Trump’s new tariffs are biting air cargo industry

Tariffs announced by the U.S. President Donald Trump along with ongoing trade tensions are biting the air cargo industry and some carriers are warning things could get worse.

Demand for the speedy shipments of high-value goods from consumer electronics to industrial components to apparel that cargo airlines provide is falling, freight airlines are warning, just as they are close to the busy year-end season.

Shares of Atlas Air Worldwide Holdings, which flies for DHL, Amazon and others, droppedd nearly 25 percent on Thursday — their steepest one-day percentage drop since November 2008 to a more than three-year low. The carrier reported weaker-than-expected second-quarter profits before the markets opened due to softer demand and warned net income would fall on the year.

President Trump later on Thursday delivered what could be another blow to the industry: a 10 percent tariff by September 1 on another $300 billion in Chinese goods coming into the U.S. The tweeted announcement sent markets tumbling.

Throughout the industry, executives are fretting over the prolonged trade battles and how that will affect demand amid an already-reduced economic growth outlook. Some recent economic indicators have been downbeat, such as the U.S. factory activity, which slowed to a nearly three-year low in July.

If trade issues “don’t get resolved soon, it’s going to get a lot worse,” said Stephen Fortune, principal at Fortune Aviation Services, an aircraft investment firm that specialises in the air cargo business.

Air cargo demand, measured by freight-ton kilometers, dropped 3.3 percent in the first five months of 2019 from the year-earlier period. The percentage drop was more than double that in the Asia-Pacific region, according to a report earlier this month from the International Air Transport Association, a trade group that represents most of the world’s airlines.

Manufacturers and shippers took a “wait-and-see approach regarding tariffs and trade issues” that hurt cargo flying demand, Atlas Air CEO Bill Flynn said in an earnings release

Air cargo had been a small but growing corner of large passenger airlines’ revenue but that business is suffering, despite recent strength in shorter flights for e-commerce customers.

Unit revenue at Air France-KLM’s cargo business went down 7.5 percent in the three months ended in June from a year earlier because of U.S.-China trade tensions and economic weakness.

“We don’t know yet what will be the trend in the next quarter, but clearly, this minus 7.5 percent of unit revenue for the cargo is not a good signal,” the Franco-Dutch airline’s CFO Frederic Gagey said on an earnings call.

Lufthansa Group said this week that weak demand between Europe and Asia drove down its cargo profit by 88 percent to 15 million euros ($16.6 million) in the first half of the year, prompting it to reduce capacity and cut costs.

Carriers are now bracing for what could become a worsening trend as the trade war continues with no end in sight as they prepare for the fourth quarter, when demand for air shipments peaks.

Still, Fortune and others in the industry argue that air cargo’s challenges aren’t signalling a downturn like the recession that ended a decade ago.

The slide in demand will likely “go from mild-to-medium,” Fortune said. “Trade still has to move.”

Atlas Air hasn’t had to discount, even temporarily, for new orders, and that the market is nowhere near as severe as in 2008 and 2009, chief executive Flynn told investors.

“That’s not the situation we’re in,” he said.

Source: CNBC