Can Passenger Airlines Revive The Growth In The Air Cargo Industry?

In continuation with our previous article on the role played by passenger airlines in the air cargo industry, in this note we talk about what issues plague these airlines and their expected performance in the cargo space in the future.

Constraints on Air Cargo

• By reducing economic activity and decreasing purchasing power, recessions result in the erosion of international trade and of demand for goods. This, in turn, leads to a decline in demand for air cargo.
• Trade barriers set up by governments and lobbyists, through the establishment of export tariffs and import duties, to promote nationalist agendas, hamper trade between nations. This discourages international trade and thus, demand for air cargo.
• To deal with the increased carbon footprint and other environmental concerns such as loud noise, and emissions causing pollution, a number of regulations are put in place on aircraft manufacturers and airlines. Meeting these regulations calls for additional resources and results in increased expenses for cargo operators. This, in turn, may affect air cargo adversely, by increasing costs.
• Volatility in oil prices results in cost fluctuations. While at the time of high oil prices, airlines may have to increase the price for cargo transportation, at times of low oil prices they suffer due to increased competition, pressurizing their yields.
• It is the most expensive mode of cargo transportation, when compared to the other transport options available. This may discourage less urgent and low value cargo to use air as the transportation mode.
• The absence of high quality transport infrastructure may hinder sustained growth in air cargo.

Recent Trends

Post 9/11 and the subprime mortgage crisis, demand for air cargo suffered a hit. The weak world economy has had an adverse impact on the mature air cargo routes connecting America-Europe, resulting in a slowdown in air cargo traffic.

As global economic growth and trade rebounded, thanks to strong emerging market growth, the revenue earned by the air cargo industry expanded. However, due to factors such as the weakness in demand, expansion in cargo capacity, appreciation of the dollar, lower surcharges, and competition from now-faster water transport, air cargo revenue became sluggish again in 2013-2014.

That said, the long-term outlook for air freight remains strong, on the back of growth forecast in online retail store sales and consumers willing to pay a premium for quick delivery of these products. Further, the new free trade agreements and unexplored opportunities in the Asia-Pacific region hold immense potential to bolster this industry, with passenger airlines leading the way.

Passenger Airlines’ Role In Air Cargo Industry

The following table talks about Trefis’ forecasts of cargo revenue for a number of airlines.

• In order to see the growth in cargo returning to historic highs, it is important to ensure that the relationships within the industry are strengthened such that airlines are able to respond to the changing consumer patterns.
• Collaboration with supply chain partners is a must in order to efficiently deliver to customers by incorporating “click-buy-fly,” “home-to-home,” and “factory-to-home” models.
• To keep worries at bay, more awareness needs to be created regarding the carbon footprint of air cargo which is limited to only 2% of total carbon dioxide emission.
• A level of safety and security is a must by fully embracing technology and reducing human intervention.
• Creating awareness regarding air cargo’s role in developing emerging nations and connecting them to the rest of the world by providing trade opportunities, which earlier were not available.

Have more questions about JetBlue Corporation (NYSE:JBLU)? See the links below:

• Why Has Trefis Revised Its Price Estimate For JetBlue To $18 Per Share?
• Capacity Growth Fuels JetBlue’s Q2’16 Revenues, Slightly Offset By Declining PRASM
• JetBlue’s Q2’16 Earnings Preview: Capacity Expansion And Mint Services To Drive Results
• What Impact Will Crude Oil Prices Have On JetBlue’s Enterprise Value?
• How Are US Air Fares Correlated To Crude Oil Prices?
• Rapid Capacity Growth And Lower Fuel Costs Drive JetBlue’s 1Q’16 Results
• How Has JetBlue Utilized Its Cash Flows Over The Last Three Years?
• How Has JetBlue’s Revenue And EBITDA Grown Over The Last Five Years?
• What Will Drive JetBlue’s Revenue And EBITDA In The Next Five Years?
• How Would JetBlue’s Equity Value Be Impacted If Crude Oil Prices Reach $100 Per Barrel By 2018?
• How Much Value Will JetBlue’s International Operations Contribute To Its Revenue By 2020?
• How Will JetBlue’s Equity Value Be Impacted If Crude Oil Prices Average At $50 Per Barrel In 2018?
• Capacity Expansions And Fuel Cost Savings Drive JetBlue’s Earnings in 2015
• How Did The Oil Slump Impact JetBlue’s Operating Margins In 2015?
• What Is JetBlue’s Fundamental Value Based On 2016 Expected Numbers?
• How Has JetBlue’s Revenue And EBITDA Composition Changed Over The Last Five Years?
• What Is JetBlue’s Revenue And EBITDA Breakdown?

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for JetBlue Corporation

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