Peak Season For Air Cargo: Past Results, Present Challenges

Each year airlines eagerly look forward to the end-of-year peak season for air cargo. The October-December (or fourth) quarter historically is the peak revenue-generating quarter for most airlines, other than those focused largely in perishables-dominated markets, which peak at other times of the year. It's a time when the supply-and-demand balance shifts more toward carriers than at any other time during the year. Demand peaks for dry cargo and space is at its tightest, giving air carriers an opportunity to leverage higher rates from forwarders and shippers, at least in the short-term. Both market and spot rates typically rise in higher demand lanes, though percentages often vary widely by market. 

SONAR Ticker: AIRREV.GRP3, AIRREV.GRP2

FreightWaves' SONAR shows average airline quarterly cargo revenue for large U.S. carriers (revenues exceeding $1 billion/year) and medium ones ($100 million to $1 billion/year in revenue) since 2008. The fourth quarter was the top quarter each year for the industry, worth from 26% to 29% of the full-year revenue total in nine of those 11 years. That means that the fourth quarter is worth from 5% to 23% more than the average quarterly revenue for the other three quarters of the year.

It starts with passenger belly capacity being pruned back from summer peaks. Higher winter season pricing may be implemented by individual airlines in expectation of higher demand, with some adjustments occurring over the course of the season. Rising volumes in key markets cause spot rates to rise and allow airlines to be more selective on higher-demand lanes. Additionally, shippers are more likely to use express modes in high-demand lanes to ensure space and arrival at destination to meet deadlines. All of these serve to drive up quarterly revenues and yields.

SONAR Ticker: DAIR.HKGLAX, DAIR.PVGLAX, AIRUSD.HKGNOA

The game usually changes right after the new year though, when first-quarter demand nearly immediately softens. The balance of power shifts to air cargo buyers and prices fall. This heightens the pressure on airlines to achieve great results in the fourth quarter and properly set the stage for a manageable first quarter. A weak fourth quarter with weak pricing often means pricing risks sliding even lower in an even-softer first quarter, getting the new year and new budget off to a poor start. This pattern of peaking and dropoff of rates each year is most dramatically seen in SONAR's Drewry and TAC indices covering the large China-U.S. market (DAIR.HKGLAX, DAIR.PVGLAX, AIRUSD.HKGNOA). For carriers that close their books as the year ends, the fourth quarter is the last opportunity to lock in solid revenue and profitability performance vis a vis annual budgets (and presumably some staff bonuses too).

Source: FreightWaves analysis, U.S. Census Bureau, USA Trade Online

Key Drivers in the Big Push

Where does the big push that makes the peak what it is come from? For the U.S. international air cargo trade, both import and export volumes increase by air, but it is the import surge that is larger and more consistent from year to year. As seen below, based on the last 10 years, 26.8% of import volumes by air fly to the U.S. in the fourth quarter, whereas only 25.1% of air exports move then. An even quarterly distribution would show 25% of the tonnage moving in the quarter, so overall U.S. exports are just slightly fourth quarter-weighted. While 26.8% of global tonnage to the U.S. may fly in the quarter, Asian-origin traffic is more skewed at 27.6%, and within that figure, China and Hong Kong top the charts at 28.5%. South America- and Europe-U.S. air cargo also exceed the 25% benchmark.

While other Asian origins also see demand surges, China has driven the quarterly peak over the last 10 years. But it is a compressed quarter for shipping, as many Chinese factories close in the first week of October for Chinese Golden Week holidays. Most shipping by air tapers off a couple of weeks before the Christmas holiday, with time needed at destination before the holidays to clear merchandise and get it onto shelves or into warehouses for last-mile distribution. Effectively, this leaves China 10 weeks or less for shipping during the quarter. 

What drives the big push? Christmas and end-of-year holidays and celebrations are a key leader. Black Friday and Cyber Monday right after Thanksgiving add to the shopping opportunities. New technology and product launches for iPhones, tablets, mobile phones, game consoles, toys and other electronics are timed to take full advantage of the shopping season. Getting them to market quickly and on time for releases drives more air freight use. The products shown in the chart are shipped more heavily in the fourth quarter than any other, at 30% share and higher of the annual volume.

