparidze said part of the reason it has done a little better is because the pick up in advanced economies and the sectors that rely on air cargo have been not as adversely hit as the others.

The other positive element has been strong consumer confidence and while the full impact of that has not been seen yet, it is none-the-less a key factor for potential optimism in the future – especially in the medium term, he said, point to the EU, US and China.

“But we do have some concerns over the short term – the most recent Purchasing Managers’ Index has decreased and in fact last month’s shows a potential contraction of export orders – and this is important because export orders are closely correlated with growth in air cargo,” he highlighted. So the next few months we may see some headwinds for air cargo demand because of what we see on the export side.”

Also adding to the bearish sentiment is the environment in the semiconductor sector, where decreases in semiconductor shipments for last few months points to yet another headwind for the short term.

Fuel prices & capacity issues
The significant fall in fuel prices has also had a major impact on the industry, creating some short term benefits for the industry, but it’s been a double edged sword because it means older freighters are cheaper to operate. With historic highs in terms of the capacity in storage, low oil prices mean this capacity is starting to to come back online, and this threatens to push significant capacity into a market already awash in lift.

While noting this is a key concern, it’s not only about freighters Anjaparidze adds. “We  have to keep in mind the passenger side of business, where, since the global financial crisis what we’ve seen is actually quite good resilience on passenger side.” And with growth of passenger demand comes widebody passenger aircraft orders which then has an immediate impact on cargo capacity.

“If we compare levels at the peak before the global economic crisis with now, passenger traffic has grown by 45 per cent over this period. That’s been driven by improvements in living standards, cheaper travel costs and also favourable demographics,” he said.

This is sharply contrasted by what’s happening on the cargo side where FTKs over that same period have only grown by 13 per cent. The capacity gained via widebody passenger aircraft deliveries has in fact outpaced the capacity from widebody freighter deliveries, he noted. This is not a concern across all trade lanes, he added, but rather specific trade lanes where it has had a significant impact on market dynamics.

“So when bring together what’s been happening on the demand environment together with what’s happening on the capacity side we can understand what will happen with yields. But in slightly optimistic tone, Anjaparidze noted that yields have been stable over the last few months – “yes fallen compared to levels we’ve seen previously, but so far the impact on yields has not been in excess to what we would expect given what we’re seeing in the fuel price.”

But, with capacity coming into the market – both on the freighter side and passenger side –  “we expect if this continues there will be further downward pressure on yields going forward.”

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