IATA: September Air Cargo Demand Up 7.7%, Capacity Just 2.7%, Jet Fuel Up 103.4%

The Analysis

Out of the same factory gate in the Pearl River Delta there are two roads to a distribution centre on the Rhine, and I have worked both of them for years. One loads a truck to Guangzhou or Hong Kong and puts the cargo into a freighter or into the belly of a passenger aircraft; twelve hours later it is on the ground in Frankfurt, Amsterdam or Liege, and five or six days after it left the loading dock it is on a pallet in Germany. The other loads a truck to Chongqing or Xian and joins a block train that runs west through Alashankou or Khorgos, changes gauge somewhere past Brest, crosses Poland and lands in Duisburg about three weeks later. The expensive road costs a multiple of the cheap one, and it is bought for exactly one reason, which is that it is fast.

IATA put a number on both of those roads on 29 October. September air cargo demand rose 7.7% year on year and 8.6% on international lanes, while capacity measured in available cargo tonne kilometres grew 2.7%. Global trade grew 3.6% in August, the forty second consecutive month of increase. The manufacturing output PMI sat at 53.8 and new export orders at 51.9, both five year highs. Jet fuel cost 17.5% more than in August and 103.4% more than a year earlier, and IATA says yields lag. By carrier region, North American carriers grew demand 11.8%, Asia Pacific carriers 8.6%, European carriers 4.5% while cutting capacity 1.6%, and Middle East carriers 3.8%.

Read that table as a league table and you will spend the next quarter worrying about the wrong lane. Read it as a route map and it tells you where the space is, where it is being withdrawn, and what the speed you are buying is actually worth. Put plainly, it is a road problem. The rate is only what the road charges you for being short of space.

Three numbers in that release matter and they measure three different things. The first is the pair 7.7 and 2.7. Demand grew seven point seven percent and capacity two point seven, and the subtraction between them is the entire release. That five point gap is the whole of the pricing power in this market for the next two quarters, and it is not a forecast, it is an identity: if more people want the same hold space than there is hold space, somebody gets told there is no room, and everybody else pays for the privilege of not being that somebody.

The second is 103.4, the jet fuel number year on year, and it is an input rather than a rate. Inside it sits the 17.5% move month on month, and that is the part which will land on your invoice, because fuel surcharge tables are built on a trailing average of a month or two. What fuel did in October is what you get billed in November and December, and a 17.5% move in thirty days tells you the pass through is still running and has not finished arriving.

The third is minus 1.6, and it is the only negative figure in the whole release. European carriers grew traffic 4.5% and cut capacity 1.6% at the same time. Every piece of copy filed on this release will print the 4.5% and skip the 1.6%. On a map, the 1.6% is the one that tells you where a road is being closed.

Why now, and why at this size. The demand side is easier to explain than people expect. Global trade grew 3.6% in August, a solid number but not a spectacular one, and the forty second consecutive month of it. Air freight grew 7.7%, roughly double the trade it serves. That spread is not air taking a bigger slice of a bigger pie, it is air taking a bigger share of a pie that is growing slowly, and what decides which goods fly is the composition of the orders. The composition is printed in the same release: manufacturing output at 53.8 and new export orders at 51.9, both five year highs. Of those two, new export orders is the leading one. Orders booked in September become cargo in November and December, which is why a five year high in new export orders in late October is a warning about space you will need in five weeks, not a comment on space you needed in September.

The supply side is the harder half and the number that explains it is 2.7%. Capacity in this industry arrives three ways: new freighters, passenger aircraft converted to freighters, and the belly of passenger aircraft. New freighters come off production lines that were starved for years. Conversions take months in a hangar and there are only so many hangars. Belly capacity exists only where passengers are flying and only in the shape the passenger network happens to take. When demand jumps 7.7% in twelve months, none of those three can be summoned in twelve months. That is the whole reason a 7.7% demand year becomes a 2.7% capacity year, and it is also why the gap between them is structural rather than a matter of somebody being slow.

One thing worth clearing up before going further, because it changes how you read the regional rows. IATA organises those rows by where the carrier is registered, not by which lane the cargo flew on. North American carriers up 11.8% is a statement about airlines headquartered in North America, and the traffic they carried may have been across the Pacific, across the Atlantic, or inside the United States. The European row works the same way. So Europe up 4.5% is not a statement about the Asia to Europe lane, it is a statement about airlines that file their accounts in Europe. If you move cargo from Shenzhen to Duisburg, you move it on European metal, on Gulf metal and increasingly on Chinese metal, and the four regional rows do not add up to the lane you booked. That matters because the row everyone will treat as the hot one, North America at 11.8%, may have nothing at all to do with your booking.

Now the part nobody filing on this release will write, and it is the reason I read it twice. The gap people will quote is five points, and the real one is wider, for a reason that lives inside the unit of measurement. ACTK counts tonne kilometres, not tonnes. It is capacity multiplied by distance, so the same freighter flying a longer sector produces more ACTK without carrying one extra kilo. Look at the two demand figures again: total demand 7.7%, international demand 8.6%. The international legs grew faster than the whole, and the whole includes short domestic legs that barely register.

