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KEY POINTS
The turn of the year saw a strong upturn in cargo volumes and yields. Confidence over further gains is
high. The challenge will be to turn growth into profit, given low aircraft utilization, new deliveries, rising fuel
costs. Also vast and perhaps enduring differences in demand conditions from one trade lane to another.
HEADLINES BY SECTION
Economic Outlook (page 2) Traffic Growth (page 3)
In Asia interest rates have already started to rise Air freight volumes rose strongly at the end of
as economies recover. However, a bigger threat 2009 and into 2010 to a level 28% up from late
to the outlook is posed by future tax increases. 2008 lows. Asian markets are strongest, reflecting
Economic growth will continue to be very uneven, economic growth. Both freighters and belly holds
with Asia strongest. are now benefiting.
Economic Outlook
Key Issue:
In Asia interest rates have already started to rise as economies recover. However, a bigger threat to the
outlook is posed by future tax increases. Economic growth will continue to be very uneven, with Asia
strongest.
Interest rates remaining low in Western economies but already rising in Asia-Pacific
Central Bank Interest Rates Low interest rates, together with direct
Source: ECB, FT, Haver
injections of liquidity into the banks and
US Fed Funds Rate
7.5 European CB Repo Rate private sectors, have played a key role
7.0
6.5 Australia interest Rate in turning economies around from deep
6.0
5.5 recession to economic upturn. In the
5.0
4.5 US and Europe, where economic
4.0
3.5 recoveries remain fragile, central banks
3.0 are keeping interest rates low.
2.5
2.0
1.5 However, in the Asia-Pacific region
1.0
0.5 economies have experienced strong
0.0
rebounds and some central banks e.g.
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Australia have already started to ‘take
the punch bowl away from the party’.
Massive fiscal stimulus has helped economic recovery but there will be a price to pay
Federal Budget Surplus (or Deficit)
Governments in many economies
Source: US Congressional Budget Office implemented massive fiscal stimulus
500 packages, boosting government
spending and cutting taxes, in order to
0 stop economies slipping into recession.
They have succeeded, but at a cost of
US $ Billion
-500
huge borrowing requirements,
-1000 approaching $2 trillion a year in the
case of the US.
-1500
This is not sustainable and the price to
-2000
pay will be large tax increases or
spending cuts in the future, which will
1999
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2001
2002
2003
2004
2005
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2007
2008
2009
2010
2011
2012
2013
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2015
2016
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2018
2019
2
from the deep recessions of 2009.
0
However, that growth is forecast to be
-2 very uneven geographically. Burdened
-4 by debt and fiscal problems the large
-6 developed economies are expected to
-8
have only sluggish growth. By contrast
US Japan Europe ASPAC ex Middle East Latin World emerging markets should see a strong
Japan America
economic expansion.
Traffic Growth
Key Changes in the data this quarter:
Air freight volumes rose strongly at the end of 2009 and into 2010 to a level 28% up from late 2008 lows.
Asian markets are strongest, reflecting economic growth. Both freighters and belly holds are now benefiting.
-22
point at the end of 2008. However, the
-28
size of the market is still 3-4% lower
May-05
May-06
May-07
May-08
May-09
Sep-05
Jan-06
Sep-06
Jan-07
Sep-07
Jan-08
Sep-08
Jan-09
Sep-09
Jan-10
than in early 2008. Domestic air freight
has also picked up strongly.
Regional data on air freight flows reflects the uneven pattern of the economic upturn
Freight Traffic Growth by O-D Region - December 2009 The uneven pattern of the economic
52 49.8 Source: ACI upturn is reflected in regional flows of
46 International air freight, though growth is starting to
37.8 Domestic
40 spread to most regions.
34
27.9 Unsurprisingly Asia-Pacific is the
% change over year
28 24.8
23.6
22 20.3 19.2
strongest international market. Also,
18.3
16 13.1
15.3 notably, European airports have seen a
12.0
10 6.3
20.3% rise in freight volumes by
4 December, yet European airlines have
-2 carried only an additional 5.2%. Trade
-8 -6.4 flows have been largely Asia to Europe
Africa Asia Pacific Europe Latin Middle East North Total
America America and local airlines seem to have been
the major beneficiary.
