'Air cargo capacity discipline lesson of 2009 downturn lost in 2010 upturn'

EVIDENCE is mounting that the capacity discipline lesson of the 2009 downturn is being lost in bullishness of the 2010 air cargo recovery, say Seabury Group analysts Ryan Keyrouse and Gert-Jan Jansen.


"Capacity should balance with demand growth. With the air freight market forecast to grow 25 per cent over the next five years, capacity growth should match this rate - if not grow less to fill current oversupply. In the first two months of 2011, demand grew 5.5 per cent - while 9.5 per cent capacity was added," said the Seabury analysts in an article published in Flightglobal.


"Recent yield improvements were due to capacity discipline. However, with capacity reintroduced net yields are now back on the decline, and no evidence suggests a reversal of this trend," the report said.


Slowing supply chains, increasing oil prices and ocean capacity oversupply are putting downward pressure on shipping rates and will make the ocean as an alternative to air freight an increasingly viable option, said the report.


"A buying frenzy seems to have taken hold: Hong Kong Airlines bought six Boeing 777Fs, and is rumoured to be negotiating for Boeing 747-8Fs; Lufthansa is about to buy five 777Fs; FedEx Express ordered another 15 777Fs; Turkish Airlines placed firm orders for three A330-200Fs; Qantas is rumoured to be adding 747-8Fs or 777Fs, AirBridge adds freighters, Thai will convert two 747-400s. And the list goes on," their report said.


This may appear reasonable, given the air cargo industry has in many ways seen a remarkable recovery. Demand was up 21 per cent in 2010, average load factors reached an all-time high of 57 per cent, yields improved 10-20 per cent and carriers who publish annual reports, such as Cargolux, showed a return to profitability after years of losses.


The report also pointed out that new passenger aircraft have been designed to increase range with cargo bellyholds, enabling carriers to serve more distant markets with increased cargo loads.


"While freighter capacity introductions are alarming, increasingly cargo-friendly passenger aircraft is a cause for concern. The average cargo capacity per seat increased 20 per cent in the past decade, implying if no more passenger seats were added freight capacity would grow 20 per cent through passenger fleet renewal.


"Without the burden of aircraft operating costs associated with freighters, belly cargo's high contribution margin presents a problem for yields. With an average contribution margin of 65 per cent for belly cargo, carriers can cut yields to gain market share and fill their increasingly large belly holds. Expensive freighter operations lack this flexibility, and could be heavily impacted on routes experiencing increased widebody passenger flights," the report warned.
(Source:http://www.schednet.com)