Despite global trade tensions heightened consumer demand, in the form of e-commerce, is lifting the profit margins of air freight carriers.
In a move that defies rising global trade tensions, e-commerce has become a driving force for air freight business thus significantly boosting the profit margins of many major airlines.
According to the International Air Transport Association (IATA), air freight demand is expected to rise by 4% in 2018.
The top beneficiaries include Germany’s Lufthansa, Hong Kong’s Cathay Pacific Airways, Korean Air Lines and Dubai’s Emirates.
The booming demand in e-commerce is a boon for parcel firms, including FedEx and UPS as well as the army of pilots who are known as “freight dogs.”
“The cargo environment is very strong,” said Carsten Spohr, CEO of Lufthansa.
Thanks to Germany’s export driven economy, planes are full on both ends of the trip – inbound and outbound.
“Inbound and outbound, I’m looking at probably the best environment I have seen in years,” said Spohr.
With rising global trade tensions, the industry is banking on consumers to buy goods online.
“Air freight may be impacted by the trade tensions, but it could be supported by GDP continuing to be relatively strong, and also by e-commerce,” said Mylene Scholnick, principal at consultancy ICF.
According to Rupert Hogg, CEO of Cathay Pacific, higher consumer spending is driving up demand for high-end goods such as electronics.
“Definitely the retail map is changing and e-commerce is just growing and growing and with it the movement of small parcels. I don’t see that changing at the moment. That is beginning to form a baseload,” said Hogg.
Trade wars are not currently a worry since aluminum and steel tend not to be shipped by air.
“The worry would be if this escalates and generally puts up trade barriers and makes it more difficult to facilitate. But at the moment, it’s not affecting air cargo,” said Brian Pearce, IATA’s chief economist.
Lufthansa’s Spohr agreed to that assessment.
“Looking at the current outlook in cargo, I am more concerned about a trade war as a European than I am concerned about a trade war as CEO of Lufthansa,” said Spohr.
2017 saw air cargo rise by 9.7% with companies banking on air freight to refill their inventories following a surprising growth of the global economy.
“Consumers need to get products and this is happening cross-border now. E-commerce is really supporting growth to a much greater extent than before,” said IATA chief economist Brian Pearce.
According to experts, Boeing 747s are being brought out of their retirement and saved from scrap and are being used to haul freight.
Boeing is also increasing the production of its mid-sized 767 aircraft to an average of 3 per month by 2020, up from 2.5, thanks to increased demand for a freighter version. Its freight variants has already won new orders from Lufthansa, Qatar Airways and Japan’s ANA Holdings.
“If the market grows between 4 and 5 percent in terms of cargo, that helps support the production of about two big widebody freighters a month. We are starting to see that demand come back,” said Randy Tinseth, Boeing Commercial Airplanes vice-president of marketing.
However, Andrew Herdman, director general of the Association of Asia Pacific Airlines cautions, airlines must not add too much capacity, lest they fall into a trap.
In 2017, capacity grew slower than demand, which helped support profits.
“Now capacity is growing at about the same or even edging slightly ahead, so load factors have stabilized. That is a warning sign to keep an eye on capacity,” said Herdman.