Industry Outlook: A Long Term Perspective
Industry Outlook: A Long Term Perspective
Presentation by: David F. Hoppin CNS Partnership Conference | Phoenix | April 2011
Putting Recent History Into Context Thinking About Air Cargo’s Long Term Future Conclusions
1
Putting Recent History Into Context Thinking About Air Cargo’s Long Term Future Conclusions
2
Historical Context
Long-distance trade is inherently volatile
World GDP and Intercontinental Trade Value: 1961 – 2015 1995 U.S. Dollars; Percent 20%
Intercon Trade as % of World GDP 15% 10% 5% 0% -5% -10%
% Change in World Real GDP
-15%
% Change in Real Intercon Trade Value -20% -25%
1961
1965
1970
1975
1980
1985
Note Intercon trade defined as world trade less intra-North America and intra-Europe. Source: Queri International
1990
1995
2000
2005
2010E
3
Global Airline Industry Cargo Revenues USD Billions; Year-Over-Year Percentage Growth
≈4%
Historical Context
Last year’s double-digit revenue growth has returned the industry to where it was in 2008
+30% -25%
Source: IATA analysis of IATA, ICAO data
4
Historical Context
Growth rates are slowing sharply – which is to be expected, after the dramatic bounce-back in 2010 IATA Freight Traffic Index Percent Change From Same Month of Prior Year
World 28%
28%
27%
34% 27%
25%
23%
20%
9%
24% 15%
14%
2%
‐23% Jan
‐22% Feb
‐21% Mar
‐22% Apr
‐17%
‐17% May
2009
Source: IATA Cargo eChartbook
Jun
‐11% Jul
2010
‐10%
Aug
‐5%
Sep
10%
5%
7%
Nov
Dec
‐1%
Oct
2011
5
Historical Context
Growth rates are slowing sharply – which is to be expected, after the dramatic bounce-back in 2010 IATA Freight Traffic Index Percent Change From Same Month of Prior Year
Asia/Pacific 38%
35%
34%
33%
39% 30%
34% 25%
22%
15%
6% ‐5% ‐28% Jan
‐25% Feb
‐24% Mar
‐22% Apr
‐16%
‐18% May
2009
Source: IATA Cargo eChartbook
Jun
‐10%
Jul
2010
‐9%
Aug
15% 15% 4% 2%
8%
‐3%
Sep
Oct
Nov
Dec
2011
6
Historical Context
Growth rates are slowing sharply – which is to be expected, after the dramatic bounce-back in 2010 IATA Freight Traffic Index Percent Change From Same Month of Prior Year
Europe 22% 12%
9% 7% 6%
12%
15% 8%
12%
10%
11%
12%
7% 5% 3% ‐6%
‐23% Jan
‐23% Feb
‐20% Mar
‐23% Apr
‐19%
‐20%
May 2009
Source: IATA Cargo eChartbook
Jun
‐16% Jul 2010
‐15% Aug
‐13% Sep
‐11%
Oct
Nov
Dec
2011
7
Historical Context
Growth rates are slowing sharply – which is to be expected, after the dramatic bounce-back in 2010 IATA Freight Traffic Index Percent Change From Same Month of Prior Year
North America 34%
27%
35%
32%
24%
24%
14%
27%
26%
24% 13%
12%
12% 14% 2% 1%
5%
‐5% ‐19% Jan
‐22% Feb
‐23% Mar
‐22% Apr
‐19%
‐19%
May
2009
Source: IATA Cargo eChartbook
Jun
‐15% Jul
2010
‐12% Aug
Sep
Oct
Nov
Dec
2011
8
US Air Export Tons: 2008 - 2011 Trailing Twelve Month Index; 2008 = 100
Historical Context
Asia and Latin America – mainly China and Brazil – are the key drivers of U.S. air export growth
125 To Asia
120 115
To Latin America TO WORLD
110 105 100 95
To Europe
90 85 80 75 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 2008
2009
2010
2011
9 Source: US Department of the Census FT 920 Report
Historical Context
U.S. air import tonnage recovered earlier than exports!
