Air France – KLM have announced today that air cargo revenue for the year ending March 31st rose 11.9% year-on-year to reach EUR2.9 billion. Indeed recent air cargo data from companies and statistical bureaus show the industry is enjoying a period of growth and increased profitability. According to Chris Morgan, Lead Analyst for Datamonitor’s logistics and express research unit, this has been driven by an improving economic climate helping increase trade, while costs have been successfully controlled. Nevertheless, Morgan says there are still three significant challenges that the industry must face. The potential shifting of cargo to dedicated freighters, increased security measures and the threat of further increases in fuel prices must all be tackled if turbulence is to be avoided. Full comment follows below.

Together with impressive year-on-year rise in air cargo revenue, France – KLM has also revealed operating income rose 18.6% to EUR166 million. During the period (year-end 31 March 2006), the company transported 1.4 million tons of cargo, an increase of 3.1%.

These promising figures have also been echoed by statistics from the International Air Transport Association (IATA). They show that first quarter air cargo traffic has improved year-on-year, the growth being spread across all regions. Airline companies in Europe reported an aggregate year-on-year rise in Freight Tonne Kilometre (FTK) of 2.2%. Their North America equivalents recorded an increase of 4.4% and strong growth was also registered in Asia-Pacific (5.7%) However the largest improvement came in the Africa/Middle East area (16.6%) albeit from a lower base.

There are also further signs that bode well for the future of the air cargo market and the players within it. Global economic growth has recovered well since 2001, and recent data suggests revivals are now well underway in the US, Europe and even in Japan, which has struggled for several years. This improvement in the economic climate has filtered through to global trade, especially in the routes between Asia-Pacific, North America and Europe. With Western consumers requiring goods manufactured in the Far East, as well as continued growth in China, this trend is set to carry on in the near future.

Efforts to control costs also seem to have been successful, which will help the future financial performance of the cargo companies. There is no doubt that airlines have been severely hit by the rapid and prolonged increase in oil prices. However, this has been tempered by an improvement in fuel efficiency as well as the effective utilisation of fuel price hedging. Non-fuel measures such as improving labour and aircraft efficiency have also helped. Indeed, statistics from IATA show unit costs excluding fuel have fallen 9% since 2001. Moreover, the introduction of the new Airbus A380 is set to help boost airfreight and logistics companies’ margins due to its larger capacity and greater fuel efficiency. Consequently it would seem that the industry is set for a period of strong growth.

However, there are still three significant challenges to face. The first is a potential increase in price for product manufacturers due to cargo switching from passenger planes to dedicated freighters. Currently, there is a mismatch between passenger and cargo routes. While the latter is seeing its fastest growth rates in the Asia-Pacific trading lanes, passenger numbers on this route are not rising as quickly. In addition, while the introduction of the A380 will increase the number of passengers flying, there will be no corresponding rise in air cargo space.

The simple solution would be to shift cargo from the bellies of passenger airlines to space in dedicated freighters. However, this is normally a more expensive option for companies. Furthermore, cargo holds and freighters are usually full when outbound from Asia, but relatively empty on the return leg due to the different locations of the manufacturers (Asia) and consumers (Europe and the US) of the cargo.

The second major challenge for the industry is that of security. After the terrorist attacks of 2001, measures for both passengers and cargo were increased. While this causes additional check-in time for passengers, the effect on cargo has been more severe. US regulations now state that any pallets being moved must be tagged by category, making the process vastly more complicated. This can easily trigger fines or, more seriously, delays, which is a particular problem when there are limited flights for the cargo to go on.

The final problem is a potential rise in fuel prices due to the maturing of existing hedging programmes. However, this should be counter-balanced by efficiency plans already in place, including the move to 100% e-ticketing and the increased use of RFID technology. Nevertheless, there are still severe challenges for the industry to face. As such, while the recent air cargo statistics paint a healthy picture, there may well be some turbulence in the near future.

Datamonitor will be publishing a report highlighting and analysing the current and future trends in the global Air Cargo industry. The report will be out in Q3 2006.