Source: FreightWaves analysis, U.S. Census Bureau, USA Trade Online

Of course, the fourth quarter also sees large increases in mail, parcel and e-commerce demand through the U.S. Postal Service, foreign postal organizations, FedEx Corporation FDX, UPS Inc. UPS and Amazon.com, Inc. AMZN. Mail and parcel activity start their rise in October, but the post-Thanksgiving period up until Christmas is when activity is at its full peak. A final contributor, sometimes waiting until the very end of the year, are air freight moves companies make to shed or reposition excess inventories, taking advantage of tax benefits.

On the export side, there are some U.S. export markets that are weighted toward the fourth quarter, with Central America being most notable, but on the whole, the season is less export-driven than import-driven. Of the top 20 U.S. exports by air by volume, only two have clearly stronger fourth-quarter air tonnage shares – books/publications and beauty and skin care products. Nevertheless, there can still be several heavy demand weeks during the quarter in both U.S. and non-Asian gateways where space tightens up, but the duration and intensity is typically less than seen from parts of Asia. All of this also suggests there may be more upside to seasonal air cargo rate price increases into the U.S. than out of the U.S.

Forward to 2019

In my experience, there is always a fair amount of industry uncertainty about peak season until it is actually underway. Large global forwarders and airlines have a mix of clients and market conditions that they are managing that are growing or declining at different rates, thereby adding layers of uncertainty.

While the air cargo business has faced varying economic conditions in the past, this year presents new and difficult challenges for the outlook. Larger and more widespread tariffs and trade war actions, Brexit anxiety and overall recession concerns are all impacting international air cargo. China and Hong Kong represented 26.8% of the 2018 air volume to the U.S., which has seen shrinkage this year by 10.1% and only partial volume replacement from elsewhere. Earlier we showed dependence on China as the historically strongest driver globally of the fourth-quarter peak for the U.S. air cargo trade. Higher U.S. tariffs also are currently planned on Chinese products for December 15, potentially driving larger volumes in early December. It's difficult to figure out all the angles this year.

Industry Executives Weigh In

FreightWaves solicited feedback on this year's peak season and early 2020 outlook from several major freight forwarders and airlines.

For example, Andreas von Pohl, head of air freight at DHL Global Forwarding, the world's largest air freight forwarder, said, "With few exceptions, we do not see a significant peak this year… We see a very moderate peak season."

Pohl continued, "We continue to see demand from the tech sector, which is connected to product releases and consumer demand." DHL sees the automotive and some industrial/chemical sectors being a bit weaker than prior years. As for 2020, DHL expects continued relatively weak market conditions. 

Asok Kumar, executive vice president of air freight region Americas at multinational forwarder DB Schenker, said Schenker is not seeing anything near a traditional peak season. Volumes have been stronger over the past few weeks, and there was a spike in June prior to the tariff, but many products are off. Cool-chain products and pharmaceuticals are still doing well. Kumar sees early 2020 as flat and perhaps a silver lining for air cargo with IMO 2020 effective next year that may impact vessel availability.

On the airline side, Jan Krems, president of United Cargo, which flies a large trans-Pacific passenger schedule, noted, "The short answer to questions about air cargo's 2019 peak season is that there doesn't look like there will be one. Thus far, we are not seeing the results we're used to experiencing with previous peak seasons, and there are very few noticeable signs that a significant peak is coming."

Krems cited United's temperature-sensitive pharmaceuticals, other healthcare materials, e-commerce and some project work as being bright spots, but tariffs, trade wars and geopolitical unrest are creating a weak outlook for the rest of 2019.

Looking to 2020, Krems added, "There are so many factors that can influence volumes and rates that accurate predictions are nearly impossible – the closest you can come is an educated guess. Uncertainty is more of a factor now than ever. Our expectations are for a flat market year-over-year as we move into the first quarter of 2020. I remain optimistic that the headwinds pushing against our business' growth will ease off a bit – but it's always been my nature to see the glass as half-full."

Air France KLM Cargo, a global operator of freighter and passenger aircraft, weighed in from a European perspective. Christophe Boucher, senior vice president of sales and distribution, commented, "As every year, there will be a peak at the end of the year. The question will be to what extent? Will there be a special high-tech product that will be in high demand at the last minute? So far no such signal is in sight. The passenger capacity reduction on the trans-Atlantic during winter usually also helps in the balance between offer and demand for the last part of the year. The low demand will probably make it less significant this year."

Image Sourced from Pixabay