US Air Import Tons: 2008 - 2011 Trailing Twelve Month Index; 2008 = 100
125 120 115
From Asia
110
FROM WORLD From Europe From Latin America
105 100 95 90 85 80 75
12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 2008
2009
2010
2011
10 Source: US Department of the Census FT 920 Report
Relationship Between Air Share and Unit Value Air % of Total CDs / DVDs Weight on AsiaÆU.S. Lanes
50%
49.9%
45%
36.7%
35%
Air Share
Unit values increase due to growing portion of DVDs and recordable products
28.2%
30% 24.3%
25%
23.6%
20%
17.2%
15.1%
15% 10%
22.7%
10.0%
10.3%
’04
’05
15.2%
5% 0%
’99
’00
’01
’02
’03
’06
’07
’08
Unit Value Air Share 24 22 20 18 16 14 12 10 8 6 4 2 0
Unit Value ($/kg)
40%
CD / DVD unit values decline due to market maturity and productivity improvements
Unit values decline due to recession
Historical Context
A commodity’s air share is directly related to its unit value
’09
The ratio of transportation cost to unit value directly influences shippers’ modal choice because higher unit values are related to higher inventory carrying cost, and thus have a direct impact on profitability In general, the unit value of a commodity will decline because of market maturity and productivity improvements; however, for some commodity classes (e.g., electronics), more mature products are replaced by newer generations of devices offering enhanced features and higher performance, which may reverse the price trend and lead shippers to continue using air transportation 11 Source: U.S. Department of Commerce
Historical Context
Boeing calculates that air share of global trade has declined steadily since the late 1980s Global Air Cargo and Containerized Ocean Traffic Trillions of Cargo Tonne-Kilometers; Percentage Of CTKs 100% = 1.0 1.2 1.3 1.4 1.5 1.6 1.8 2.0 2.2 2.4 2.6 2.9 3.2 3.5 3.6 3.8 4.3 4.8 5.3 5.9 6.6
Contz. Ocean
Air
12 Source: Boeing analysis based on Fearnleys, UNCTAD Review of Maritime Trade, Boeing primary research
Historical Context
Freighter capacity is coming back
Global Large Freighter Fleet In-Service Units B777s
500
B747-400s (Conversions)
450 400
B747-400s Factory-Built
350 300 250
MD-11Fs
200 150
B747 Classics (Conversions)
100 B747 Classics (Factory-Built Freighters)
50 0 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
13 Source: Boeing analysis of Ascend CASE data
Primary Large Freighter Fleet Options Net Payload versus Range; Existing & Potential Fleet Size (Excluding Integrators) Maximum Volumetric Payload (Metric Tons – Net)
Historical Context
There are a number of large freighter options, each offering distinct trade-offs between capacity risk/unit cost and capital cost/operating efficiency
135 130 125
B747-8F
120
74
115
114
110 105
68 B747 Classic
63
100 95
B747-400P2F
B777F MD-11F/c
40
B747-400F
+216/b
90 85
B747-400ERF
+52
54+5
70
80 75 70 6,200 6,400 6,600 6,800 7,000 7,200 7,400 7,600 7,800 8,000 8,200 8,400 8,600 8,800 9,000 9,200 9,400
Still-Air Range At Max Volumetric Payload (Kilometers) Existing + Known Orders Potential (Announced Options + Conversion Feedstock) Source: DFH Associates analysis of Ascend CASE fleet database, aircraft performance data from manufacturers
14
Global Twin-Aisle Passenger Aircraft Deliveries
Recent History
Passenger widebody deliveries are expected to rise sharply
15 Source: IATA analysis of Ascend CASE data
Putting Recent History Into Context Thinking About Air Cargo’s Long Term Future Conclusions
16
Key Questions To Be Explored
Long-Term Future
We will consider three key forces acting on air freight demand growth over the next five years
17
Historical Crude Oil And Jet Fuel Prices USD per barrel
EXAMPLE
What impacts from sustained higher energy prices?