FTK billion
Demand Environment
Key Changes in the data this quarter:
The usual indicators of freight demand are broadly positive. Business stopped cutting inventory in 2009Q4
and semi-conductor shipments are up strongly, but purchasing managers’ optimism has stabilised.
45
-6 The PMI led the air freight recovery
International FTKs -10
JP Morgan Output PMI (+ 2 months) -14 very closely up to November. But the
40 -18 spike in freight growth rates in the past
-22
35 -26
two months is much higher than
Nov-05
May-06
Nov-06
May-07
Nov-07
May-08
Nov-08
May-09
Nov-09
Jul-05
Sep-05
Jan-06
Mar-06
Jul-06
Sep-06
Jan-07
Mar-07
Jul-07
Sep-07
Jan-08
Mar-08
Jul-08
Sep-08
Jan-09
Mar-09
Jul-09
Sep-09
Jan-10
Manufacturers’ inventory overhang almost eliminated, boosting demand for air freight
US Manufacturing Inventories to Sales Ratio
The level of air freight is almost a
1.48
Source: Haver perfect mirror image of the inventory-
1.44 sales ratio in manufacturing. The rise
1.40 to a massive inventory overhang was
1.36 mirrored in the end-2008 collapse of
1.32 freight volumes. Rising sales and de-
1.28 stocking has almost eliminated that
1.24 overhang, boosting air freight.
1.20
Business stopped cutting their
1.16
inventories in 2009Q4, having slowed
1.12
destocking in Q2 & Q3. That caused
Jan-2000
Jul-2000
Jan-2001
Jul-2001
Jan-2002
Jul-2002
Jan-2003
Jul-2003
Jan-2004
Jul-2004
Jan-2005
Jul-2005
Jan-2006
Jul-2006
Jan-2007
Jul-2007
Jan-2008
Jul-2008
Jan-2009
Jul-2009
Semi-Conductor Shipments
% Growth, Semi-Conductor
26
14
20
10 – high value/low volume - has shown
14
Shipments
8
6 strong growth.
2
2 -2 Wireless handsets have replaced other
-4 -6
-10
consumer electronics as the recent
-10
-16 -14 driver in demand, with the industry,
-22 -18 according to the Semi Conductors
-28 -22
-34 -26
Industry Association, expecting growth
Jun-09
Dec-09
Sep-07
Dec-07
Jun-08
Mar-08
Sep-08
Dec-08
Mar-09
Sep-09
Jun-03
Sep-03
Dec-03
Jun-04
Mar-04
Sep-04
Dec-04
Jun-05
Dec-05
Jun-06
Mar-05
Sep-05
Mar-06
Sep-06
Dec-06
Jun-07
Mar-07
Demand Drivers
Key Changes in the data this quarter:
Indicators of final demand – on which air freight will depend once the inventory cycle is over – are mixed.
Consumer spending is strong in China, weak in the West. Capex plans have, at best, stopped shrinking.
-5
100 consumer spending. There have been
-10 signs of improved confidence world-
80
wide, but in the big developed
-15
US
60 economies confidence and consumer
-20 spending remain slow growing and
40 fragile – burdened by debt and
-25
unemployment.
20 Europe -30
(right scale) By contrast in emerging economies like
0 -35 China consumers slowed rather than
Jan-2004 Jan-2005 Jan-2006 Jan-2007 Jan-2008 Jan-2009 Jan-2010
reduced spending, and the outlook here
is for more growth at a rate of 9% or so.
Business investment plans have stopped shrinking but no CAPEX boom ahead
Capital spending intentions
Business investment is another key
70 15 driver of final demand, along with
50
consumer spending. Many of the
Japan business 10
Net balance intending to increase
investment
10
0 so it was not surprising to see business
-10
investment collapse early last year.
-5
-30 UK business By the end of last year tentative signs
(left scale)
-10 were emerging that business had
-50
stopped slashing capex plans. This
-70 -15 means capex will no longer be a drag
Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009 Q1-2010
on air freight but it will take some time
before it becomes a stimulus again.
