Update to the Air Cargo Impact Matrix 03.07.10...we’ll hold to our modest to-moderate improvement

Commentary:

What’s moving the matrix?

Recent reports have suggested that the air cargo business will continue to spike as it did in January. The IATA report showing a year-over-year increase of 28% in January has led many analysts to suggest that the recovery is fully here and air cargo will continue to benefit as a result. But there are some underlying fundamentals that need to be explored to ensure that the market will fully support strong recovery.

1. Fuel prices: In January, fuel prices were still relatively low, with the price per barrel for oil resting in the low $70’s / high $60’s. Since that time, oil has steadily risen into the low $80’s and could continue to climb to $95 through the summer and fall (barring any significant supply disruptions). High jet fuel prices was one of the items that threw the airline industry into crisis at the beginning of the deep portion of the recession in the summer of 2008. The return of high jet fuel prices will force consumers to once again take fuel costs into account when purchasing transportation.

2. Year-over-year differences in business volumes are playing a significant role in the statistical increases that are being seen in the early stages of 2010. In other words, the comparisons between this year and last year are getting much easier. In the spring of 2009, the airline industry was considered to be in one of its worst crises in decades. Many of the companies weathered the storm, but many also closed during the period. Therefore, saying that an industry had a 28% increase over the previous year is impressive, but perhaps not as incredible as first thought.

3. Business inventories were nearly at “all time” lows coming out of the Christmas season of 2009. In January, when consumers began to redeem gift cards (which saw a significant increase in use in 2009), retailers and some manufacturers scrambled to bring in small quantities of items to get through the gift card redemption season. In addition, some higher end durable goods manufacturing activity increased in the early part of the year – creating high demand for parts and supplies just before the start of the Chinese New Year (a period when many manufacturers in China shut down operations for a week or more). During the month of January, rates for charters booked out of China spiked and capacity was difficult to find. That trend slowed in February and is now returning to “normal” given the current economic state.

4. Demand for products and services in the United States are moderating now after a slight rebuilding of inventory in January and early February. That will slow retailers and manufacturers in rebuilding more inventory; fears of new overstock situations developing if demand remains slow to build are still fresh in buyer’s minds. That creates a situation in which supply chain managers will have more time to rebuild inventories in the near future – and will opt to take advantage of slower modes of transportation. We are seeing some of this trend begin to capture momentum in the LCL (less-than-container-load) shipments moving to the US via maritime services. Slight upticks in intermodal would also be indicative of this trend. And lastly, hiring at the key west coast ports that transfer much of the import activity from Asia have begun to pick up.

There is likely to be a slowdown in air activity in March as supply chains extend and manager’s look to reduce total landed cost. Extending supply chains increases the time in transit allowance – letting transportation managers choose slower modes to save on transportation costs. That will especially play a role if there is another spike in fuel prices.

There are also hints that corporations may have already spent much of their capital investments on technology – and corporate investment in durable goods has already begun to slow slightly. With consumer spending still low, any drop in corporate spending will adversely affect business volumes and reduce the need for higher-end transportation.

Some of the trends that would help keep air cargo moving would include: an increase in purchases of high-tech goods by either corporations or consumers. A new technology with broad appeal and distribution could have this affect. Second, continued worries about economic recovery might force companies to keep order quantities low for inventory rebuilding. This smaller size inventory moving at high speeds could provide new demand for air cargo. Third, competitiveness in the air cargo industry could keep prices down. The inverse is beginning to happen in ocean cargo. Collectively, the industry is trying to push prices higher – which could bring the cost differential closer together between air and ocean. If that becomes the case, there are a number of advantages to moving via air cargo – as long as price is a lesser issue. Lastly, there are situations developing off the coast of Singapore and increased pirate activity happening off of the coast of Somalia. If this activity were to pick up significantly enough that maritime shipments were widely disrupted, supply chain managers might opt for a mode with a lesser chance of being delayed or lost altogether.

In summary, we have to be cautious when looking at some of the air cargo statistics and the outlook for the industry. Indeed, the economic environment is looking up. There are spots of recovery all over the marketplace. But, there are also a number of items that are looming larger that may work to temper growth – and at a minimum keep its trajectory on a slighter slope.

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