US-China trade tariff drama undermining air cargo confidence

US-China trade tariff drama undermining air cargo confidence

Air freight is loaded into a Cargolux B747 freighter. Photo credit: Cargolux.

The high stakes trade tariff poker playing out between the United States and China is clouding the air freight outlook for 2018 despite a solid start to the year for volume and cargo yield.

By combining January and February figures to remove the distortions of a late Lunar New Year in February, demand for air freight in the first two months of the year increased by 7.7 percent compared with the same period in 2017, the strongest start to a year since 2015, according to International Air Transport Association (IATA) data. Air cargo analyst WorldACD said worldwide yields rose by 20 percent in US dollar terms in the January-February period.

But storm clouds were gathering and threatening to impact an industry that in 2017 enjoyed its best year since the global financial crisis. The US decision to impose tariffs on a wide range of Chinese-made products and China's retaliatory tariffs on US goods is making it difficult for the industry to count on continuing strong demand for air cargo.

“The positive outlook for the rest of 2018 faces some potentially strong headwinds, including escalation of protectionist measures into a full-blown trade war,” warned IATA director general and CEO Alexandre de Juniac. “Prosperity grows when borders are open to people and to trade, and we are all held back when they are not.”

Despite the risks to global trade posed by the protectionist measures, IATA’s business surveys still point to solid annual freight ton kilometer (FTK) growth of about 5.6 percent in the second quarter. Strong FTK growth has been forecast by IATA on the segment-based trade lanes to, from, and within Asia over the next five years. A stronger economic backdrop in Europe is also expected to drive faster growth on the key trade lanes to and from the region up to 2022 compared with the previous five years.

Andrew Herdman, director general of the Association of Asia Pacific Airlines, said high manufacturing activity in the region boosted air cargo volume in the first two months of the year, with Asian airlines registering an 8.2 percent increase in air cargo demand.

Trade war vibe hangs over sector

But the specter of a trade war is hanging over the industry, and Herdman also expressed concern about what this could mean to air freight in Asia, declaring that “the recent rise in protectionist rhetoric poses some risks to trade and business activity.”

Asia-Pacific airlines carry close to 37 percent of global air freight with much of that flying on the busy trans-Pacific routes to and from the United States, which means any risks from protectionist measures impacting the region would be disproportionately high.

Also high are freight rates. Shippers forced into using air freight — around half of all air cargo is the result of an emergency — know all about the rising cost of transport by air, and they can look to the supply-demand balance for the reason. Freight capacity, measured in available FTKs, grew by 5.6 percent year over year in February as demand growth outstripped capacity growth for the 19th month in a row.

WorldACD put the January-February demand at 6.95 percent and called it, “a good start of the year by any standard, except by the standard of the extraordinary year 2017.” But the analyst said it may be too early to draw conclusions on where 2018 is headed.

“We still reserve our final judgment, as past experience has taught us that the post-Lunar New Year effects may last as long as three weeks, in other words into March,” WorldACD noted.

IATA said the continued growth in air cargo demand after a strong 2017 was consistent with ongoing and robust global trade flows, but the association said there were signs that the best of the upturn for air freight has passed.

Demand drivers for air cargo were moving away from the highly supportive levels seen last year, and IATA said in recent months the Purchasing Managers’ Index for manufacturing and export orders has softened in a number of key exporting nations including Germany, China, and the United States. The seasonally adjusted demand for air cargo, which rose at a double-digit annualized rate for much of 2017, is now trending at 3 percent.

Taking a longer view, steadily increasing volume from the e-commerce and pharmaceuticals sectors is starting to look sustainable, and IATA said the outlook for air freight over the next five years would be supported by a brighter economic and trade backdrop than what was seen between 2012 and 2017. Having accelerated in 2017, global GDP growth is expected to remain relatively robust over the next five years. IATA has forecast industry-wide FTK to grow by 4.9 percent on average over each of the next five years.

Contact Greg Knowler at greg.knowler@ihsmarkit.com and follow him on Twitter: @greg_knowler.

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