Oil price collapse alters the landscape of air freight

Diesel Prices

Very few people will be unaware that the price of oil has collapsed dramatically since the middle of 2014.

Today, using either the benchmarks of Brent or West Texas Intermediate crude oil, the price of a barrel has plunged by almost two thirds, according to US Energy Information Administration data. Specifically, the level of Brent has dropped from around $115 in June 2014 to just under $40 in December 2015, and is now threatening to fall past the recession low of around $34.

Such a dramatic shift in price has had a substantial impact on the transport and logistics sector, though it is not always possible to put together a comprehensive picture of the knock-on effects due to a lack of complementary data. At least for the air freight sector, some of IATA’s recently released documentation offers a degree of clarity.

According to the organisation’s latest set of forecasts released this month, the fuel spend for the global airline industry is expected to amount to $180bn in 2015 and $135bn in 2016, representing year-on-year reductions of 20.5% and 24.7% respectively. Such declines are anticipated even when fuel use is predicted to rise by 4.2% and 4.6% in the same years. The 2016 fuel spend prediction is predicated on the average price of jet fuel being $63.8 per barrel and a Brent crude barrel coming in at an average of $51 over the course of the year. IATA notes that such a forecast is subject to considerable uncertainty, with some forecasters expecting $20 per barrel while others predict a rise to $60 per barrel.

The cost structure of the aviation sector will also see significant adjustment. Jet fuel is expected to account for 27.4% of global airline industry operating costs in 2015, down from 31.6% in 2014. Moreover, this proportion is anticipated to fall to 20.6% in 2016, marking an 11 percentage point reduction in just two years.

Although it is clear that the cost base will be affected, the impact on profitability is less obvious. With costs falling so drastically, at least some portion will be passed on to shippers – the overwhelming winner of the oil price plunge – in the form of lower freight rates. As measured in constant 2015 dollars, the average global freight rate or yield ($ per kg) is expected to decline by 19.8% in 2015 and 8.4% in 2016.

IATA states that, “On average, globally, the fall in yields for air cargo (cargo-only and belly) services in 2014 and 2015 have been lower than the fall in jet fuel prices.”

This should give some level of encouragement to air cargo providers around the state of their profitability. However, it is worth ending with a caution that the global yield figures disguise substantial regional variations. For example, in 2015, the average yields on the North/Mid-Pacific trade lane decreased far more than traffic originating from Asia compared to traffic originating in North America. Elsewhere, on the Europe-Asia trade lane, yields were slashed by nine percentage points more compared to the global yield performance. Coupled with the uncertainty surrounding oil price and demand forecasts,reassurance cannot be given to the air cargo sector regarding its profitability.