Update to the Air Cargo Impact Matrix




What’s moving the matrix?

Shipper Patterns and Inventory Strategies Keeping Volumes Stronger

The air cargo industry is experiencing a nice bump in activity during the typical “dog days of summer” just prior to the busy peak season. Volumes remain strong worldwide and the industry is expected to continue to pull strong tonnage through the end of the year. The reasons for this strong demand may be somewhat surprising – and are atypical for a normal peak season shipping cycle.

Transportation activity generally builds from its lows in January through November as a general rule. But, in a normal year, July can be one of the “soft” months for much of the transportation industry. It comes between seasons just before the active fall peak transportation period of inventory building for the fall seasonal holiday’s – and begins typically in August running hard through November. During this time, different modes will experience their own “real” peak starting with the largest volume modes and ending with the smallest.

This seasonal change in mode preference and density building is fairly common sense in nature. The following is a highly oversimplified concept on how the peak season works. Early in the peak season, large retailers are building holiday season inventories and typically use the larger volume modes (maritime and rail). The lag between order time and shipment from Asia or Europe, leading to shipments actually hitting the US shore is the difference between a pick up in the maritime mode and port activity and the resulting feel we get for rail and truckload. As larger full loads hit the coasts, rail full carload, intermodal, and truckload services feel their respective bursts, followed by LTL and air cargo as speed becomes important and full loads are broken down into smaller regional shipments. What does this have to do with air cargo being strong now through the end of the year?

This year is shaping up to be a bit different than other years. First, we will likely have a peak of some sort for the first time in several years. Starting with the beginning of the recession in the fall of 2007, peak season shipping patterns have been derailed. This year, the inventory building cycle may actually favor a little more of a peak season than we have seen – specifically for air cargo.

As mentioned many times, retailers and manufacturers are going into the fall light on inventory – but highly conservative in strategy. Companies want to avoid carrying over inventory at the potential expense of losing sales. The only caveat in this observation is that Wall Street is starting to penalize companies for weak top-line growth. Those that are highly sensitive to Wall Street notions may opt to get more aggressive on pricing – will use low-cost modes of transportation and cheap sourcing locations and may go into the fall season with a low-price strategy to capture sales.

But for now, what we see is a conservative approach to inventory in the fall – erring on the risk-averse side and not wanting to carry over any significant stock into 2011. What that sets up is a push to use high-speed modes for filling shorts and stock outages early and late in the season. Charter rates for aircraft are still strong and some of the largest retailers are getting ready to use the mode for filling gaps in supply as we get later in the year.

Some air cargo carriers in the global market have significantly increased expectations for the year and are expecting pricing to be strong, capacity to be tight, and significant up-bidding to happen late in the year to lock down capacity. And, if jet fuel prices remain at a moderate level as they currently are, there will be some significant profits reported for the final two chapters of 2010.

The main item to watch is the retail segment. As we get deeper into the earnings season currently underway and companies discuss their outlook for the rest of the year, the potential for air cargo will get stronger. What we see is a much tougher 2009 year-over-year comparison setting up for the remainder of 2010. That will be important to listen to when hearing corporate expectation language. If companies continue to say that sales are expected to slightly outstrip 2009 Q3 and Q4 levels – realize that this is still significant growth. Companies will have to build more inventory than current levels if sales volumes start to exceed last year are by 1-4%. Inventory levels are very low and the last half of last year was improving significantly over Q1 of 2009.

Perhaps the bottom line on the air cargo industry is this: as Chairman Bernanke testified in front of Congress – the rest of 2010 will be fraught with uncertainty. Simply, buyers and supply chain managers just don’t really know what to expect. So, managing risk is critical. But, if volumes start to pick up rapidly – that will require them to scramble late in the fall season. That scrambling would likely lead to increased air cargo, LTL, and parcel lifts in business activity. The FedEx earnings preview for the rest of the year was a revised upward forecast – corroborating this scenario.

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