IATA forecasts FTK growth against stronger trade backdrop

IATA Economics has forecast industry-wide freight tonne kilometres (FTKs) to grow by 4.9% on average over each of the next five years (2018-2022), helped by a stronger economic and trade backdrop than was the case during the previous five-year period.

The prediction is based on the assumption that airfreight will continue to outperform global goods trade modestly between 2018 and 2022, although this is “a key area of uncertainty and a prime area for our future research”, IATA says.

Key relationships
The strength of demand for airfreight each year depends on the broader health of global goods trade flows, as well as factors specific to airfreight, the forecast explained.

The relationship between global GDP growth and global goods trade growth has changed significantly since the global financial crisis: prior to that event, global goods trade usually grew at twice the pace of GDP, in a context of increasing globalisation and fragmentation of supply chains.

In more recent times, though, global goods trade has only grown broadly in line with global GDP. This slowdown in trade growth has attributed to a number of possible causes including protectionism, a slowdown in the fragmentation of supply chains/on-shoring, and a broader decline in investment growth, IATA says.

Another key relationship is that between freight volumes and global goods trade. On average, year-on-year growth in airfreight volumes has tended to grow slightly more slowly than growth in global goods trade volumes over the past 30 years or so (around 0.95 times the pace), albeit with distinct periods of over- and under-performance, the IATA Economics report noted.

Airfreight has tended to underperform in periods of relative economic stability, partly related to modal shift to seafreight  such as occurred during the early 2000s. However, airfreight has tended to outperform global goods trade strongly during the upturns following significant global economic slowdowns over the past 30 years.

The cyclical outperformance of airfreight growth relates in large part to its ability to move goods quickly and its key role in the restocking cycle. Periods in which the inventory-to-sales ratio has fallen sharply have been consistent with strong demand growth for airfreight volumes in the past.

Similarly, periods when global manufacturing firms have reported rising demand for their exports have also been closely correlated with freight growth.

IATA says these two key relationships help to explain what drove the strong growth in airfreight volumes seen in 2017.

A stronger global trade backdrop certainly helped. According to the International Monetary Fund (IMF), global goods trade volumes increased by 4.3% in 2017 – the strongest year of growth since 2011 – alongside a broad-based pick-up in global economic activity.

However, FTKs grew more than twice as fast as global trade volumes in 2017 as a whole, which was the widest margin of outperformance since 2010. This outperformance largely reflects the boost from the restocking cycle, which was also evident in buoyant demand for global manufacturing firms’ exports.

On average, IATA estimates that every 0.01-point year-on-year decline in the inventory-to-sales ratio is consistent with annual airfreight growth outperforming its world trade counterpart by around 0.9 percentage points. Given the magnitude of the fall in the inventory-to-sales ratio seen last year, this factor explains around half of airfreight’s outperformance relative to global goods trade in 2017.

Other factors include an uptick in investment and growth in sectors such as e-commerce and pharmaceuticals.

Taking all of this into account, alongside signs of impending increases in interest rates, IATA says an economic downturn is highly likely to occur within the next five years.

Nonetheless, the outlook for airfreight will be supported by a brighter economic and trade backdrop than we saw between 2012 and 2017. Having accelerated in 2017, global GDP growth is expected to remain relatively robust over the next five years. The IMF forecasts real GDP growth to average 3.1% between 2018 and 2022, compared to 2.8% during the previous five years (measured using market exchange rates).

Similarly, global goods trade is also forecast to grow more quickly than it did in the 2012-2017 period. The IMF forecast global goods trade growth to average 3.9% between 2018 and 2022, up from 3.1%.

Having outperformed global goods trade by the biggest margin in seven years during 2017, business surveys are currently consistent with airfreight outperforming global goods trade growth again in 2018, albeit much more modestly than last year.

Indeed, having increased to a fresh seven-year high in January 2018, the new export order books component of the global manufacturing Purchasing Mangers’ Index is currently 1.3 points higher than its average during the whole of 2017. While there is a long way to go this year, IATA estimates that this is consistent with industry-wide FTK growth outperforming world trade growth by around 1 percentage point in 2018.

Based on the IMF’s forecasts for goods trade, this implies FTK growth in the region of 5.3% in 2018.

The big question, IATA says, is how the relationship between airfreight and global goods trade will settle in the later years of the forecast period.

Typically, modal shift has eaten into airfreight’s market share during periods of economic stability. However, FTK growth has outperformed global goods trade growth in every year since 2014. The bulk of this outperformance has not been explainable by the usual ‘cyclical’ indicators of demand.

This suggests that other factors – potentially the increasing importance of areas such as e-commerce and pharmaceuticals – are helping airfreight growth to ‘decouple’ from global goods trade.

