Air Cargo: Industry Overview and Recent Trends: MIT Icat

MIT
ICAT
Air Cargo:
Industry Overview and Recent Trends
Dr. Peter P. Belobaba

February 2003
MIT
ICAT
Lecture Outline
Air Cargo Industry

Types of air cargo and air cargo carriers
Largest air cargo carriers
Demand for Air Cargo Services

Drivers of air cargo growth
Constraints on growth
Recent Trends in Air Cargo

Traffic and tariffs
Industry structure
Impacts of recent recession and 9/11
MIT
ICAT
Air Cargo Industry
Air Cargo Categories

Express/time definite: small packages (less than 100 lb.)
Heavyweight freight shipments (greater than 100 lb.)
Mail transport
Participants:
All-Cargo Airlines
Integrated Express Carriers (express/small packages; door to door
service)
Non-integrated Freight Carriers (heavyweight freight shipments;
work with freight forwarders, etc.)
Passenger (Combination) Airlines

Can carry air freight, express packages and mail in passenger
aircraft belly or on combi aircraft
Also can have dedicated freight aircraft
MIT
ICAT
Top Air Cargo Airlines Worldwide in 2000

Total Freight and Mail (Intl + Domestic)
Carrier
Ton-miles (millions)
1. Federal Express
7,466
2. Lufthansa German Airlines
4,995
3. Singapore Airlines
4,188
4. Korean Air
3,873
5. Air France
3,553
6. Japan Air Lines
3,226
7. United Airlines
3,153
8. KLM Royal Dutch Airlines
2,969
Source: Aviation and Aerospace Almanac 2002
MIT
ICAT
Top U.S. Air Cargo Airlines in 2001

Total Freight and Mail (Intl + Domestic)
Carrier
Ton-miles (millions)
1. Federal Express
7,565
2. UPS Airlines
4,081
3. United Airlines
1,919
4. Northwest Airlines
1,918
5. American Airlines
1,813
6. Delta Airlines
1,269
7. Atlas Air
1,072
8. Polar Air Cargo

Source: ATA Annual Report 2002
892
MIT
ICAT
Selected Cargo Carriers 2001 (Source: ATA)
Carrier
Number
of
Aircraft
Air Cargo
Ton-miles
(millions)
Air Cargo
Revenue
($ million)
% of
Operating
Revenue
FedEx
320
7,609
$ 6,948
45.8 %
UPS Air
258
4,094
$ 2,624
96.6 %
United
543
2,390
704
4.3 %
Northwest
440
2,161
715
7.5 %
KLM
132
2,512
882
15.5 %
MIT
ICAT
Demand for Air Cargo Services
Like demand for passenger air travel, demand for air

cargo shipment is a derived demand.
Primary drivers of air cargo demand include:
Economic growth and trade (especially imports/exports)
Relative prices of air cargo versus alternatives ocean, truck, rail
Difficult to quantify demand/supply accurately:

No comprehensive sources of data on air cargo traffic and pricing
Lack of published schedule data (unlike passenger airlines)
Vertically integrated air cargo operators (like Fedex and UPS) only
publish limited schedules for selected flights
All-cargo carriers tend to operate flexibly based on daily/weekly
demands
Combination carriers provide joint supply of cargo and passenger
capacity
MIT
ICAT
Drivers of Air Cargo Growth in 1990s
Overall economic growth (especially world trade)

Historically, 2 to 2.5% increase in world trade with each 1% increase
in total GDP
Air freight trade has been growing even faster, due to regional
differences in economic growth
Since 1993, average 7-10% annual growth in world air freight traffic
Globalization
Increasingly integrated and interdependent national economies
Liberalized (free) trade and reduced protectionism
Lean Inventory Strategies

Reduced order-cycle times: just in time and make to order
Less stock on hand to avoid production shutdowns, retail stockouts
Air freight shortens delivery times to customer
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ICAT
Growth of Air Freight (Source: ATA 2002)
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ICAT
Relationship to GDP Growth (Source: ATA)
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ICAT
Constraints on Air Cargo Growth
Economic recession
Reduced production, demand for goods, international trade
Trade barriers
Tariffs or protectionism designed to limit free trade
Aircraft regulations
Air cargo operators have used older aircraft that are most affected
by new regulations on noise, emissions and safety
For example, noise hush-kits reduce cargo payloads
Modal competition
Air freight has tremendous speed advantage for long distances, but
is highest-cost option
Trucks very competitive for short haul (1000 miles, overnight)
Development of new fast ships for ocean cargo
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Modal Market Shares (Source: ATA)
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ICAT
Recent Trends in Air Cargo
Rapid growth in demand for air cargo

