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Slight recovery amid mixed demand

Slight recovery amid mixed demand

As volumes continue to trend sideways, growth achieved in April has been better than previous months. This IATA report identifies the best performing regions and most popular routes

Year-on-year growth in industry-wide freight tonne kilometres (FTKs) recovered to 4.1 per cent in April, having fallen to a 23-month low of 1.8 per cent in March. We continue to expect FTKs to grow in the region of four per cent in 2018. However, with volumes now having trended sideways in seasonally adjusted (SA) terms for the past eight months, the risks appear to be more on the downside. Annual growth in freight capacity exceeded that of demand in April for just the second time in 21 months.

Annual FTK growth recovered somewhat in April

Having fallen to a 23-month low of 1.8 per cent in March, year-on-year growth in industry-wide FTKs recovered to 4.1 per cent in April. This outcome reflected a pick-up in freight volumes in seasonally adjusted month-on-month terms in April, and broadly reversed the corresponding decline seen in March.

Traffic trends sideways

Nonetheless, the mixed demand picture since the end of last year means that the increase in April was just the second rise on a month-on-month basis since December. Indeed, the bigger picture is that FTK volumes have now trended broadly sideways in SA terms since August last year. Unless we see a pick-up in the seasonally adjusted demand trend in the coming months, the implication is that the annual FTK growth rate will slow once again towards mid-2018.

Air freight demand drivers have softened

The current moderation in air freight demand momentum largely reflects the fact that the inventory re-stocking cycle, which helped to boost freight demand last year, looks to have now run its course. As we have noted before, having fallen between the start of 2016 and the end of 2017, the inventory-to-sales ratio in the US has risen so far in 2018. The moderation in air freight demand is also consistent with the latest signs from the new export orders component of the global manufacturing Purchasing Managers’ Index (PMI), which has proven to be a very good leading indicator for air freight in the past. While the series remains above the 50-mark that is notionally consistent with rising export orders, it fell in April to its lowest level since October 2016, and is currently pointing to annual FTK growth remaining in low single digit territory in the coming months.

Wider weakness in world trade expected

The latest developments in the global PMI series reflect a broad-based moderation in export order books for manufacturing firms across the major exporting countries in the world. Meanwhile, it is interesting to note that growth in global containerized trade has also slowed in tandem with air freight in recent months. Taken together, both of these factors suggest that wider momentum in world trade growth may be weakening alongside the recent pick-up in protectionist measures and rhetoric. As we noted in a recent research note, the latest developments in air freight suggest that it is prudent to be cautious about the wider outlook for world trade.

Solid FTK growth still expected in 2018 as a whole

There is still a long way to go this year, and we continue to expect industry-wide FTKs to grow in the region of 4 per cent in 2018 as a whole. Following the very strong growth performance seen in 2017, this would still be a robust outcome for the air freight segment. Nonetheless, this would need air freight volumes to resume their upward SA trend in the coming months, and the risks to the outlook appear to be tilted to the downside. 

Capacity is growing faster than demand

Available freight tonne kilometres (AFTKs) grew by 5.1 per cent year-on-year in April, down from 6.3 per cent in the previous month. The upward trend in SA FTKs has fallen below that of AFTKs over the past eight months or so. April was just the second time in 21 months in which the annual pace of capacity growth has exceeded that of demand. As a result, the industry wide freight load factor fell by 0.5 percentage points compared to April 2017. International FTK growth also recovered modestly Industry-wide international FTKs grew by 4.9 per cent year-on-year in April, up from 2.2 per cent in March.

Latin America topped the growth chart again

Annual growth in international FTKs flown by airlines based in Latin America fell to 10.8 per cent in April from 17.4 per cent in March, but the region still topped the annual growth chart for the second month in a row. Freight volumes have recovered over the past 18 months or so alongside an improvement in economic conditions in the continent’s largest economy, Brazil. In SA terms, volumes remain at levels last seen in the second half of 2014.

Middle East carriers came in a close second

Middle Eastern carriers posted the second fastest annual growth rate in April (7.3 per cent, up from 1.0 per cent in March). However, the acceleration in the annual growth rate mainly reflected developments a year ago rather than any substantial change in the near-term trend; in fact, international FTK volumes have trended upwards at just a modest annualized rate of just 1-2 per cent over the past six months. All told, this supports signs of a broader moderation in global trade conditions.

Asia Pacific and Europe present subdues picture

It is an even more subdued picture for the two largest freight-flying regions, Asia Pacific and Europe.

Admittedly, airlines based in these regions both reported accelerations in year-on-year growth in international FTKs in April relative to March (to 5.6 per cent from two per cent in the case of Asia Pacific, and to 2.4 per cent from 0.8 per cent for Europe). However, the bigger picture is that both regions have seen air freight volumes trend sideways in SA terms since mid-2017. As the largest freight-carrying region, Asia Pacific is most exposed to any risks of rising global protectionism or trade wars. Meanwhile, a stronger euro, combined with the softer new export order index for the region’s key exporting nation, Germany, pose downside risks for European carriers.

Downward trend in North American volumes

Airlines based in North America saw a deceleration in annual international FTK growth in April (to 4.0 per cent, from 5.3 per cent in March). A downward trend in traffic has emerged since the end of last year and is something we will continue to monitor closely. The weakening in the US dollar that we saw from the start of 2017 into the start of this year looks to have supported outbound air shipments; according to the US Census Bureau, export volumes from the US by air grew by 11.7 per cent year-on-year in Q1, compared to a corresponding 7.5 per cent increase in imports. (Note that the US dollar has been rising more recently.)

Africa growth jumps back into positive territory

Meanwhile, year-on-year growth in international FTKs flown by African airlines recovered into positive territory in April (+5.8 per cent, from -3.1 per cent in March). Recall that international FTK volumes flown by African airlines surged by 25 per cent last year. However, FTKs have trended down in SA terms since peaking in late-2017 and are currently at levels last seen in the middle of last year. IATA Economics economics@iata.org

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