There are regional differences, of course. Economic activity in the so-called advanced economies is expected to grow at a broadly similar pace over the next five years than it did in the previous five, with modest slowdowns in the US and Japan being offset by stronger growth in the Eurozone. The latter is likely to support inbound demand for airfreight into Europe on the key trade lanes between North America and Asia over the next five years.

GDP growth in the developing group of countries is expected to accelerate over the next five years, helped by stronger activity in energy-producing countries including Brazil and Russia.

There is a similar range in expectations for global goods trade at a regional and country level. Stronger economic growth in the developed economies is expected to translate into faster goods import growth over the next five years. Sub-Saharan Africa is also expected to see strong goods trade growth over the next five years, linked in part to foreign direct investment inflows from Asia.

IATA noted that African airlines flew around 25% more international FTKs in 2017 than they did in 2016, helped by a surge in FTKs flown on the Africa to Asia market segment.

China is the only major region or country anticipated by the IMF to see a slowdown in goods trade growth over the next five years. However, IATA expects this impact to be felt most acutely by bulk shippers and seafreight as demand for heavy materials linked to investment declines. In fact, the association sees opportunities for airfreight as the country moves towards a more consumer-led growth model.

All told, IATA expects to see robust FTK growth on the segment-based trade lanes to, from and within Asia over the next five years. A stronger economic backdrop in Europe is also expected to drive faster growth on the key trade lanes to and from the region over the forecast horizon than in the previous five years.

IATA predicts that the upward trend in traffic passing through the Middle East will resume over the forecast period after stalling in 2017. This will be linked partly to ongoing strong growth in the widebody fleet in the region: during 2018, a total of 77 widebodies are due to be delivered to carriers based there – down slightly from the amount made in the previous two years, but still the second highest of all regions.

Upside, downside…
The baseline forecasts presented thus far are just one way in which airfreight demand could develop over the coming five years. IATA points out that there are many risks and uncertainties on both the upside and the downside, which range in nature, severity, and likelihood.

One key risk is to the economic backdrop. The global economy is currently experiencing its broadest-based cyclical growth pick-up since 2010 – but  some economists argue that unorthodox central bank policies since the global financial crisis have created asset bubbles in financial and housing markets rather than driven a sustainable path to economic growth; by encouraging credit and debt expansion, these policies pose a threat to financial stability and potential economic growth in the future.

This could result in slower economic growth than in the baseline, and translate directly into lower demand for airfreight.

A more specific risk to global goods trade volumes is that posed by protectionism. After decades of globalisation and the breaking down of borders, there is a risk that policymakers continue down a more inward-looking path.

Certainly, recent years have seen politicians embrace more national solutions, IATA says; the recent imposition of tariffs on steel and aluminium imports by the US are a case in point. Once again, a pick-up in protectionism would weaken the underlying operating environment for airfreight in the coming years.

Geopolitical risks could also play a key role in shaping the composition of growth and traffic in the airfreight industry in the years ahead, particularly in the Middle East. Airlines based in the region have increased their share of industry-wide FTKs from less than 4% in 2000 to almost 14% at present.

If, for example, regional unrest or conflict were to deter traffic from using the region’s major hubs, this could see European and Asia Pacific airlines regain some of the market share that they have lost in recent decades. Of course, similar geopolitical tensions and risks exist in other regions too.

Not all uncertainties are negative, though. Indeed, if economic activity turns out to be stronger than forecast in the baseline, this will translate directly into stronger demand for airfreight.

Moreover, while the US has become openly more hostile to trade openness, it is worth noting that the other countries involved in the now defunct Trans-Pacific Partnership, for example, are determined to reach a new agreement without the US’s involvement. Any progress on new or amended trade agreements could help to reinvigorate global trade flows in the future and to subsequently help boost airfreight demand.

Meanwhile, as stated earlier, new and fast-growing areas such as e-commerce and pharmaceuticals appear to offer opportunities for airfreight to potentially decouple altogether from the link with global goods trade in future years.

It is worth noting that only around 1% of total goods trade volumes are flown by air (although around 35% in value terms). Even a very small increase in this share over a short-period of time would be consistent with sizeable FTK outperformance relative to global goods trade.

To illustrate, IATA says that if the share were to rise by just 0.1 percentage points over five years, this would see airfreight growth outperform wider goods trade by around 2 percentage points each year. Such a shift could happen if key airfreight sectors like e-commerce or pharmaceuticals outperform other areas of the economy.

If GDP growth returns to pre-crisis levels, IATA says FTKs could grow by 9.5% per annum over the next five years – almost double the baseline prediction.

If global GDP fails to sustain its 2017 pace, then FTK growth would stand at 3.4% per year on average between 2018 and 2022 – 1.5 percentage points slower than in the baseline.