Coming off its worst year since 2009, the global air cargo business enters the 2020s cautiously optimistic. This year is expected to produce flat to modest growth in year-over-year air cargo traffic demand. But uncertainty continues to cloud the formerly predictable air cargo sector, with the transition to an e-commerce-dominated world ongoing and concerns over trade wars, political tensions and Brexit persisting.
Global air cargo traffic declined 3.3% year-over-year in 2019, according to IATA, making it the first negative year for the industry since 2012 and the worst performance since 2009, when the global financial crisis was weighing the sector down.
IATA predicts a rebound to 2% growth in 2020, though some industry observers see this as a rosy-scenario forecast given the ambiguity in global trade, particularly regarding the US-China standoff and the new US-Iran tensions. But IATA, which issued its forecast in December before the US killed an Iranian general in Iraq, notes that even this modest traffic growth will keep cargo below its 2018 performance, and yields are expected to drop 3% year-over-year while total revenue generated by air cargo falls 1.1% to $101.2 billion, which would mark 2020 as the third year in a row of declining air cargo revenue.
“I think it’s tricky to forecast anything right now,” Jesse Cohen, a former United Airlines cargo executive who now serves as a market expert at consultancy FreightWaves, told ATW. “Those tariffs [imposed by the US and China] have a pretty big bite.”
“We’ve had a glut of cargo capacity out there,” Airlines for America (A4A) chief economist John Heimlich said, explaining that even a return to positive traffic growth in 2020 likely will not lead to positive yield growth.
“Yields will continue to slide with a 3% decline forecast for 2020, an improvement from a 5% decline in 2019,” IATA stated in its 2020 cargo forecast.
In its fourth-quarter 2019 Cargo Chartbook, IATA reported that the air cargo outlook “remains generally soft and with high uncertainty,” adding, “Cargo yields continue trending downward, and were more than 10% lower than their year-ago level in October. Our latest business confidence survey shows that airlines expect [cargo] yields to remain weak [through October 2020].”
The tepid air cargo environment is most felt in Asia, where airlines carry about 36% of the cargo transported by air globally.
“As usual with cargo, there is not much forward outlook,” Association of Asia Pacific Airlines (AAPA) DG Andrew Herdman told ATW. “Cargo load factors have fallen significantly. The outlook for [2020 is uncertain]. People are cautious [in Asia] even on the passenger side. Trade has slowed down to where it is stagnant.”
Initially, he explained, “the trade wars [created] an uncertainty for overseas investment, but as  went on, the uncertainty affected consumer confidence. The outlook [for cargo in 2020] very much depends on the trade frictions. Until we see progress in the China-US situation, we are cautious.”
In Asia, as elsewhere, air cargo capacity has generally not kept pace with market conditions, lowering yields.
“Capacity growth was higher than demand in all [global] regions, driving load factors down,” IATA reported in the fourth quarter. “In parallel, large freighter utilization has been maintained at relatively high levels. This has also contributed to the downward pressure on freight load factors, which have fallen significantly since mid-2017. Against a soft demand backdrop, seasonally adjusted [SA] cargo yields remained on the downward trend, which began in Q3 2018. Despite a modest month-on-month improvement in October, non-SA industrywide yields were down more than 10% year-on-year.”
The big macroeconomic story in the cargo sector continues to be the ongoing rise of e-commerce, which has changed air cargo from an industry once defined by business-to-business (B2B) shipping to one in which business-to-consumer (B2C) shipments are an increasingly important factor. Overall, consumer confidence is stronger than business confidence, meaning cargo operators can often expect greater rewards from consumer deliveries versus traditional B2B shipping.
“As you are aware, trade uncertainty continues to create macro challenges for businesses,” UPS CEO David Abney told analysts recently. “We are working closely with our customers to help them adjust, while also making the most efficient use of our assets. Here in the US, the consumer continues to drive the economy with strong retail, health care and e-commerce sales, bolstered by solid consumer economic conditions. … E-commerce and the rise of online marketplaces and platforms offers boundless opportunities for customers and for UPS. B2C and B2B sellers of all sizes benefit from the convenience of platforms to reach customers and manage their business.”
FedEx reports the same trends. “We continue to be in a period of challenges and changes,” FedEx chairman and CEO Fred Smith told analysts and reporters in December, citing “significant effects on the industrial economy due to continuing trade disputes, including reductions in international air freight and tepid, at best, B2B domestic parcel and freight shipping.”
To counter, “FedEx is aggressively expanding North American package services for the rapidly growing e-commerce market to include year-round, seven-day delivery,” Smith said. FedEx is also deploying “numerous other new technologies and operating processes … to ensure we can profitably deliver increasing numbers of lighter-weight residential packages. These strategies are being well-received in the marketplace with record peak package volumes … and high overall customer satisfaction.”
