Middle East Freight Forecast 2012

What can the Mid East's air cargo operators expect the year to bring?
ANALYSIS, Aviation

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With the increasingly precarious outlook of the Eurozone Sovereign debt crisis, aviation association IATA issued a depressing revision of its forecast for 2012 in December last year. As governments worked unremittingly towards averting another credit crunch, IATA warned that should this turn into a full-on banking crisis, industry wide losses could reach a staggering US$8.3 billion. Fortunately ,some months into 2012, and with a clearer picture of the industry’s progress so far, the association issued a much more positive outlook for the year ahead.

Whilst the European Central Bank and a second Greek bail-out have not fully resolved the Eurozone problem, IATA believes that enough has been done to push this risk beyond 2012. “Several months after December, when IATA modelled the effects of a possible banking crisis on the aviation industry, it looks like this possibility has receded,” explains Des Vertannes, IATA global head of cargo. The threat of a collapse of the euro has not been completely averted, but the situation seems to have stabilised for now.

IATA’s revised 2012 forecast only slightly downgrades expected net profits for the year, bringing welcome news for a global air cargo industry which had already witnessed the shrinkage of freight volumes last year. “Our March forecast indicates that airlines will make a profit of US$3 billion this year, slightly down from our forecast last December of a $3.5 billion profit,” says Vertannes. “The change is largely due to the increase in the price of oil, which threatens to turn the industry profit into a $5.3 billion loss if it spikes above $150 a barrel later in the year.” Whilst yields were forecast to be flat in 2012 for both passenger and cargo, IATA believes that the higher fuel costs, coupled with the more successful capacity management in passenger markets and the stabilisation of the freight markets, portends a 2% yield improvement in 2012. “For air freight, an encouraging start to 2011 petered out and volume growth turned negative towards the end of the year,” recalls Vertannes. “But cargo revenues are estimated to rise to US$72 billion in 2012 (up from US$69 billion in 2011).”

Other factors have also come into play to paint a more positive scenario for the air cargo industry this year, such as rising consumer confidence in the US and slower growth in capacity than expected. Furthermore, the year’s outlook promises to be even more encouraging for the Middle East’s air cargo industry with IATA’s forecasting a 5.8% rise for the market in 2012.

“But that forecast was made before the recent rises in oil prices, which along with continued weakness in European markets, could trend lower growth,” warns Vertannes. “The indications so far, however, are that the Middle East market is performing very well in comparison to other freight markets. Our forecast for combined passenger and freight growth in the Middle East in 2012 is 8.8% - making it the fastest growing aviation region of all.”

So why is the Middle East’s air cargo industry in such a strong position for the year head? “The Eurozone debt crisis and associated austerity measures have been depressing demand, especially on the periphery of the continent, and this is being reflected in lower demand for high-value consumer electronics which are typically shipped by air,” says Vertannes.

“However, as growth in Asia Pacific is still strong, and European exports are holding up, Middle East freight carriers are well-placed to benefit from their geographical position to win their share of this business.”

Peter Scholten, vice-president commercial at Saudi Airlines Cargo, agrees that the geographic location of the Middle East between the fast-growing trade lanes of Asia and Africa shields the region’s operators from some of the potential impact of the Eurozone crisis this year. “The crisis has mainly impacted on the imports in Europe,” he maintains. “We noticed a drop in the rates but we managed to keep reasonable load factors to Europe on our flights.” The cargo operator has found that exports from Europe, particularly to Saudi Arabia and UAE, have, conversely, remained strong. “We are growing our market shares to these destinations and are experiencing very good load factors from Europe, although rates do continue to be pressured,” he adds.
“Strong home purchasing power is also a powerful buffer – with the government of the Kingdom of Saudi Arabia already giving out one of its strongest-ever announcements to encourage foreign investment. “

The fourth quarter of 2011 has demonstrated a 35% growth for the cargo operator, compared to the previous year, and this trend has continued into the first quarter of 2012. “We have no reason to believe that it will change in the second quarter,” Scholten says optimistically. The cargo operator has bullishly budgeted growth at 15% this year, and is hoping even to hit the 20-25% mark if growth continues at the pace of the first quarter.

Like Saudi Airlines Cargo, Bahraini Gulf Air’s cargo contingent has enjoyed considerable growth in the first quarter of 2012 when compared to last year and is looking forward to an even better second quarter. “As a compact and more agile airline concentrating on using our hub to feed the Middle East, we rely on a different cargo mix than freighter operators,” says Rory Black, senior manager for cargo at Bahraini carrier Gulf Air. “We were not immune to the economic uncertainty at the end of last year, but being a Middle Eastern operator, we managed to sustain a good level of business whereever we flew, although with some pressure on yields system-wide. By reviewing its distribution strategy, Gulf Air Falcon Cargo has been able to lower its costs and enlarge its footprint in the market with positive results. Uncertainty in any region is not good for trade,” admits Black. “Fortunately we operate an international network, where one region’s results can balance some weaker performance elsewhere. As Gulf Air Falcon Cargo does not operate in the region most affected by the euro-crisis, we’re less affected than other carriers with direct operations in these markets.”

