Air freight providers have felt the stinging effects of high fuel costs, freight shift towards ocean carriers and a sluggish global economy for some time now. If that was not enough, many shippers that have continued to use air freight have moved from the premium service offerings to the deferred, economical services. As a result of these effects, air freight providers have experienced several unprofitable quarters.
In fact, just this week, FedEx noted such trends in its recent earnings report with declines of over 60% in operating income in its Express division alone. As such, the company announced it would reduce capacity between Asia and the US. According to the CEO of FedEx, Fred Smith, the company got a little ahead of itself in increasing capacity in the US-Asia market and as customers moved away from overnight shipments to deferred deliveries, the company found itself carrying too many lower priced packages on expensive aircraft. As a result, FedEx is in the midst of correcting its global and domestic network.
For lower-priced packages, FedEx is utilising its freight forwarding arm, FedEx Trade Networks, to move such products to the bellies of passenger airplanes while a focus on its International Priority service is emphasised to fill FedEx Express airplanes.
Europe’s largest all-cargo provider, Lufthansa Cargo, knows all too well what FedEx is going through. It too has undergone a reduction in capacity as it corrected its network. For 2012, the company cut capacity by 8.2% and according to the head of the company, Karl Ulrich Garnadt, Lufthansa Cargo lost some market share as it began to focus on more profitable freight such as perishable goods and the healthcare industry. However, Garnadt announced the company plans to actually increase freight capacity by up to 2% as it expects demand to rebound in the second half of the year. According to a Bloomberg article, Lufthansa Cargo “is pinning its hopes on growth in Germany, Asia-Pacific and the US”.
Lufthansa Cargo’s optimism may indeed have some merit. IATA’s current outlook is more upbeat than it has been in some time. Although costs are expected to remain high, modest growth in air freight is expected this year with Asia-Pacific and the US as the two regions that are expected to benefit the most. For much of the air freight industry, however, capacity remains an issue. Air freight providers will continue to “right-size” their networks by removing capacity from unprofitable trade lanes and focus on the shipment of high-value and time-definite goods.