Major Industry Trends
Slump in Global Trade Devastates Industry
The fortunes of the transport and logistics industry are closely connected to the economic cycle. When economic activity is buoyant, demand for transport and logistics services is equally strong. Consumer and business demand for goods and services inevitably translates into higher demand for transport and logistics services. Thus, the slump in global economic growth that occurred in the second half of 2008 and during the course of 2009 caused global trade volumes to plummet, and had a severe impact on the transport and logistics industry.
Around the world, ports and airports reported sharp falls in traffic. The International Air Transport Association (IATA) reported that cargo volumes fell by 4% in 2008 and the closing stages of the year and the opening months of 2009 saw further, unprecedented declines in cargo volumes. By December 2008 they had fallen by 22.6% and by 23.2% year-on-year by January 2009. Reacting to the January 2009 figures, Giovanni Bisignani, IATA’s director general and CEO, said: “The industry is in crisis and nobody knows that better than our cargo colleagues. Cargo demand has fallen off a cliff.” He had earlier described the December 2008 figures as “unprecedented and shocking,” adding that “there is no clearer description of the slowdown in world trade. Even in September 2001, when much of the global fleet was grounded, the decline was only 13.9%.
The low point for air freight was reached in March 2009, after which the fall in demand began to stabilize. The fall in air cargo through 2009 was steep at 10.5%, surpassing the 3.5% decline recorded among passengers, but not quite the disaster that had been indicated by the figures for the start of the year. IATA’s Bisignani called 2009 the worst year in aviation history in terms of demand, predicting that airlines would lose US$5.6 billion on a net basis in 2010 after losing US$11 billion in 2009.
However, freight demand began to pick up sharply towards the end of 2009, signaling a wider revival in the global economy. Thus, air freight demand rose by 24.4% in December 2009, compared with the figure a year earlier. But this year-on-year strength was exaggerated by an unusually weak December 2008, the low point in the cycle.
According to IATA, air cargo represents about 10% of the airline industry’s revenues. As 35% of the value of goods traded internationally are transported by air, air cargo is a barometer of global economic health.
The shipping industry has also been badly affected by the slump in global economic growth and trade. The Baltic Dry Index provides the daily average cost to ship bulk dry commodities (such as grain products or coal) around the world. It is highly sensitive to global economic activity, as the freight costs it measures move in response to demand for shipping services. The greater the demand for raw materials around the globe, the higher the index moves.
It normally takes around six to nine months for raw materials to be delivered to customers and made into finished products. Thus the index is also a highly accurate “leading indicator” of global economic activity—in other words, movements in the Baltic Dry Index provide a very good guide to the future direction of the global economy. On May 20, 2008, the index reached its record high level since its introduction in 1985, reaching 11,793 points. But by December 2008, the index had dropped by 94%, to 663 points, the lowest since 1986, presaging the global recession. Overall, the Baltic Dry Index fell by 92% in 2008. In August 2009, it reached a low of 2,772, but it then rallied sharply to a 2009 high of 4,381 points in November.
By April 2010, the Baltic Dry Index had risen by 58.5% over the previous 12 months. However, in April 2010, it was also showing weakness, despite the fact that global industrial production was rebounding at the strongest rate since 2000.
Average global container freight rates saw a major rally in late 2009, according to Drewry’s Container Freight Rate Insight report. After collapsing in the first half of 2009, the Drewry Global Freight Rate Index increased by 18% between July and September, and rose by another 6% between September and November. According to Drewry, the global “all-in” container freight rate index rose from US$2,040 per 40-foot container to US$2,160 from September to November.
The upturn continued through 2010 and into 2011. Danish logistics operator DSV, for example, reported in April 2010 that it saw maritime container volumes surge 19% in the first quarter of 2010 and added that deep-sea freight rates “have reached a peak” on the Far East to Europe trades, which accounts for half of its ocean business.
Recession Affects Logistics Industry
The global recession has also taken a toll on logistics firms. In March 2009, DHL reported that business had declined in the fourth quarter of 2008, with volumes dropping by as much as 30%, depending on the region. In March 2010, DHL reported that it had successfully managed the repercussions of the economic crisis and exceeded its targets for 2009. It also forecast a moderate recovery in global transport volumes. By July 2011 DHL was able to report that consolidated EBIT (earnings before interest and taxation) would be close to €2.4 billion. The company continued to see encouraging growth in its European domestic parcels business and in Asia, with profits and margins rising significantly.
Environmental Laws Could Hit Transport Firms
Air freight companies may be affected by stricter environmental regulations over the next few years, according to Cargonews Asia. The website said that the likely advent of more stringent global environmental regulations “would impact not only the economics of using air transport, but would also possibly result in punitive sanctions against goods produced with environmentally questionable practices.” It added that the latter element would significantly erode the comparative advantage enjoyed by manufacturers in Asia, which have fueled the growth in demand for air cargo in recent years. These concerns appear to be shared by IATA. Cargonews Asia quoted the organization’s chief economist Brian Pearce as saying that “the cost of protectionism and deglobalization, higher taxes, and climate-change policies will all have an impact on the industry.”
Aviation Industry Cuts Jobs and Capacity, While Mergers Increase
The slump in global trade hit the airlines and shipping companies hard. Airlines cut capacity, routes, and jobs in 2008 and 2009. The downturn has also hurried the consolidation of the industry. In November 2009, British Airways and Spanish airline Iberia said that they had reached a preliminary agreement for a merger, which completed in late 2010. In May 2010, Continental Airlines and UAL Corporation’s United Airlines merged to create the world’s largest airline. The new airline is a US$3 billion company capable of carrying 144 million passengers per year. Sector analysts generally approve of mergers since they allow carriers to pool costs and to raise fares on routes where they used to compete. However, this latter reason is also why regulators scrutinize potential merger deals very closely before giving their approval.
Overcapacity Plagues Shipping Industry
The shipping sector is suffering from a combination of plummeting demand and an oversupply of ships as vessels ordered during the growth years are delivered. The shipping industry enjoyed five boom years until 2007, but the global recession has sapped demand for the transportation of Asian-made goods. In 2010, many shipping companies reported that, although demand picked up, overcapacity affected both rates and their profits. In April 2009, for example, China Cosco Holdings Co., the world’s largest operator of dry-bulk ships, announced an annual loss after rates for hauling commodities, while container prices tumbled on overcapacity.
Global Economic Slump Hits Logistics Specialists
Many of the major logistics firms were affected by the global economic slump, but have made a reasonable recovery through to the first half of 2011. In its 2009 annual results, the CEO of the logistics giant TNT said that “while 2008 was a year of two halves, with the second half clearly marked by the impact of the global economic crisis, 2009 has seen the impact of the economic crisis for its full duration.” The company said that its express business, with its cyclical nature, was most severely affected. “Many customers in Europe have chosen slower and cheaper forms of transport, leading to a move away from air towards road express. The result was an unprecedented drop in volumes of air express of 25% in the beginning of the year, with road volume declines also building up during the year to double digit levels.” Looking forward, TNT said that the fourth quarter of 2009 showed the return of positive growth in express volumes, compared to the dramatic lows in the final quarter of 2008. TNT CEO Peter Bakker said in the Group’s 2010 Annual Report (for the year ending December 31, 2010) that 2010 had been a year of large operating challenges for logistics companies, complicated by both the volcanic ash cloud which grounded large numbers of European flights, and by the extreme winter conditions experienced in 2010. However, the year also saw growth returning to both advanced markets and, more robustly, to emerging markets. The company’s express delivery volumes rose to pre-economic crisis levels and the volume growth in the company’s parcels business continued.