Looking back at my last air freight demand forecast ,which I wrote on 8th Jan 2017 reminds me that I should be buying more lottery tickets (please read the 2017 post if you like to know why (chamindagunasekera.blogspot.be).
If I had enough cash to buy some capacity as a derivative and sell it during the peak, I could have been on my own island sipping a cocktail or playing golf every morning.2017 was a watershed year for air freight. The growth of air freight demand surpassed the global trade growth (approx. +4%) and capacity growth (approx. 1.3%).The FTK growth in 2017 ( 9%) was double the growth of 2016 which was 3.6% . The capacity only grew by 1.3% (all facts as per IATA).
Let’s do a postmortem. I will argue the point that airlines did not forecast well on the growth they saw in the last quarter of 2016 and thought 2017 wasn’t going to be a steady growth. Airlines did not add capacity to plan for a steady demand. Why? Because the demand that we saw was so dynamic? No, I don’t think so. We all saw the tsunami of ecommerce demand rising up from Asia to Europe and Europe to Asia, then Intra Asia and imports from Europe to Asia. In 2017 most airlines enjoyed healthy yields and good load factors. Intra-Asia was very full except a few routes, with ecommerce demand. The reasons I believe which made HKG record the highest growth in tonnage in the history and some airlines in HK recorded the highest revenues ,were because E-commerce pushed up the demand and even drove the rates higher. Ecommerce occupied the capacity to an extent where normal air cargo had no choice but to pay the same rates.
One good example of this artificial demand was, a popular e-commerce marketplace had over 600 tons back log in Hong Kong and had no capacity to Riyadh, Saudi Arabia. The market place was willing to pay any amount of money to anyone who could find them charters. Their main objective was to avoid the onslaught of social media giving them bad remarks of delayed deliveries, not the money they were burning to move the freight. This means we now live in a world that airfreight demand is no longer a barometer of job gains and consumer confidence in USA or Europe but a reflection of social media responses too. The worst case scenario for airlines, forwarders and the whole domain of supply chain is in front of us, that’s called “dynamic demand”. Perhaps it’s time for 100 years old Airline industry and old fashioned freight forwarders to think about Artificial intelligence and deploy forecasting methods that I spoke about in my 2017 article ie artificial neural network and machine learning (AI) to be strengthening the demand forecasting by taking in to consideration the data available from social media and internet to massage the demand forecasting.
2018 is going to be a different year. Let’s analyze the demand, Commercial trends and geopolitical issues with a special focus on Asia being the factory of the world. I will begin to establish my point being, 2018 is going to be a strong year but not an uncontrollable peak like in 2017.
If we look at the world trade by the mode of air transport by B2B or B2C, one point is very clear, Speed of supply chain is taking over the decisions. The World has envied the logistics concept of Indicted or mostly known by the brand name ZARA. If we analyze the supply chain concept, the foundation concept is “speed to market”. Zara’s yearly inventory turnover reached 12 times in 2017 compared to other struggling fashion brands who had 3-4. 50% of their production is closer to the end consumer market and order replenishment is 2-5 days long from POS to Production to shop floor. The mark downs are only 15-20% compared to other traditional brands who have 30-40% mark downs. Its Fast fashion! However we also say few brands came very close to copying ZARA’s model and they got the fashion seasons right but they failed as their logistics process never changed.
As we see it, gone are the days that a delayed Ocean container converted to air freight for a fashion brand in USA, could define the state of air freight demand. I recently witnessed an expected rate of a global bid by a very famous fashion brand in USA. When I looked at the rates they have been pushing forwarders to agree, I wondered why freight forwarders would want to sign up for these bids with a year round rate. It looked suicidal to me. Perhaps, these forwarders who go after these traditional air freight bids, should be called “my grandfather’s forwarders” as one of my mentors say.
Most say what happens in China define the Asian export demand and rates. China’s demand for general cargo air freight is not going to drive the rates up so high in 2018. China has introduced a unified customs system where shippers or forwarders could export goods from any airport or port. This will ease the pressure on capacity ex PVG. No airline needs to maintain the slots in PVG as airports like CGO could uplift cargo coming from any corner of China. Charter operators will move to interior, low cost airports than PVG. PVG already has a landing and parking approval bottleneck.
On the other hand HKG will be completely the opposite. HKG will be adding its 3rd runway only in 6 years from now. Until such time, not many additional freighters can be given landing permissions, leave alone the demand for passenger flights to HKG. This will drive airlines to maintain the number of frequencies no matter there is demand or not. If any airline loses one slot, it’s gone forever. Furthermore, e-commerce boom will add pressure on HKG capacity as the main e-commerce hub for whole of mainland China. The production in China is going strong however China government has started to tighten corporate credits. This might be an issue for the manufacturing sector. HKG’s restriction on availability of landing rights for additional capacity will drive airlines to merge and consolidate capacity. Just like the one we have seen between CX and LH going metal neutral.