Long-Term Future
Thinking about the long-term future is less about volatility and more about “mega-trends” and the impacts on demand, sourcing patterns and modal competition
Hurts economic and trade growth Widens the cost disadvantage of air freight relative to surface modes • But also preserves, and potentially widens, the speed gap with time-definite ocean services due to slow steaming
Pushes manufacturers and retailers to shorten supply chains (“near-shoring” or “rightshoring”)
18 Source: IATA analysis of Platts and RBS data
air freight boom World GDP: 2011/1 Trillions of 1995 U.S. Dollars $12.0 Other
29%
Consumer Spending
71%
North America
Share of Global Consumer Spending:
$13.1
$14.0
42%
47%
58%
53%
Europe
33%
Notes /1
29%
$3.8 38%
62%
Asia/PacificRest of World
28%
Economic Intelligence Unit estimate as of April 2011
Source: Economist Intelligence Unit
Long-Term Future
Consumer spending the to sustaining current Consumer spending is theiskey tokey sustaining air freightthe growth
9%
19
Long-Term Future
Unemployment in the world’s major economies has been declining very slowly so far Unemployment Percent of Total Labor Force
12%
Eurozone
11% 10%
United States
9% 8% 7% 6% 5%
Newly-Industrialized Asian Economies/1
4% 3% 2% 1%
Japan
0% ’80’81’82’83’84’85’86’87’88’89’90’91’92’93’94’95’96’97’98’99’00’01’02’03’04’05’06’07’08’09’10’11’12 Forecast Note /1 Newly-Industrialized Asian Economies includes South Korea, Singapore, the Hong Kong Special Administrative Region, and Taiwan Source: DFH&A analysis of IMF World Economic Outlook Database
20
U.S. Home Prices S&P/Case-Schiller Index (100 = January 2000)
Long-Term Future
US home prices are not bouncing back
21 Source: S&P/Case-Schiller Home Price Indices
Shifting Dynamics of Off-shoring vs. Near-sourcing
Low
Industrial Machinery
Auto parts
Servers & copiers
2015 Consumer Electronics
High Apparel & Footwear
Auto parts
Industrial Machinery
Manufacturing Cost Per Unit
Servers & copiers
Apparel & Footwear
High
2011 Consumer Electronics
Manufacturing Cost Per Unit
Long-Term Future
Changing sourcing patterns may reduce average lengths of haul and thereby erode the competitive advantage of air freight
Low Low
High Transport Weight per Unit
Low
High Transport Weight per Unit Built in Asia Built in Mexico Built in US
Source: McKinsey Quarterly
22
Illustrative Price/Speed Options for Intercontinental Shipments
Price/speed trade-offs have not changed significantly over the past 20 years
Price/Kilo
High
Long-Term Future
Modal competition is a function of price/speed and planning
What is changing is shipper’s ability to plan, and thereby reduce the occurrence of emergencies that account for an estimated 50 percent of intercon air freight shipments
Air
Ocean
• Quality and speed of information continues to increase • Cost of communications and analysis continue to decline
Low 2 days
5-7 days
30 days
Door-To-Door Transit Time 23
Putting Recent History Into Context Thinking About Air Cargo’s Long Term Future Conclusions
24
Conclusions
Conclusions
Dramatic rebound has brought us back to 2008 – critical question is whether industry can resume historical growth rates
Keep in mind the conditions for two key scenarios • Back to Normal: relationship between GDP and air freight traffic will continue as before • Permanently Slower Growth: GDP growth will translate into less air freight growth due to: sustained higher energy prices changed sourcing patterns better planning and communication
25
Presentation by: David F. Hoppin CNS Partnership Conference | Phoenix | April 2011
Putting Recent History Into Context Thinking About Air Cargo’s Long Term Future Conclusions
1
Putting Recent History Into Context Thinking About Air Cargo’s Long Term Future Conclusions
2
Historical Context
Long-distance trade is inherently volatile
World GDP and Intercontinental Trade Value: 1961 – 2015 1995 U.S. Dollars; Percent 20%
Intercon Trade as % of World GDP 15% 10% 5% 0% -5% -10%
% Change in World Real GDP
-15%
% Change in Real Intercon Trade Value -20% -25%
1961
1965
1970
1975
1980
1985
Note Intercon trade defined as world trade less intra-North America and intra-Europe. Source: Queri International
1990
1995
2000
2005
2010E
3
Global Airline Industry Cargo Revenues USD Billions; Year-Over-Year Percentage Growth
≈4%
Historical Context
Last year’s double-digit revenue growth has returned the industry to where it was in 2008
+30% -25%
Source: IATA analysis of IATA, ICAO data
4
Historical Context
Growth rates are slowing sharply – which is to be expected, after the dramatic bounce-back in 2010 IATA Freight Traffic Index Percent Change From Same Month of Prior Year
World 28%
28%
27%
34% 27%
25%
23%
20%
9%
24% 15%
14%
2%
‐23% Jan
‐22% Feb
‐21% Mar
‐22% Apr
‐17%
‐17% May
2009
Source: IATA Cargo eChartbook
Jun
‐11% Jul
2010
‐10%
Aug
‐5%
Sep
10%
5%
7%
Nov
Dec
‐1%
Oct
2011
5
Historical Context
Growth rates are slowing sharply – which is to be expected, after the dramatic bounce-back in 2010 IATA Freight Traffic Index Percent Change From Same Month of Prior Year
Asia/Pacific 38%
35%
34%
33%
39% 30%
34% 25%
22%
15%
6% ‐5% ‐28% Jan