World trade is the immediate driver of air freight and air remains favoured mode
World trade in goods and air FTKs
Air freight has risen three times as far
14.0
Source: Netherlands CPB and IATA
135 as world trade from its end-2008 low,
130
as shippers switched transport modes
International FTKs
index of world trade, 2000=100
13.0
(left scale) to air from ocean and surface transport
125
to reduce time and working capital as
12.0 120
the economic recovery gathered pace.
Billion FTKs
115
11.0 This rapid post-recession upturn phase
110
is usually associated with the business
10.0 105
inventory cycle and normally lasts 6-12
100
9.0 World goods trade volumes months. It is likely we are within 6
(right scale) 95
months of the end of this phase, after
8.0 90 which growth will be more in line with
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
world trade increases of 5-6% a year.
IATA Economics: www.iata.org/economics 5
Cargo eChartbook – Q1 2010
Cargo yields turn up in 2009H2 – in some markets – as load factor rise impacts market
Air Freight Yields US$ per Kilo Cargo yields rose sharply in 2009Q4,
Global Total Source: IATA CASS
following the beginnings of an upturn in
Europe (RHS) to North America
1.60 3.40 Q3. However, the rise is concentrated
SE Asia to Europe (RHS)
1.50 geographically and directionally.
2.90
1.40
2.40
Trade lanes from Asia have seen a
1.30
strong rebound in exports and a
1.20 1.90
relative shortage of capacity. Cargo
1.10
1.40 rates from Asia are up 50% from Q2
1.00
lows. By contrast rates into Asia are
0.90
0.90
up only 20% and on other trade lanes
0.80 0.40
e.g. transatlantic there has been only a
2005 Q1
2005 Q2
2005 Q3
2005 Q4
2006 Q1
2006 Q2
2006 Q3
2006 Q4
2007 Q1
2007 Q2
2007 Q3
2007 Q4
2008 Q1
2008 Q2
2008 Q3
2008 Q4
2009 Q1
2009 Q2
2009 Q3
2009 Q4
slight increase or further decline.
However, Asian trade is so important
for air freight that it is driving the total.
Cargo revenues in 2009 will reflect the disasterous first half of the year
Global Airline Industry Cargo Revenues
We estimate that cargo revenues were
Source: ICAO, IATA down by just over 25% in 2009 – the
60.7 20%
60
Cargo Revenues 58.6 worst decline faced by the industry in
% Growth 53.2 15%
46.6 47.9 the past 50 years. Volumes fell by an
44.9 10%
45 40.2 40.2 average of around 10% and yields
Revenues (US$ billion)
38.6 37.9 5%
0%
were down by 15%.
% Growth
30
-5% However, the worst of this decline was
15
-10% in the first half when revenues were
-15% down over 40% at one point. By the
0 -20% fourth quarter revenues were up an
-25% estimated 12% on the previous year.
-15 -30% That pace of improvement is
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009E
threatened by sluggish Western
economies and now rising capacity.
Air freight regains lost market share at the start of an upturn in economic activity
Value of Import and Export by Air as % of Total
Data on US exports and imports by
Source: US Census bureau mode of transport has shown air cargo
36%
recovering its market share by value in
32%
the past 12 months. Part of this earlier
loss and more recent gain is due to the
Export
28% price of oil, which increased the value
of ocean trade up to mid 2008 and
24% reduced it to end 2008.
Import Oil prices rose throughout 2009 –
20%
raising the value of ocean trade - but
16% air cargo nonetheless boosted its share
Nov-06
Nov-07
Nov-08
Nov-09
May-06
May-07
May-08
May-09
Jan-06
Mar-06
Jul-06
Sep-06
Jan-07
Mar-07
Jul-07
Sep-07
Jan-08
Mar-08
Jul-08
Sep-08
Jan-09
Mar-09
Jul-09
Sep-09
Costs
Key Changes in the data this quarter:
Fuel prices have been trending higher as the world economy gathers strength, with jet averaging $85 a
barrel and expected to trend to $90. Recession brought other costs down but there are signs that is ending.
