Air cargo profits take off

While the world’s airlines are posting an impressive revenue rebound, air cargo analysts claim that volatility caused by too little or too much capacity in the market has resulted in wide swings in rates and overall carrier performance.

By Karen E. Thuermer, Contributing Editor
November 10, 2010

While the height of the global recession in 2008-2009 saw the airline industry facing unprecedented declines, the dramatic upturn that began in the 4th Quarter of 2009—driven by shipper needs to restock depleted inventory—only draws more attention to the air freight market’s volatility.

At first glance, the news appears positive for the carriers. International Air Transport Association (IATA) projects that for 2010, global demand for both passenger and cargo service will expand by 11 percent.

IATA forecasts 2010 yields for cargo to grow 7.9 percent, sharply higher than the 4.5 percent previously projected. As of September, IATA now expects the airline industry worldwide to generate net profits of $8.9 billion in 2010, up from its previous forecast of $2.5 billion. Certainly, current airline revenue figures are impressive. In the United States alone, Delta Airlines posted a $467 million second quarter 2010 profit, part of the cumulative $1.45 billion profit reported by the top nine U.S. passenger airlines for that period—and a dramatic turnaround from their net loss of $556 million a year ago. However, the IATA maintains that this recovery is not sustainable and only reflects a post recession rebound; in the meantime, the organization does commend the industry for managing its assets with tight capacity over the past 12 months.

Any way you slice it, it’s time for a reality check. The IATA warns that even with this year’s improvement, yields are still 8 percent below the pre-crisis levels of 2008. In addition, doubts linger about how long this cyclical upturn will last. “This year is as good as it gets,” says Giovanni Bisignani, IATA director general and CEO. “It will be the peak of the cycle and 2011 will be a much tougher year.” Bisignani’s reasoning for the slow down in the air is directly related to the forces that have kept the current rebound rather tepid: government stimulus monies are ending; new jobs haven’t been created; and consumer confidence remains low. “Even if it is sustainable, the profit margins are so razor thin that even increasing profits 3.5 times only generates a 1.6 percent margin,” he adds. This is below the 2.5 percent margin of the previous cycle peak in 2007 and far below what it would take just to cover the industry’s capital costs.“The bounce that we saw this year was to restock inventories,” Bisignani adds. “Now consumer spending needs to support demand.”