‐25% Feb
‐24% Mar
‐22% Apr
‐16%
‐18% May
2009
Source: IATA Cargo eChartbook
Jun
‐10%
Jul
2010
‐9%
Aug
15% 15% 4% 2%
8%
‐3%
Sep
Oct
Nov
Dec
2011
6
Historical Context
Growth rates are slowing sharply – which is to be expected, after the dramatic bounce-back in 2010 IATA Freight Traffic Index Percent Change From Same Month of Prior Year
Europe 22% 12%
9% 7% 6%
12%
15% 8%
12%
10%
11%
12%
7% 5% 3% ‐6%
‐23% Jan
‐23% Feb
‐20% Mar
‐23% Apr
‐19%
‐20%
May 2009
Source: IATA Cargo eChartbook
Jun
‐16% Jul 2010
‐15% Aug
‐13% Sep
‐11%
Oct
Nov
Dec
2011
7
Historical Context
Growth rates are slowing sharply – which is to be expected, after the dramatic bounce-back in 2010 IATA Freight Traffic Index Percent Change From Same Month of Prior Year
North America 34%
27%
35%
32%
24%
24%
14%
27%
26%
24% 13%
12%
12% 14% 2% 1%
5%
‐5% ‐19% Jan
‐22% Feb
‐23% Mar
‐22% Apr
‐19%
‐19%
May
2009
Source: IATA Cargo eChartbook
Jun
‐15% Jul
2010
‐12% Aug
Sep
Oct
Nov
Dec
2011
8
US Air Export Tons: 2008 - 2011 Trailing Twelve Month Index; 2008 = 100
Historical Context
Asia and Latin America – mainly China and Brazil – are the key drivers of U.S. air export growth
125 To Asia
120 115
To Latin America TO WORLD
110 105 100 95
To Europe
90 85 80 75 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 2008
2009
2010
2011
9 Source: US Department of the Census FT 920 Report
Historical Context
U.S. air import tonnage recovered earlier than exports!
US Air Import Tons: 2008 - 2011 Trailing Twelve Month Index; 2008 = 100
125 120 115
From Asia
110
FROM WORLD From Europe From Latin America
105 100 95 90 85 80 75
12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 12 1 2 2008
2009
2010
2011
10 Source: US Department of the Census FT 920 Report
Relationship Between Air Share and Unit Value Air % of Total CDs / DVDs Weight on AsiaÆU.S. Lanes
50%
49.9%
45%
36.7%
35%
Air Share
Unit values increase due to growing portion of DVDs and recordable products
28.2%
30% 24.3%
25%
23.6%
20%
17.2%
15.1%
15% 10%
22.7%
10.0%
10.3%
’04
’05
15.2%
5% 0%
’99
’00
’01
’02
’03
’06
’07
’08
Unit Value Air Share 24 22 20 18 16 14 12 10 8 6 4 2 0
Unit Value ($/kg)
40%
CD / DVD unit values decline due to market maturity and productivity improvements
Unit values decline due to recession
Historical Context
A commodity’s air share is directly related to its unit value
’09
The ratio of transportation cost to unit value directly influences shippers’ modal choice because higher unit values are related to higher inventory carrying cost, and thus have a direct impact on profitability In general, the unit value of a commodity will decline because of market maturity and productivity improvements; however, for some commodity classes (e.g., electronics), more mature products are replaced by newer generations of devices offering enhanced features and higher performance, which may reverse the price trend and lead shippers to continue using air transportation 11 Source: U.S. Department of Commerce
Historical Context
Boeing calculates that air share of global trade has declined steadily since the late 1980s Global Air Cargo and Containerized Ocean Traffic Trillions of Cargo Tonne-Kilometers; Percentage Of CTKs 100% = 1.0 1.2 1.3 1.4 1.5 1.6 1.8 2.0 2.2 2.4 2.6 2.9 3.2 3.5 3.6 3.8 4.3 4.8 5.3 5.9 6.6
Contz. Ocean
Air
12 Source: Boeing analysis based on Fearnleys, UNCTAD Review of Maritime Trade, Boeing primary research
Historical Context
Freighter capacity is coming back
Global Large Freighter Fleet In-Service Units B777s
500
B747-400s (Conversions)
450 400
B747-400s Factory-Built
350 300 250
MD-11Fs
200 150
B747 Classics (Conversions)
100 B747 Classics (Factory-Built Freighters)
50 0 2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
13 Source: Boeing analysis of Ascend CASE data
Primary Large Freighter Fleet Options Net Payload versus Range; Existing & Potential Fleet Size (Excluding Integrators) Maximum Volumetric Payload (Metric Tons – Net)
Historical Context
There are a number of large freighter options, each offering distinct trade-offs between capacity risk/unit cost and capital cost/operating efficiency
135 130 125
B747-8F
120
74
115
114
110 105
68 B747 Classic
63
100 95
B747-400P2F
B777F MD-11F/c
40
B747-400F
+216/b
90 85
B747-400ERF
+52
54+5
70
80 75 70 6,200 6,400 6,600 6,800 7,000 7,200 7,400 7,600 7,800 8,000 8,200 8,400 8,600 8,800 9,000 9,200 9,400
Still-Air Range At Max Volumetric Payload (Kilometers) Existing + Known Orders Potential (Announced Options + Conversion Feedstock) Source: DFH Associates analysis of Ascend CASE fleet database, aircraft performance data from manufacturers
14
Global Twin-Aisle Passenger Aircraft Deliveries
Recent History
Passenger widebody deliveries are expected to rise sharply
15 Source: IATA analysis of Ascend CASE data
Putting Recent History Into Context Thinking About Air Cargo’s Long Term Future Conclusions
16
Key Questions To Be Explored
Long-Term Future
We will consider three key forces acting on air freight demand growth over the next five years
17
Historical Crude Oil And Jet Fuel Prices USD per barrel
EXAMPLE
What impacts from sustained higher energy prices?