Jet fuel price, pushed higher by oil prices, fluctuating around $85 a barrel
Jet Fuel and Crude Oil Price ($/barrel)
Average jet kerosene prices have
200 Source: Platts, RBS fluctuated around $85 a barrel this
180
year; a significant rise from the lows of
160
end-2008 but one-third lower than the
140 2008 average and not far from average
120 2006-2007 prices. Higher oil prices
Jet fuel price
100 have been partially offset by a lower
80 (13% vs normal 25%) crack spread.
60
Looking ahead futures markets are
40
Crude oil price (Brent) pricing in a slowly rising oil price to
20
around $80 a barrel later this year,
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US dollar weakness in 2009 provided a moderate offset to jet fuel price rises for some
Jet Fuel Price Currency Comparison
During the 2007-08 and 2009 rising oil
200 Source: Platts, RBS price periods the US dollar weakened
180
against many currencies. This helped
160
moderate the impact of higher $ oil
140
prices on non-US$ airlines. During
120
$ per barrel 2009 this led to a 38% rise in the Euro
100
price of oil versus a 42% rise in the
80
US$ price. But that’s not much.
60
€ per barrel Moreover, US$ weakness increases
40
the incentives of the OPEC cartel to
20
push US$ prices up to preserve the
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High unemployment has brought wage growth down but unions are resisting change
Nominal Wage Growth
Unemployment rates have risen
Source: Haver Analytics sharply following the ‘Great Recession’
7 21
leading to a slowdown in wage
% Growth in nominal wages (China)
Q3-2001
Q1-2002
Q3-2002
Q1-2003
Q3-2003
Q1-2004
Q3-2004
Q1-2005
Q3-2005
Q1-2006
Q3-2006
Q1-2007
Q3-2007
Q1-2008
Q3-2008
Q1-2009
Q3-2009
Capacity
Key Changes in the data this quarter:
Capacity has started to return but is still some 10% lower than in early 2008. The freighter fleet is 160 down.
Back to pre-911 load factors. But belly capacity is up and aircraft utilization is -7% - not good for profitability.
Load factors now back to pre-9/11 levels but in-service aircraft numbers rising again
Cargo fleet composition The industry has managed to pull
Source: Ascend
freight load factors, on international
Freighter fleet in service Widebody pax fleet in service Seasonally adjusted load factor
markets, steadily upwards since they
3200 60%
58%
collapsed at the end of 2008. At 54%
3100
56% of weight capacity in January this is
3000 54%
back to load factor levels last seen in
52%
2900
50%
2000.
2800
48%
During this period of rising load factors
2700 46%
44% there was a reduction in the freighter
2600
42% fleet by 200 aircraft at one point,
2500 40%
though 40 have returned. However,
May/09
Mar/09
Nov/09
Dec/00
Dec/01
Dec/02
Dec/03
Dec/04
Dec/05
Dec/06
Dec/07
Dec/08
Jan/09
Feb/09
Apr/09
Jun/09
Jul/09
Aug/09
Sep/09
Oct/09
Dec/09
Jan/10
Rising profile for delivery of new freight capacity in the next few years
Twin Aisle Aircraft Deliveries by Airline Region
Despite 2009 being the worst ever for
Source: Ascend the air cargo industry, and almost the
350
Other
worst for the passenger business, there
Middle East
300 were over 200 new wide-bodied aircraft
North America
Europe delivered – not all for replacement.
250
Asia Pacific
Number of Aircraft
200
Moreover, there are a further 240 on
the books to be delivered this year,
150
including over 50 freighters. There
100 were a lot of freighters taken out of
service last year. But with no further
50
retirements the deliveries of new
0 aircraft would add 4-5% to the wide-
2004 2005 2006 2007 2008 2009 2010 2011 2012
body/freighter fleet.
Twin and single aisle fleet expanding as deliveries continue to exceed parking
Aircraft Retirements and Deliveries
The storage of freighters appeared to
Source: Ascend
turn up in the records during December
Deliveries Retirements Storage
220 2008 and January 2009. Since then
the change in the number of aircraft in
160
storage has fluctuated from positive to
Aircraft per month
100
negative, while retirements have
averaged just over 20 aircraft a month.
