The global economy may be showing signs of strength but the market for air and sea cargo remains weak as a result of continued overcapacity.
“I don’t sense any real improvement because shipping companies are still buying bigger ships and there is not enough demand to support that,” says Denis Sanguinetti, sea freight procurement manager for Bolloré Logistics in Paris.
Global demand for sea freight is expected to rise just 4.4 percent this year, according to consultants Alphaliner, while capacity is expected to grow 5.5 percent.
Driving the capacity is a “race to reduce unit costs,” says Sanguinetti, with container liners acquiring massive vessels that can carry up to 18,000 TEUs (twenty-foot equivalent units). Led by the world’s biggest players such as Denmark’s Maersk Line, Switzerland’s Mediterranean Shipping Company, Taiwan’s Evergreen, the United Arab Shipping Company owned by six Gulf States and the CMA CGM Group of France, other shipping companies are attempting to follow the trend towards gigantism in a bid to stay competitive.
Not all groups will make it. Some will be forced to abandon routes altogether or to seek alliances to strengthen their positions, says Sanguinetti, citing the P3 alliance between Maersk Line, MSC and CMA CGM on Asia-Europe, trans-Pacific and transatlantic routes. Germany’s Hapag-Lloyd and Chile’s CSAV, meanwhile, are in merger talks to create the world’s fourth-largest container ship fleet while the G6 alliance is extending its cooperation to transatlantic and trans-Pacific trades. In addition, China’s state-owned Cosco and China Shipping Container Lines recently signed a cooperation agreement.
“These kinds of alliances could bring more stability to the market,” says Sanguinetti, noting the volatile pricing that has characterized the shipping market over the last 12 months.
It’s a similar story for air freight. “We are positioned for recovery but there is still the problem of overcapacity that is swallowing all the growth,” warns Georges Van Hove, manager of airfreight procurement at Bolloré Logistics in Paris. This year, Van Hove expects a modest increase in demand from Europe of around two percent and around seven percent growth in cargo from Asia. At the same time, he expects three percent more capacity than demand on both routes.
Globally, airlines carried 51.6 million tonnes of cargo in 2013, increasing to 52.5 million tonnes in 2014, according to the International Air Transport Association. This modest increase, however, will be offset by declines in yields of around 2 percent because of the rise in capacity.
In particular, carriers from the Middle East continue to add passenger jets to their fleets, automatically creating extra capacity for freight in the huge cargo holds of big jets. “Passenger demand is driving the air industry and that is affecting cargo,” Van Hove adds. He cites airlines such as Dubai-based Emirates Airlines, the world’s largest passenger airline, that has orders for over 100 Airbus A380’s and over 20 Boeing 777/300s, “thus continuously fuelling the endemic overcapacity that is easily offsetting the modest economic growth,” Van Hove says.
The air industry faces further challenges. In particular, the transport of commodities such as clothing or even pharmaceuticals is increasingly switching to the maritime market as companies look to save money on transport costs, says Van Hove. He estimates that between five and ten percent of the volumes in the airfreight market switched to sea freight last year, depending on the routes.
As in the ocean freight industry, the tough market conditions, rising fuel prices and chronic overcapacity will likely lead to a shakeout of the air cargo market, Van Hove predicts. “The center of power is shifting slowly but surely to the Middle East and airlines that operate the more fuel efficient planes such as Boeing 777s,” he says. “There are real question marks over whether the smaller cargo players will be able to survive except in niche markets such as humanitarian missions or cargo for the oil industry.”