Despite their market optimism, neither Scholten nor Black is willing to dismiss the fact that 2012 will be a difficult year for the air cargo industry overall, particularly as volatile fuel prices threaten to be one the greatest challenges.

According to the IATA, careful yield and capacity management has been vital in keeping airline cash flows stable and, in producing a supply-demand environment able to help offset the damage to profitability from high fuel prices. Despite the increasing number of wide-bodied aircraft entering fleets, the association is forecasting that capacity (both passenger and cargo) is unlikely to outpace demand this year – with capacity expected to grow by 3.2% compared to a 3.6% expansion in demand.

André Sies, head of alliances and market intelligence for European all-cargo operator Cargolux Airlines has observed how the strong declines experienced by most air cargo carriers at the beginning of the year led to further capacity reductions. During the last quarter in 2011 and the first two months in 2012, the cargo operator witnessed a low demand from Asia to Europe and the US, partly due to the impact of the Chinese New Year at the end of January. March, however, has shown a pick-up in demand. “Due to the capacity reductions of freighter carriers in early 2012, we also saw an increased demand to Middle East destinations and we expect this to continue throughout 2012,” says Sies. “Further capacity reductions should lead to a healthier demand/supply ratio, particularly in the Asian markets and imports into Africa.”

Cargolux has just received a third Boeing 747-8F as part of its own fleet-renewal process in an effort to replace older freight equipment, rather than to increase capacity. “During the course of 2012 we will actually slightly reduce our total capacity compared to 2011, due to the overall challenging business expectations,” admits Sies. “Nevertheless, we are also receiving positive signals from the markets which indicate that there could be some growth in the months ahead.”

Andreas Hermann, vice president freighters, customer affairs for Airbus is similarly advocating a positive outlook for the long-term future. In particular, he points to improvements in macroeconomic conditions such as the continued growth of world trade in the emerging economies (a much better consumer index in the US) and the slow but definite re-growth of business confidence. “The air freight market is a cyclical one and the current situation should not overshadow the long-term growth perspectives,” Hermann emphasises. “Despite uncertainties, some leading indicators are on the way up, notably the US Consumer Confidence index, which has never been higher in the past three years.” Although consumer confidence remains weak in Europe, he remains staunchly confident that it will rebound. “We are already seeing this rebound in Germany. But air freight is a global business and 50% of all FTKs are actually on what we would consider today as secondary trade lanes such as Africa,” he states. “Airlines such as Etihad Airways, which has included the A330-200F mid-sized freighter in its fleet, are properly geared to match capacity demand on all markets, without relying solely on the trunk routes, where competition is fierce.”

Airbus’ own predictions suggest that freight traffic will almost triple in the next 20 years, with traffic between emerging markets taking an increasingly important role (around 20% of the market in 2030). The Middle East’s air freight market is also expected to almost triple over this period as the region’s carriers benefit from being at the crossroads of three continents – Asia, Europe and the increasingly attractive Africa. “We forecast the Middle East carriers will be very present in Africa as they can efficiently link this continent with Asia,” adds Hermann.

Rival aircraft manufacturer, Boeing’s 20-year forecast shows equally positive long-term potential for the region’s air cargo industry, driven by increased economic activity and world manufacturing. “Despite European softness, Middle Eastern carriers expanded air cargo at around an 8% growth rate in 2011,” says Bradley Hart, regional director of cargo market at Boeing. “While we would expect some near-term impact on traffic to and from Europe, the long-term prospects for the Europe – Middle East trade lane remain attractive.”

Boeing’s forecast (slightly higher than IATA’s), is predicting that air cargo traffic will expand globally at a rate of 3.1%, with growth mounting in the second half of the year. Hart admits that this growth will be more slower than the long-term trend as the world economy regains its footing after economic weakness in 2011.

“Twenty year forecasts focus upon long term market growth rates and are averaged in a way that can’t account for specific business cycles,” he explains. “What we are presently seeing in the market (and this is a factor in IATA’s forecast for 2012) is the middle of a down cycle in the air cargo industry, evidenced by below-trend growth rates of air cargo. But we will see stronger growth beginning in the second half of this year as world economic activity increases.”
 

 

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