Long-Term Future
Thinking about the long-term future is less about volatility and more about “mega-trends” and the impacts on demand, sourcing patterns and modal competition
Hurts economic and trade growth Widens the cost disadvantage of air freight relative to surface modes • But also preserves, and potentially widens, the speed gap with time-definite ocean services due to slow steaming
Pushes manufacturers and retailers to shorten supply chains (“near-shoring” or “rightshoring”)
18 Source: IATA analysis of Platts and RBS data
air freight boom World GDP: 2011/1 Trillions of 1995 U.S. Dollars $12.0 Other
29%
Consumer Spending
71%
North America
Share of Global Consumer Spending:
$13.1
$14.0
42%
47%
58%
53%
Europe
33%
Notes /1
29%
$3.8 38%
62%
Asia/PacificRest of World
28%
Economic Intelligence Unit estimate as of April 2011
Source: Economist Intelligence Unit
Long-Term Future
Consumer spending the to sustaining current Consumer spending is theiskey tokey sustaining air freightthe growth
9%
19
Long-Term Future
Unemployment in the world’s major economies has been declining very slowly so far Unemployment Percent of Total Labor Force
12%
Eurozone
11% 10%
United States
9% 8% 7% 6% 5%
Newly-Industrialized Asian Economies/1
4% 3% 2% 1%
Japan
0% ’80’81’82’83’84’85’86’87’88’89’90’91’92’93’94’95’96’97’98’99’00’01’02’03’04’05’06’07’08’09’10’11’12 Forecast Note /1 Newly-Industrialized Asian Economies includes South Korea, Singapore, the Hong Kong Special Administrative Region, and Taiwan Source: DFH&A analysis of IMF World Economic Outlook Database
20
U.S. Home Prices S&P/Case-Schiller Index (100 = January 2000)
Long-Term Future
US home prices are not bouncing back
21 Source: S&P/Case-Schiller Home Price Indices
Shifting Dynamics of Off-shoring vs. Near-sourcing
Low
Industrial Machinery
Auto parts
Servers & copiers
2015 Consumer Electronics
High Apparel & Footwear
Auto parts
Industrial Machinery
Manufacturing Cost Per Unit
Servers & copiers
Apparel & Footwear
High
2011 Consumer Electronics
Manufacturing Cost Per Unit
Long-Term Future
Changing sourcing patterns may reduce average lengths of haul and thereby erode the competitive advantage of air freight
Low Low
High Transport Weight per Unit
Low
High Transport Weight per Unit Built in Asia Built in Mexico Built in US
Source: McKinsey Quarterly
22
Illustrative Price/Speed Options for Intercontinental Shipments
Price/speed trade-offs have not changed significantly over the past 20 years
Price/Kilo
High
Long-Term Future
Modal competition is a function of price/speed and planning
What is changing is shipper’s ability to plan, and thereby reduce the occurrence of emergencies that account for an estimated 50 percent of intercon air freight shipments
Air
Ocean
• Quality and speed of information continues to increase • Cost of communications and analysis continue to decline
Low 2 days
5-7 days
30 days
Door-To-Door Transit Time 23
Putting Recent History Into Context Thinking About Air Cargo’s Long Term Future Conclusions
24
Conclusions
Conclusions
Dramatic rebound has brought us back to 2008 – critical question is whether industry can resume historical growth rates
Keep in mind the conditions for two key scenarios • Back to Normal: relationship between GDP and air freight traffic will continue as before • Permanently Slower Growth: GDP growth will translate into less air freight growth due to: sustained higher energy prices changed sourcing patterns better planning and communication
25
