Airlines healthy profits are not built on air freight

The World’s economy may still be in the slow lane but the airline industry is profitable. In 2016 IATA expects it to make $39bn in profit, up from $35bn in 2015 and representing a return on capital of 9.8%. This is a big change from the situation a few years ago when the sector struggled to make any return on its assets at all.

Yet this is still bad news for the air cargo sector as all the running is being made by the passenger side of the business.

The numbers, released a few days ago by IATA, show that whilst passenger demand grew by 7.4% in 2015 and is expected to grow by 6.2% in 2016, demand for air cargo in 2016 is growing at an annualised rate of 2.1%, with freight rate so weak that revenue will fall from $52.8bn in 2015 to $49.6bn this year.

The cargo business’ experience is the reverse of the passenger business, with more aircraft and more belly-freight hitting the market than demand can support. Consequently, cargo yield is falling by 8%. In contrast the fall in oil prices has triggered a virtuous circle enabling airlines to cut the price of tickets for passengers without shrinking margins, thus stimulating demand and leading to an improvement in asset utilisation.

Part of the problem is that whereas passengers are enticed by lower fares, air freight demand is driven by a combination of underlying macro-economic forces and very low sea freight rates.

Yet perhaps the airlines are a bit too pessimistic about air freight. They do have a service offering which is potentially highly attractive in a global economy increasingly focussed on fast response to customer demand and is increasingly cheap. Although large parts of the world economy are stuck in what IATA describes as a “low economic growth path” the robustness of demand for passenger services indicates that underlying consumer demand remains strong. If and when this translates into higher output growth the airlines who have the right service offering in freight ought to have an attractive product in the market-place.

Source: Transport Intelligence, June 8, 2016