For a corridor reader that says two things at once. The growth is concentrated on the long haul, and because the growth is on the long haul, part of the 2.7% capacity growth is distance rather than metal. The physical space on the lanes you actually book grew by less than 2.7%, which means the physical gap on those lanes is more than five points. Every published commentary will tell you the market is five points tight. It is tighter than that on the long lanes, which is where your cargo is.

Where the slack is, then, and this is the routing instruction hidden in the table. The slowest growing row in the whole release is the Middle East at 3.8%, and the Middle East carriers are the transit specialists. Their hubs exist to connect Asia to Europe and to Africa, and most of what they carry started somewhere else and will finish somewhere else. Set that 3.8% against North America at 11.8% and Asia Pacific at 8.6% and you have a picture in which the origin markets are growing fastest and the transfer points are growing slowest.

In a squeeze that is not a footnote. If the transfer specialists are the ones with the slack, the transit routing through the Gulf holds space longer than the nonstop does, and the price of using it is six to ten hours on the ground. The price of not using it, when the nonstop is full, is a roll to the next uplift, which is a day, or a roll to the day after, which is two. Six hours against twenty four. I have made that trade a hundred times and it is not a close call.

The reason the Gulf hubs can do this at all is the eight hour radius: a freighter out of Hong Kong or Guangzhou reaches the Gulf in roughly eight hours, and from the Gulf anything in Europe is six hours away, which is what makes it the natural place to break the journey in two.

The second skipped figure is where the minus 1.6% lands. European carriers are the ones cutting, and what a European carrier cuts first in a cargo programme is not the trunk freighter frequency into Frankfurt, because its contract customers would scream. What it cuts is the frequencies that make the connections work: the off peak rotation, the second daily, the spoke that fed the hub. Frequency is the thing that breaks first in a capacity cut, and when frequency goes the connection that used to make in three hours makes in nineteen. The cargo that used to be on the ground in Amsterdam by six in the morning is there by ten at night, and the truck that was booked to meet it has gone home. Lose a frequency and you have not lost space at all, you have lost a day, and a day on a five day door to door promise is twenty percent of the thing you paid the premium for.

Timing, because the three problems arrive on three different clocks. The fuel pass through is the fastest and it works on the invoice lag: trailing one to two months, so the 17.5% October move shows up in the November and December billing. The capacity part works on the order book, and the order book is already printed in the 51.9. New export orders lead physical shipments by roughly two to three months, which puts the volume from September's order book on the tarmac in November and December, arriving on top of the Christmas push and then the pre Lunar New Year build.

So the sequence is fixed: your November and December invoices carry the October fuel, your December and January space is contested by the volume the 51.9 ordered, and the capacity available to move it is 2.7% bigger than last year's, or less if you are on a long lane. Those two curves cross in about five weeks, and everything worth deciding has to be decided before that rather than during it.

Let me put the fuel onto a shipment, with the assumptions written out, because this is where it stops being a story. Take a 1,000 kilogramme consignment. Assume that a year ago the all in rate was 3.00 dollars a kilogramme, of which twenty percent, 0.60 dollars, was the fuel surcharge line and 2.40 dollars was the base freight; that is an unremarkable shape for an Asia to Europe FAK rate. Jet fuel is up 103.4% year on year, so if the surcharge tracks the fuel, 0.60 becomes 0.60 multiplied by 2.034, which is 1.22 dollars a kilo. On the 1,000 kilo consignment the fuel line goes from 600 dollars to 1,220 dollars, an increase of 620 dollars a tonne, and the base rate has not moved one cent. IATA says yields lag. What lags is the base. The surcharge goes straight through, and the surcharge is now the fastest growing line on your bill.

Now the part that turns this from a cost question into a corridor question. A 1,000 kilo consignment of consumer electronics or spare parts is worth in the region of 10,000 dollars. Air from Guangzhou to a Rhine distribution centre is about five and a half days door to door when it works: a day at origin, twelve hours in the air, a day at destination, and a day and a half for customs and the final leg. The landbridge is about twenty days, and it runs anywhere from eighteen to twenty five depending on the route and the border.

The difference is fourteen and a half days. Assume an all in carrying cost of twenty percent a year on the value of the goods, which is what you get when you put the cost of capital, insurance, shrinkage and warehousing in the same pot. Fourteen and a half days of carrying is 14.5 divided by 365 times twenty percent, which is 0.79 percent of cargo value, or 79 dollars on the 10,000. Call it eight cents a kilo. The fuel line alone just added sixty two cents a kilo.

Read that slowly, because it is the whole argument. The increase in the fuel line alone, before a single cent of capacity premium, is roughly eight times the entire inventory carrying value of the two weeks you save by flying. It does not follow that you should put everything on the train. It follows that the class of cargo for which air still pays is much narrower than it was a year ago, and what is left inside it is the cargo where time is the product: a production line that is down waiting on a part, launch stock with a date printed on the marketing, anything that goes stale on the shelf. Every other kilo in the air book is now, in arithmetic, paying sixty two cents to save eight, and it is doing that because it always has, not because the sum works.

