Last summer I attended a number of interesting air cargo conferences, one in Shanghai and another one in Dubai. These conference are always a great place to catch up with people from the industry, hear the latest air cargo gossip, and feel the heartbeat of what is going on at the air cargo world. Typical discussion topics at these industry gatherings are the declining yields, tougher government regulation on security, modal shift to sea transport, and the lack of streamlined processes and IT systems. These concern are legitimate, but I hear these issues since I started attending these conferences more than a decade ago. What surprises me is that many cargo executives do not observe the elephants in the room.
During the round table discussions, it is obvious that there is a lack of an air cargo industry leader, or at least an airline who takes up leadership and carries the industry flag. Most similar industries with this set up have at least one industry leader who stands up, dominates the discussions, and sets the standard. While the top 50 airlines carry three quarters of the air cargo, the top 10 airlines are still relatively small, and, in addition, the interests of these airlines are not aligned. The two huge integrators FedEx and UPS work fairly independent in expanding their empire, pushed by the worldwide growth in E-commerce. Emirates works hard on its impressive expansion, Lufthansa and Air France/KLM are fighting to get back in the black respectively, and Korean Air, Singapore Airlines and Cathay Pacific have their issues and like to do it their own way… What about the US companies who traditionally like to take up the world wide industry lead? The big three US airlines already lost the cargo game to the two US integrators and play only a minor role domestically and internationally.
Another often neglected fact is that the air cargo industry is a derived demand from the worldwide trade in merchandise goods. This means that we cannot really influence aggregate demand for air cargo by lowering the price. A typical economics handbook statement is that a lower price creates additional demand. Not within our industry unfortunately… This means that an industry player can only grow if he takes business away from its competitors in this zero-sum-game air cargo market. In addition, wide-body passenger aircraft are becoming increasingly cargo friendly, generating a close to zero marginal cost environment to transport air freight on board a passenger aircraft. Hence, the reduction in yields given the expansion of a number new kids on the block in the Middle East and Asia. A small addition to the capacity in our industry leads to a disproportionate lower price.
Many words and articles have been spent on the impressive expansion plans of the ambitious players in the Middle East and Turkey. The big three Middle Eastern airlines alone will add about 10 million tons of wide body cargo capacity over het next decade. About 60 million tons of air cargo is yearly transported internationally. These 10 tons will be added onto the only partly utilised worldwide network capacity of a 120 million tons of cargo. Not counting the additional planned wide body capacity growth by Turkish Airlines and some Chinese airlines, this additional capacity in the air cargo zero-sum-game environment will lead to even stronger yield reductions, as capacity growth outstrips the demand growth.
Thanks god, the air cargo industry is still growing thanks to the increased worldwide trade and cross border E-commerce flows, mainly to and within Asia. However, a number of elephants are still in the room, and they have no intention to leave this room. No industry leader? Our cargo product is a derived demand? More additional capacity? Production of capacity a close to zero marginal cost environment? Working in a zero-sum-game industry? Surprised the yields are declining? You ain’t seen nothing yet… Fasten your seat belts!
By Dr. W. Dewulf, Professor at C-MAT, University of Antwerp