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Air Cargo Down as Comerica Mulls Recession Risk: Freight Markets

Air Cargo Down as Comerica Mulls Recession Risk
The airline-cargo slowdown began in May, following Japan’s March 11 earthquake and tsunami. Photographer: Michael Nagle/Bloomberg

Sagging cargo shipments in the belly of passenger jets at carriers such as United Continental Holdings Inc. and Delta Air Lines Inc. are stoking concern that the U.S. economy risks a double-dip recession.

United’s cargo traffic plunged 17 percent in August for the fourth straight drop that exceeded 10 percent, while Delta’s cargo was little changed for three months in a row and American Airlines extended a streak of decreases that began in May.

“We have a lot of consumer nervousness over the economy,” Delta Chief Cargo Officer Neel Shah said in a telephone interview. “One day people feel good, and the next day they feel bad, and it’s that volatility that’s the problem.”

Cargo is a bellwether for the carriers’ main business of flying people, said Hunter Keay, a Wolfe Trahan & Co. analyst. While cargo is less than 4 percent of sales at the biggest U.S. airlines, their monthly reports offer more-timely soundings on the $60 billion global air-freight market than quarterly results from FedEx Corp. and United Parcel Service Inc.

Frequent flights and broad networks help airlines win business for everything from U.S. mail to electronics, along with niche shipments such as sushi-grade seafood, baby chicks for poultry farms and caskets containing human remains.

“The decline in air cargo is yet another indicator among so many that suggests the economy continues to be weak and may be inching closer to recession,” said Robert Dye, Comerica Inc.’s chief economist.

‘Off a Cliff’

The slide in air-carrier cargo correlates with “consumer confidence falling off a cliff” in August, Dye said in an interview from Dallas. The Bloomberg Consumer Comfort Index slid to minus 49.3 in the week ended Sept. 4, 2011’s second-worst reading, and stayed at that level last week.

Dye rates the risk of a recession at 45 percent. Mark Vitner, senior economist at Wells Fargo Securities LLC in Charlotte, North Carolina, put the chances at one in three. The cargo drop “flies in the face” of assertions that shipping disruptions from Japan’s earthquake had been resolved, he said.

“I don’t think it’s unreasonable to look at these cargo numbers and grow a little suspicious on what it means for passenger trends,” Keay, who is based in New York, said in an interview.

Analysts and investors have been watching for signs of a return to recession because unemployment has hovered at about 9 percent or more for two years, damping consumer confidence and spending.

Bond Outlook

Federal Reserve Chairman Ben S. Bernanke is among the economists saying the U.S. will avoid another slump, and Treasury investors are backing that forecast. Since the so-called long bond debuted in 1977, the economy has never contracted when the gap between 10- and 30-year rates has been as wide as it is now.

The Fed also reported today that U.S. industrial output unexpectedly rose in August, signaling manufacturing will support the world’s largest economy.

The airline-cargo slowdown began in May, following Japan’s March 11 earthquake and tsunami. Carriers also cited tougher comparisons with a year earlier when many businesses replenished inventory as the economy improved.

At Atlanta-based Delta, cargo traffic had been growing by 15 percent in March and April before cooling to a 2.1 percent pace for May. Traffic has been little changed since then. Exports are down from China and Japan, and domestic U.S. loads are shrinking, Shah said.

Holiday Season

“Everyone is cautious,” said Shah, who added that his conversations with customers indicate that there won’t be the usual fourth-quarter shipment peak from holiday gift-buying.

Softening cargo volumes, which are measured in the number of tons flown a mile, are only the latest drag on airline stocks in a year in which jet-fuel prices have averaged 45 percent more than in the same period of 2010.

The Bloomberg U.S. Airlines Index was down 29 percent this year through yesterday, paced by American parent AMR Corp.’s 54 percent plunge. Delta dropped 33 percent, and United slid 15 percent.

United, the world’s biggest airline, had $1.16 billion in cargo sales last year, or 3.4 percent of its total. Delta’s cargo revenue was $850 million, or 2.7 percent, while American reported $672 million, or 3 percent.

United’s 2011 cargo results have been hamstrung by a limited ability to reposition aircraft while awaiting regulatory clearance to run its United Airlines and Continental Airlines units as a single carrier after their 2010 merger, said Mike Trevino, a spokesman for the Chicago-based company.

Jet Choices

Continental uses mostly narrow-body jets to Latin America and Europe, which are among the most resilient markets for cargo right now, and those planes can’t carry as much payload as United’s wide-body jets flying to Asia, the weakest region now.

“Our strength is in Asia, so as Asia has had difficulties, that has had an impact,” Trevino said. “We will have some upside as we continue” to integrate the two airlines, he said.

Freight traffic at Fort Worth, Texas-based American has shrunk from the prior year each month in 2011 except for April’s 2.2 percent increase. New offerings such as temperature monitoring for pharmaceuticals have helped blunt the declines, said Jennifer Pemberton, a spokeswoman.

“This year we think it’s just a typical summer slump,” she said. “We’re a little bit out of pattern because last year there was more restocking” as the economy strengthened.

Global Decline

Global air-cargo shipments fell for three straight months through July, the most-recent month for which data are available, according to the International Air Transport Association. The Geneva-based trade group estimates that the world air-cargo market is valued at $60 billion, which includes freight-only operators such as UPS and FedEx.

“Historically, cargo has been a pretty good leading indicator for business and premium traffic by about three to six months,” Michael Linenberg, a Deutsche Bank AG analyst in New York, said in a note last month. “Business and premium traffic tends to lead leisure travel by a similar time frame.”

Even as industry executives such as Delta President Ed Bastian said this week at a conference hosted by Linenberg that travel demand was firm, some also signaled their concern with steps to shrink passenger capacity.

Delta said it would trim 2012 flying by 2 percent to 3 percent, while American said it would pare available seats next quarter by 0.5 percent and said its plans for next year are under review. United and Delta previously scaled back on seating for the end of this year.

“Cargo is usually the canary in the mine shaft,” Delta’s Shah said. “I don’t know if we’re going to face that sort of situation this time. Passenger demand is holding up quite well, yet everyone is being very cautious with costs and capacity.”

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