40 With new deliveries averaging 100 a
month the fleet of passenger and
-20 freighter aircraft has been expanding
Monthly
Average by a net 80 aircraft or 0.4% a month.
-80
This has been squared with AFTK
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0
06
07
08
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09
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10
-0
-0
-0
-0
-0
l-0
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-0
-0
l -0
-0
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p-
n-
b-
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n-
20
20
20
ug
ug
pr
ay
ar
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O
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Competition
Key Changes in the data this quarter:
There are some signs of the world trade upturn in the bulk commodities and containerized shipping
industries, but these sectors are lagging air freight at present. But ocean rates are now rising in line with air.
Cost of shipping bulk commodities trending higher but volatility from new capacity
Baltic Dry Index
The Baltic Dry Index, measuring the
12000
Source: Bloomberg cost of shipping bulk commodities, has
been rising since dramatically
10000
collapsing at the end of 2008. This
rising trend through 2009 and into 2010
Index Jan 1985 = 1000
8000
reflects the economic recovery in Asia
6000 together with some degree of strategic
stockpiling by China.
4000
The volatility is caused by the
2000 shipbuilding cycle which is now
delivering a lot of capacity to a market
0
1998 1998 1999 2000 2000 2001 2002 2003 2003 2004 2005 2006 2006 2007 2008 2009 2010 at a time when it does not need it.
Ocean container freight rates show more volatility than air freight but both now rising
Ocean container and air freight rate growth
Ocean freight had been gaining market
20% Source: Drewry, IATA CASS share over air freight during the
10% expansion years of 2004-2008. Ocean
freight rates were also rising faster, so
0%
it would seem this market share gain
% change over year
Container demand rise lagging air freight and showing very large regional differences
Container Shipping Volume Growth by Region
The very large regional differences in
Source: Drewry recovery from the ‘Great Recession’ is
Sep-09
10 very apparent in the demand for
Oct-09
container shipping. By November
5 Nov-09
there was some modest single figure
% Growth, Year-on-Year
Profitability
Key Changes in the data this quarter:
Financial results for most of 2009 reflect the severest downturn the industry has ever experienced. Even so
losses seemed to be levelling out in Q3 and some profits were evident in Q4. Confidence has risen sharply.
Cargo losses may have bottomed out during the second half of 2009
Profitability of US Cargo Only Airlines
US cargo airlines in aggregate – the
Source: US BTS results dominated by the integrators –
12%
Operating Profit Margin saw profits in 2009Q3, suggesting that
10% Net Profit Margin the downward trend may be bottoming
8%
out. Available information suggested
% of Revenues
6%
European air cargo businesses
4% continued to generate losses in Q3.
2%
However, the sharp revival in air freight
0%
volumes and rates from Asia was
-2%
apparent in Asia-Pacific airlines cargo
-4%
revenues in Q4 with at least one
1999 Q1
2000 Q1
2001 Q1
2002 Q1
2003 Q1
2004 Q1
2005 Q1
2006 Q1
2007 Q1
2008 Q1
2009Q1
-10% to -8%
-12% to -14%
-12% to -10%
-8% to -6%
-6% to -4%
-4% to -2%
-2% to 0%
0% to 2%
2% to 4%
4% to 6%
6% to 8%
8% to 10%
10% to 12%
Business confidence over future cargo revenues improves further in January survey
Heads of cargo surveyed by IATA
IATA survey of heads of cargo
100
reported improved confidence in the
90 Volumes - next 12
months growth of both cargo volumes and
80
yields over the next 12 months.
Weighted Score
70
60 The indices opposite weight those
50 expecting an increase with those
40 Yields - next 12 months expecting no change and a fall. Behind
30
these numbers 72% expect an
20
10 expansion of both volumes and yields
0 over the coming year, with less than
Jun 2006
Jul 2007
Jul 2008
Jul 2009
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Jan 2008
Jan 2009
Jan 2010
Mar 2006
Sep 2006
Apr 2007
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Oct 2008
Apr 2009
Oct 2009
IATA Economics
March 2010