Feb. 9 (Bloomberg) -- A recovery in demand for cargo shipments is failing to lift prices as bigger passenger jets like the A380 superjumbo create a glut of belly space, crimping margins at Deutsche Lufthansa AG and Delta Air Lines Inc.
Air freight rose 0.2 percent in December, year-on-year, after shrinking most months since mid-2010, the International Air Transport Association said Feb. 1. Still, the load factor, a measure of cargo-hold utilization, was stuck at 48.1 percent.
“The more capacity is put into the market, the more profits will be under pressure,” said Karl Ulrich Garnadt, cargo chief at Lufthansa, the biggest freight carrier among passenger airlines. “All wide-body planes have an impact.”
The revival in cargo traffic, which generated sales of about $66 billion in 2011, was led by an order surge in the weeks before Christmas. Airlines need to turn the rebound into improved profitability amid slowing gains in passenger travel, which can lag cargo trends by months.
Shares of Cologne-based Lufthansa, Europe’s second-largest airline, have advanced 20 percent so far this year after falling 44 percent in 2011. Freight contributed operating profit of 310 million euros ($412 million) in 2010, 36 percent of the total.
Atlanta-based Delta is up 34 percent and FedEx Corp. of Memphis, the No. 1 cargo carrier, has gained almost 13 percent, while United Parcel Service Inc., largest package-delivery business, also headquartered in Atlanta, has added 4.2 percent.
Unlike passenger traffic, which tends to track consumer confidence and employment figures, cargo demand is driven by business sentiment as companies restock using the fastest mode of transport, according to IATA Chief Economist Brian Pearce.
Though traffic showed month-on-month growth in November and December, rebounding from a 4.7 percent drop in October, which usually marks the Christmas peak, it’s too early to say whether the surge presages a sustained recovery, he said by phone.
“The air-freight environment has stopped deteriorating, but it’s a mixed picture and I’d want to see a solution in Europe to be sure that we’re moving toward a better place,” Pearce said.
Europe, beset by the sovereign debt crisis, will suffer a “mild recession” in 2012, with the economy shrinking 0.5 percent, the International Monetary Fund said Jan. 24, cutting its global growth forecast to 3.3 percent from 4 percent.
Expansion should return in the second half and the prospect of a “true double-dip” is only 40 percent, according to Jean-Michel Six, an economist at Standard & Poor’s in London.
Air France Slump
IATA estimates that air-cargo sales will be little changed this year, though it says the market could shrink about 6 percent to $62 billion in the event of a renewed banking crisis.
January’s traffic figures were skewed as the early Chinese New Year led to a slump in demand as Asian companies took time off, making it tough to spot longer-term trends, carriers said.
Lufthansa, where December cargo traffic rose 2 percent, had a 12 percent decline last month, though the cargo unit halted flights in advance and the load factor slipped only 0.6 points.
Air France-KLM Group, Europe’s biggest airline, posted a 10 percent drop, greater than the 6 percent capacity cut, so that the Paris-based company’s load factor fell 3 percentage points.
“The international situation isn’t brilliant,” said Jean-Claude Raynaud, a spokesman for the carrier’s cargo unit. “Visibility is low, and I don’t think any sensible person can say what the market will be like in three or four months.”
International Consolidated Airlines Group SA, the regional No. 3, has less exposure to China and recorded a 0.9 percent advance in January cargo traffic, which grew at its British Airways unit while sliding 7.4 percent at Madrid-based Iberia.
At Lufthansa, Garnadt says he has been actively managing capacity while stopping short of sending planes to the desert for storage, as many carriers did during the last recession.
“We are cautiously optimistic for 2012,” he said by e-mail. “We expect a first half with weaker market development, but for the second half we see a positive development.”
Half of European air-freight shipments come from Germany, whose 2010 exports were worth three times those of the U.K., World Trade Organization data show, with Bonn-based Deutsche Post AG the biggest carrier of air and sea cargo by volume.
Turning a profit from cargo handling has become tougher even after a reduction in dedicated freighter capacity as passenger-fleet decisions taken prior to the last slump and during the optimism of the 2010 rebound create oversupply.
Airbus has so far delivered 68 A380s since 2007, while 240 Boeing Co. 777 wide-bodies have entered service in the past three years. The Chicago-based company also brought its new 747 freighter to market in 2011, handing over nine of the planes.
Gulf carriers are adding capacity fastest, with Dubai-based Emirates building up a fleet of 90 A380s, Etihad Airways of Abu Dhabi ordering 96 long-haul planes and Qatar Airways Ltd. planning to operate as many as 190 planes by 2010.
“A lot of new aircraft are coming into service this year, so we expect that capacity will be outweighing demand,” said Henrik Lund, head of air freight at Switzerland’s Panalpina Welttransport Holding AG, the fourth-largest freight-forwarding company. “Rates have stabilized in some of the traditional large trade lanes out of Asia, but it is still a very soft market.”
Overcapacity has also become a “challenge” for Delta, the No. 2 carrier by passenger traffic, as rivals deploy jets away from East Asian routes to counter a drop in shipments to the West, said Danita Waterfall-Brizzi, the company’s cargo sales director for Europe, the Middle East, Africa and India.
“There’s a lot of freighter capacity moving around,” she said. “Whereas it used to be residing mostly in Asia, with the changes in the market we see a lot more moving into India and Germany. The upshot is that the pricing rate gets brought down.”
That’s being accentuated as Mideast carriers increasingly target U.S. shipments, funneling capacity via Europe, she said.
Delta, which in 2011 derived almost 50 percent of its $1.2 billion profit from cargo, had a “strong” January, Waterfall-Brizzi said, and while there’s a “question mark” over the first few quarters of this year, the expectation is that “things then really come forward in the second half.”
With demand remaining below that seen in the middle of last year even after the recent recovery, IATA’s Pearce said it will still take months of growth to reach peak levels of early 2010.
“The capacity situation means that it’s still a buyer’s market,” the economist said. “And that means it’s a very difficult one to make money in.”
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