The express operators also view health care as a potently significant growth area, and in some cases are remaking their operations to cater to emerging trends in health care shipping. UPS, for example, has launched a new division, UPS Flight Forward, which last year became the first company to receive FAA approval to operate a commercial drone network.
“We are working to quickly scale, and just announced a new health care campus delivery program at the University of Utah in partnership with Matternet,” Abney said. “We will transport samples, specimens and other cargo via drone instead of using couriers.”
Flight Forward is also “partnering with CVS Health to establish other drone delivery use cases involving deliveries to residential locations,” Abney noted, explaining that consumers are increasingly receiving medication via express delivery.
“Together, [UPS and CVS] will define and implement shipping solutions for urgent deliveries, including pharmaceutical or other CVS Health merchandise. These solutions leverage the speed and point-to-point delivery capabilities of our Flight Forward drone delivery network. This is an important expansion, as CVS Health is the first retail partner for UPS Flight Forward’s programs.”
It is growth in niche areas such as health care and the overall expansion of e-commerce that gives air cargo executives long-term confidence in the face of near-term challenges.
“Air freight is a long-term growth industry,” Atlas Air Worldwide chairman Bill Flynn said recently. “Despite current macroeconomic issues, the global middle class continues to expand, and supply chains continue to grow and develop to meet demand. And as consumption increases and supply chains evolve, air freight is vital in transporting the goods and materials required by consumers safely, reliably and efficiently.”
Atlas, based in Purchase, New York, is one of three airline companies involved in the expanding Amazon Inc. freighter business. Amazon Air, the airline arm of the Seattle-based e-commerce retail giant, contracts freighter flying with Atlas and Wilmington, Ohio-based Air Transport International (ATI). Atlas operates 22 freighters on behalf of Amazon, a mix of converted Boeing 767Fs and 737Fs. ATI operates 28 converted 767Fs for Amazon.
In December, Amazon inked an agreement with Minneapolis-based Sun Country Airlines that will see the ultra-LCC move into the freighter business in 2020. Starting in the 2020 second quarter, Sun Country will induct 10 Boeing 737-800 converted freighters into its fleet. All 10 aircraft will be subleased to Sun Country by Amazon.
“Our partnership with Amazon presents a unique opportunity to significantly grow our airline,” Sun Country CEO Jude Bricker said, noting that the ULCC passenger business will be just part of the company’s future operation—the freighters will represent nearly a quarter of Sun Country’s fleet, all 737-800s (the carrier operates 29 737-800 passenger aircraft).
“Sun Country is on an incredible growth path, and our secret sauce lies in our ability to run an ever-changing schedule across different areas of our business, including scheduled service, charter and cargo,” Bricker said. The carrier plans to hire 70 pilots this year to support the Amazon business.
Amazon’s freighter fleet, which supplements the company’s shipping on other carriers, such as UPS, and the 3 million sq. ft. cargo hub it is building at Cincinnati/Northern Kentucky International Airport, provide a stark example of the way the air cargo business is changing, particularly in North America. According to Amazon, it is endeavoring to “ensure fast, free delivery” to consumers, and the Amazon Air cargo airline is a way to provide greater control of its delivery network and allow the company’s business to grow even if it is unable to book capacity on other carriers.
Whether Amazon Air represents a threat to UPS and FedEx is more of an open question. The express cargo operators have taken different views of Amazon Air. UPS continues to work with Amazon, carrying packages on behalf of the e-commerce retailer, while FedEx cut ties with Amazon in 2019.
Analysts viewed FedEx’s move as the company parting ways with what it sees as a growing rival that threatens its own e-commerce business. In a statement explaining its decision to no longer carry Amazon shipments, FedEx said it was focusing on the “broader e-commerce market.”
“There is significant demand and opportunity for growth in e-commerce, which is expected to grow from 50 million to 100 million packages a day in the US by 2026. FedEx has already built out the network and capacity to serve thousands of retailers in the e-commerce space. We are excited about the future of e-commerce and our role as a leader in it,” the company said.
Some analysts are not convinced. “UPS looks a lot better than FedEx” in terms of the domestic US e-commerce delivery market, Cohen noted, saying that—at least in the near term—it looks smarter to partner with Amazon and scoop up as much of the e-commerce retailer’s business as possible.
FedEx likely believes it is taking the longer view in disentangling itself from Amazon.
Regardless of whether they are partnering with Amazon or competing with it (in UPS’ case, it is some of both), the traditional express cargo operators are being heavily influenced by the Amazon business.
“Amazon is helping fund the expansion of a lot of secondary airports in the US,” which are growing to accommodate greater cargo demand fueled by e-commerce, Cohen explained.