The Indian sub-continent had a good 2017 as production was booming in India and Bangladesh. However Bangladesh is losing its status as a Low cost country and their duty concessions will not be there due to improve per capita income. The garment production in Bangladesh will still be a power house but a considerable amount of production will move to North Africa due to AGOA act 2, duty free status. Only efficiency and technology will help Bangladesh to offset the lost competitiveness by losing the duty concessions. This is evident from the capacity additions in the pipeline by African carriers in the continent. In 2017 as per IATA, 7.9% AFTK growth was registered by African flag carriers.
The main driver of this year’s airfreight demand yet again will be the e-commerce volumes. China’s singles day in 2016 reached USD 14.3 Billion while 2017 was USD17.8 Billion (staggering 24% growth). Whilst most of the movements happened inside China, availability of millions of products and suppliers influenced one of the highest demand for air cargo space for cross boarder e-commerce. 650 million orders where placed by 115 Million shoppers during the singles day (Source: Alibaba and Xinhua). We could expect the same growth trajectory in 2018 with eCommerce demand.
The international cross boarder e-commerce is becoming so simple and smooth and most countries are adopting the Low Value Bulk Clearance (LVBC) or otherwise known in US as ECCF facility. This lowers the cost of e-commerce parcel movements but builds up the pressure on air freight rates. The characteristics of air freight demand is changing permanently. Ecommerce is now moving in to Food & beverage, Pharmaceuticals, cosmetics and other commodities which needs a defined and sometimes temperature controlled air freight products. This will speed up the whole air freight process and these commodities have the affordability to pay more to airlines to move their goods due to profitability as well and product expiry conditions.
Fuel at 60-80 a barrel will drive away the B747F freighters as it will no longer be viable to operate due to fuel cost. B777Fs are getting back to the top as most viable freighters and B747-8 will follow, all airlines will be looking at the possibility of 20-30% savings on fuel with these two types of metal.
I am now walking into dangerous grounds by trying to predict and even go further to advice the industry, but I think it’s ok to be brave and share your thoughts rather than writing a synopsis of what has already happened. I will stand trial by this time next year on this article.
Airlines should adopt the skills of a master loader. Secure capacity and play strategic for 4-5 months and reap the benefits during the peak. It’s time for airline managers to think different. The sales people of airlines need to be “on the ball” as one of my senior airline friends told me last week when I saw him for a coffee in Hong Kong. I thought he was from the new age ! The days have long gone that airlines can think if they sign BSAs and trap forwarders for yearlong contracts, that airlines are safe. No! All contracts have termination clauses or airlines will be pushed to reduce the rates. But why can’t airlines adopt a more dynamic capacity and demand management? Why can’t airlines adopt intelligence from artificial neural networks and machine learning to predict the trends?
I firmly believe airlines are thinking about dynamic demand and pricing. A good example can be taken from East Africa where the freighters that used to carry the flowers on a charter basis have gone looking for greener pastures. That means, airlines are now thinking to adjust to the changing landscape than sticking to what they used to do for a decade and see the yields come down every day. All cargo operators will be happy to sit out and wait for the right opportunity to operate than getting held up for cheap long contracts.
When airlines started behaving this way with a dynamic demand and pricing , forwarders will follow, customers will follow and the whole domain of supply chain and logistics will adopt the new age. Which is dynamic demand forecasting and pricing.
Another opportunity that Airlines haven’t fully figured out (to make money) is the Tsunami type growth of e-commerce. Airlines carry millions of tons of e-commerce but haven’t had the pleasure of enjoying the profitability of this growth. Airlines have made considerable attempts to sneak in to the value chain of e-commerce but the reluctance to break barriers and think out of the box have made all airlines still hovering in the air, instead of getting a steady yield growth from the new wave of ecommerce growth.
I am not advocating to adopt rocket science to air freight industry but it’s what you see out there that can be explored. If you agree what happened in 2017 (due to retailers rushing last minute inventory replenishment and airlines carrying ecommerce spikes due to Double11 buying frenzy) , then you will understand that adopting to a shorter sight of demand will make you more relevant to the present day challenges and opportunities.
No one is considered an expert of all. Only through dialog and anyone being brave enough to reasons out, will make a subject more educational.
Thank you for your valuable time. Please share your thoughts with me on Twitter ChamindaG1 or LinkedIn.
by Chaminda Gunasakera FCILT
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