Then the space, because the space is what bites in a squeeze and it is arithmetic rather than opinion. Demand 107.7 against capacity 102.7, on a year ago base of 100 for each, is 4.9 percent more demand per unit of capacity. Assume the peak push on the Asia to Europe lane adds fifteen percent to the September demand level with freighter capacity held flat, which is the conservative case, because freighters do not appear in six weeks in this market. That gives demand of 123.9 chasing capacity of 102.7, which is twenty and a half percent more demand than capacity.

In route terms: for every 100 tonnes you moved in last year's peak there are 102.7 tonnes of hold space and 123.9 tonnes of cargo that would like it. The 21 tonnes that do not fit do not vanish. They are rolled to the next uplift, or repriced into the peak spot rate, or moved onto a different road. On a standing monthly book of 10 tonnes that is roughly 2 tonnes a month sitting in one of those three states, and what you end up paying is entirely a question of which one.

And that is how the premium actually reaches you this year, which is worth saying because people expect a premium to arrive as a number. It arrives as time. If you hold a 10 tonne monthly book and 2 tonnes of it roll, and each roll costs you a day, then you paid the full air rate for a service that delivered 4.5 days of a 5.5 day promise, which is 82 percent of the speed you bought. That is the premium, and it is invoiced in hours, not in cents. The floor under it is the 62 cents a kilo the fuel added. The ceiling over it is the cost of being a day late, and for most cargo that ceiling is set by the landbridge: if being a day late costs you less than being fourteen and a half days late, then the right answer was the train, and you were always going to get there.

What would flip this, because every read carries a condition. The cleanest one is passenger flying. ACTK measures total scheduled capacity, freighter and belly together, and in this industry the swing capacity has always been the belly rather than the freighter. If passenger schedules come back hard over the next two quarters, the gap can close without one new freighter being delivered, and it can close inside a season. The second is fuel; if jet fuel gives back a third of the 103.4%, the surcharge line falls by about 40 cents a kilo on the example above and the comparison against the landbridge shifts back, because the rail transit time has not moved while the air cost has.

The third is the order book. New export orders at 51.9 is a five year high, and five year highs have a habit of being the top. If the 51.9 rolls over, the demand side of the gap deflates faster than the capacity side can be unwound, and the squeeze ends before the peak lands. A shipper controls none of those three. What a shipper controls is which road the cargo is sitting on when one of them happens.

On the roads themselves, and their traps. Switching to the landbridge costs fourteen and a half days, and the traps are not in the transit time, which is predictable enough; they are in the nodes. Never underestimate the gauge change at Brest or Malaszewicze, where the 1520 millimetre bogies come off and the 1435 go on. It is two hours when the yard is working and two days when it is not, and I have watched a book of containers sit there over a public holiday on both sides of it, because there are two countries and two calendars and the holiday counts in each.

There is also the packing: a rail box will see minus thirty and it will be lifted by a spreader, and moisture that was harmless in a hold space destroys a pallet in a container crossing Kazakhstan in January. Do not move moisture sensitive or temperature sensitive cargo onto the landbridge in the fourth quarter purely because the fuel surcharge doubled, because you will trade a 62 cent a kilo problem for a hundred percent write off. There is a third road through the same region that air freight people never mention, the middle corridor across the Caspian, China into Kazakhstan, across to Azerbaijan, through Georgia and Turkey and on into Europe.

It is slower than the northern route and it has a capacity ceiling, and its Caspian leg is the sort of node that looks tidy on a map and takes four days in a storm, so I am not going to tell anyone to adopt it inside a quarter when they have not tested it. I will say it is worth a look in a year when the alternative has doubled.

Switching to the Gulf transit routing costs six to ten hours and buys space, and the trap in it is the minimum connection time. If the booking you accept has a ninety minute connection at Doha and the published minimum is two hours, that is not a connection, it is a miss, and a miss at a transit hub costs you a full day, which is twice what the direct would have cost you. Ask what the scheduled ground time is and hold the booking to it. On the far side of that, the trap that catches everybody in a fuel shock is not a corridor problem at all: get the rate quoted all in, per kilo, with every line named.

In a market where the fuel line has just doubled, a rate excluding fuel, security and the peak surcharge is not a rate, it is a down payment, and the distance between the two is now the widest it has been in years. How that lands in a landed cost model is Grace Yang's territory rather than mine, but you do not need a model to know that a quote with three lines missing cannot be compared to one that includes them.

So, does the road still work. It does, and it will keep working, because twelve hours beats three weeks and there is cargo with no other option. What has changed is the width of the cargo it works for. The five point gap will show up as space and as rolls before it shows up as rate. The fuel will show up on your November invoice before it shows up in your contract. The minus 1.6% will show up as a missing frequency at a European hub before it shows up anywhere in the numbers at all. Every corridor has a story and a pothole, and this quarter the pothole is not the price. The pothole is the space, and the price is only what you pay to drive around it.

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— By Ömer Kaya