For airlines, cargo no substitute for people
Air cargo and airline passenger business are inextricably linked, but they don’t share the same path to recovery from the coronavirus pandemic.
Shipment volumes have nearly recovered to their 2019 levels and will grow by double digits this year, while outbreaks of new coronavirus strains and more government travel restrictions dampen expectations that passenger traffic can crawl back to half of 2019’s level, the International Air Transport Association said Wednesday.
Although the cargo sector and passenger airlines both experienced their worst years on record in 2020, the damage wasn’t evenly distributed. Air cargo volumes improved significantly from the spring bottom when supply and demand shocks caused by the coronavirus put a brake on trade. For the year, cargo ton-kilometers fell 10.6%, with volume in the critical cross-border long-haul sector down 11.8%, whereas passenger traffic fell by two-thirds compared to 2019, according to IATA.
By December, air cargo traffic nearly reached 2019 parity, contracting a mere 0.5%. That compares with a 70% downturn in passenger demand, with international air travel 85% below the prior year.
Progress in vaccinating people against COVID-19 holds promise for airline business to grow in the second half, but new COVID-19 variants and the reaction of governments to tighten border controls could swing modest growth projections to the downside, IATA officials said during a news conference.
Projections for reaching herd immunity and when vulnerable populations will be vaccinated, as well as signs of strong pent-up demand for travel, led IATA to recently forecast 50% year-over-year growth in passenger traffic for a full-year total at 50% of the 2019 level.
But the start of the year will be difficult for airlines. A modest recovery in passenger numbers stalled by the fourth quarter, and as control of the virus has become more difficult, bookings for future travel have deteriorated 10 points to about 70% of the pre-pandemic level, IATA chief economist Brian Pierce said.
IATA said its outlook worsens to only 13% growth and 38% of the 2019 volume if governments take a more cautious approach and don’t relax travel restrictions.
“Last year was a catastrophe. There is no other way to describe it,” IATA Director General Alexandre de Juniac said.
Airline revenues last year fell short of the 2019 total by $391 billion, the airline group reported last month.
“Optimism that the arrival and initial distribution of vaccines would lead to a prompt and orderly restoration in global air travel have been dashed in the face of new outbreaks and new mutations of the disease,” de Juniac said. “The world is more locked down today than at virtually any point in the past 12 months and passengers face a bewildering array of rapidly changing and globally uncoordinated travel restrictions.”
De Juniac called on governments to partner on benchmarks and conditions for reopening air travel so the industry can contribute to the global economic recovery. And he pleaded again for authorities to provide further financial aid to keep airlines afloat without saddling them with debt, adding that international development banks should step in to help in some cases.
U.S. airlines are already warning of layoffs after federal payroll support dries up March 31.
The fate of passenger networks, especially widebody international routes, directly affects the air cargo industry. More than 50% of global air cargo capacity is normally carried in the belly of passenger airplanes, which offer more regular and frequent connections for shippers than all-cargo aircraft. Freighter operators have added dozens of aircraft and extra flights, resulting in a 20.6% increase in available space and a 24.2% increase in December. But with about 30% of the global passenger fleet still in storage, there is still a 17.7% deficit in air cargo capacity — nearly double the contraction in demand but a big improvement from the nearly 40% drop in airlift last spring.
The supply shortage led to a 7.7% increase in load factors, which significantly boosted yields and revenues for carriers. Cargo revenues shot up 75% in December as the industry enjoyed a longer-than-normal peak season, according to CargoIS.
Cargo results likely would have been better in 2020 with more airlift, and capacity remains a handicap, officials said.
Strong cargo demand led passenger airlines to turn many aircraft into temporary freighters, carrying cargo in the lower deck and in some cases in the cargo cabin.
At several passenger airlines, cargo revenue last year occupied a bigger portion of total sales. United Airlines (NASDQ: UAL), for example, enjoyed a 40% jump in cargo revenues, with cargo representing 11% of total revenues compared to normal 2.5% share.
Although cargo has become a revenue lifeline for these carriers, the reality is that for most of them it is too small a part of the business — about 12% on average — to offset the huge drop in passenger revenues, Pierce said.
Volume in all major air cargo markets fell by double digits last year, except for North America, where carriers posted a 1.1% gain despite a 15.9% drop in capacity. International throughput, however, fell 5.2% — but still better than the rest of the world. December’s 3.1% traffic increase was the strongest monthly performance since late 2018. Strong traffic between Asia and North America, which was up 2.1% for the year, was driven by consumer online orders and contributed to the strong overall figures.
Air cargo’s decline was worse than for overall global trade, which economists say is typical during downturns.
Recent growth in export orders and industrial production, combined with companies trying to fill depleted inventories as economic conditions spur purchases, should result in double-digit growth in 2021, IATA estimated.
And the year is already off to a strong start for carriers, according to more recent statistics from CLIVE Data Services. Load factors in January, typically a slow shipping period, jumped 9 points from the prior year to 66%, with an exceptionally strong rise of 10 to 15 points in the final two weeks of the month.
On one trade lane analyzed by the company, load factors across the Atlantic were higher in January than in November and December, punching in at 88% and 76% for westbound and eastbound routes, respectively.
So many flights are full that some carriers are telling customers they cannot guarantee capacity commitments in January and February, said CLIVE Data Managing Director Niall van de Wouw.
“Capacity is tight and we sense no underlying currents which will swiftly
change this,” he said in a monthly report.
Airfreight rates peaked in the past week after falling at the start of January, according to the TAC Index, which tracks the industry.
IATA officials said better results for domestic travel demonstrate there is demand to fly if consumers aren’t subject to severe travel restrictions. In China and Russia, for example, domestic travel almost achieved a full recovery with load factors above 70%, while state-level restrictions within Australia decimated travel most of the year.
Demand is strongest for leisure destinations and family visits. Corporate travel may never fully bounce back after companies become used to virtual meetings, but there remains a need for face-to-face engagement to transfer knowledge or close sales, Pierce said.
Air travel in emerging markets will take longer to recover, because the vaccine rollout will be slower there and residents could be barred from developed nations until immunizations are widespread, the IATA economist said.