Intra-Asia is the largest true air freight market
Even during Asian economic crisis air freight traffic grew
Forecasts for continued traffic growth at 6% per year
Falling real yields (revenue per ton-mile)

Average 2.5% decline in yields (CPI adjusted)
Growth in international trade has increased trip length, associated
with lower tariffs per mile
Wide-body aircraft have unused belly capacity, viewed by
passenger airlines as virtually costless
Passenger airlines have become price leaders in air freight
Regulatory liberalization has spurred price competition

Lower tariffs further stimulate demand, but also cause airlines to focus
on lowering unit costs
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ICAT
Wide-body Aircraft Trends (Source: ATA)
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ICAT
Trends in Air Cargo (contd)
Integrator expansion
Integrated express carriers own air and ground assets to handle
entire shipment journey
Fedex and UPS, facing competition and decreasing yields in
express documents, expanded to international markets
With limited international small package growth, carry standard air
freight (airport to airport) as filler
Trying to develop products for higher-yield industrial traffic
Consolidation of freight forwarders

Non-integrated carriers receive majority of traffic from freight
forwarders FFs handle retail marketing and pick-up/delivery
Number of mid-sized freight forwarders has been shrinking, leaving
largest operators and niche competitors
MIT
ICAT
Total Air Cargo 2000-02 (Source: ATA)
Millions
Total Cargo Revenue Ton Miles
2,500
2000
2001
2002
2,300
2,100
1,900
1,700
1,500
January
February
March
April
May
June
July
August
September
October
November
December
MIT
ICAT
Freight and Express 2000-02 (Source: ATA)
Millions
Freight & Express Revenue Ton Miles
2,200
2000
2001
2002
2,100
2,000
1,900
1,800
1,700
1,600
1,500
January
February
March
April
May
June
July
August
September
October
November
December
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ICAT
Mail Air Cargo 2002-02 (Source: ATA)
Millions
Mail Revenue Ton Miles
300
2000
2001
2002
250
200
150
100
50
January
February
March
April
May
June
July
August
September
October
November
December
MIT
ICAT
Freight and Mail 2001-02 (Source: ATA)
MIT
ICAT
Outlook for Air Cargo Growth
Short-term outlook is mixed, uncertain:

Economic slowdown, end of high-tech boom responsible for cargo
decreases, more so than 9/11
Asia air cargo traffic indicates potential recovery largest Asian
airports reporting 20-25% gains in 2002 over much weaker 2001
Total tonnage returning to 2000 levels, but yields are much lower
US West Coast seaport strike gave air cargo demand a boost
But continued economic weakness and threat of war will delay air
cargo recovery
Longer term fundamentals support strong growth:

Chinas economy grew 7.8% in 1st half 2002, air cargo grew 14%
Normal growth rates of 6-7% worldwide possible by 2004
Boeing predicts 6.4% annual air cargo growth for next 20 years
(Source: Airline Business, November 2002)

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MIT

Dr. Peter P. Belobaba

Air Cargo Industry

Demand for Air Cargo Services

Recent Trends in Air Cargo

Air Cargo Industry

Air Cargo Categories

Passenger (Combination) Airlines

Top Air Cargo Airlines Worldwide in 2000

2. Lufthansa German Airlines

6. Japan Air Lines

8. KLM Royal Dutch Airlines

Source: Aviation and Aerospace Almanac 2002

Top U.S. Air Cargo Airlines in 2001

8. Polar Air Cargo

Selected Cargo Carriers 2001 (Source: ATA)

Demand for Air Cargo Services

Like demand for passenger air travel, demand for air

Difficult to quantify demand/supply accurately:

Drivers of Air Cargo Growth in 1990s

Overall economic growth (especially world trade)

Lean Inventory Strategies

Growth of Air Freight (Source: ATA 2002)

Relationship to GDP Growth (Source: ATA)

Constraints on Air Cargo Growth

Modal Market Shares (Source: ATA)

Recent Trends in Air Cargo

Rapid growth in demand for air cargo

Falling real yields (revenue per ton-mile)

Regulatory liberalization has spurred price competition

Wide-body Aircraft Trends (Source: ATA)

Trends in Air Cargo (contd)

Consolidation of freight forwarders

Total Air Cargo 2000-02 (Source: ATA)

Total Cargo Revenue Ton Miles

Freight and Express 2000-02 (Source: ATA)

Freight & Express Revenue Ton Miles

Mail Air Cargo 2002-02 (Source: ATA)

Mail Revenue Ton Miles

Freight and Mail 2001-02 (Source: ATA)

Outlook for Air Cargo Growth

Short-term outlook is mixed, uncertain:

Longer term fundamentals support strong growth:

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