IATA Economics www.iata.org/economics 1

CARGO E-CHARTBOOK Q3 2014 OVERVIEW Air freight volumes continue to show solid gains on a year ago, supported by economic improvements in

some regions, but high jet fuel prices and overall weakness in yields kept cargo financial performance from improving so far this year. Emerging Asia trade volumes have rebounded after weakness in Q1 and consumers in the US are more optimistic about future economic performance. These developments have supported growth in demand for air-freighted commodities like semi-conductors. However, in Europe consumer confidence and trade activity have weakened due to the Russia-Ukraine crisis, which could weaken air freight demand in months ahead. Business confidence continues to point to expansion, but rates of improvements are still weaker than 2013 year-end. And although jet fuel prices have eased slightly, they remain high at about $120/bb. On the positive side, yields appear to be stabilizing and are up slightly on a year ago, which could reduce downward pressure on financial performance in months ahead. Consistent with more supportive demand conditions in some regions, cargo heads surveyed in July expect growth in traffic and yields to pick-up during the year ahead.

Economic Situation – the economic outlook for 2014 remains improved on 2013, but expectations have been revised down slightly, mostly due to weather-related slowdown in the US in early-2014 (page 2)

Traffic Growth – traffic volumes are up 4-5% on a year ago, but other than a solid rise in July, the trend has been broadly flat throughout 2014. Growth ahead could be dampened by trends in production which suggest a shift toward domestic activity (page 2)

Demand Environment – remains supportive, but recent months have shown diverging developments across regions. World trade volumes have rebounded in Asia, but have fallen in Europe as a result of the Russia-Ukraine crisis. Business confidence continues to signal expansion in manufacturing activity, but rates of improvement still track at a slower pace than those seen toward the end of 2013 (page 3)

Demand Drivers – are mostly positive but also show regional divergence. In China, consumer confidence remains stable and is improving in the US, but European consumers have become more pessimistic over recent months. Capital spending intentions of companies in the UK and Japan remain positive on balance, but have weakened slightly in Japan compared to Q2 (page 3)

Capacity – improvements in freight load factors have moderated in 2014 but aircraft utilization rates are showing some signs of improvement. However, pressure on aircraft utilization remains could intensify, with new aircraft deliveries set to expand the existing widebody fleet by more than 7% in 2014 (page 4)

Competition – air freight rates are stable but show now improvement on a year ago. By contrast, sea freight rates have improved, supported by strength in container shipping in the Americas and Asia (page 4)

Revenue and Yields – air freight yields appear to have stabilized, and have some improvement on a year ago. This could alleviate some downward pressure on cargo business financial performance (page 5)

Costs – jet fuel prices have eased slight, but remain high at about $120/bbl. Nominal wage rates continue to fall in Europe and China, but have been on the rise in the US (page 5)

Profitability outlook – consistent with some improvement in demand conditions in Q3 compared to H1, heads of cargo surveyed in July expect stronger growth in traffic and yields over the next 12 months (page 5)

IATA Economics: www.iata.org/economics 2

Cargo eChartbook – Q3 2014

Economic Outlook & Traffic Growth The global economic outlook for 2014 remains improved on 2013 (1), but there has been yet another

downward revision to the outlook since the start of the year. The global outlook has been dampened by weaker than expected performance of the US economy, which was negatively impacted by extreme weather earlier this year. Recent indicators, however, point to rising employment and growth in manufacturing.

Despite recent impacts of the Russia-Ukraine crisis on the Eurozone recovery, the region is expected to grow much more strongly in 2014 compared to 2013. Europe and the US are now expected to expand at similar rates in 2014, even though the US has enjoyed relatively looser bank lending standards (3). Tightening fiscal policy in both the US and Europe will ensure that growth remains well below that of emerging market economies.

Air freight volumes remain 4-5% above year ago levels, supported by cyclical improvements in economic growth. However, stronger economic growth in 2014 has not generated the expansion of international trade that it would have done in the past, as production has been on-shored (6) – partly due to market factors such as rising wages in low cost economies and partly due to a recent rise in protectionist measures. The Bali trade deal on trade facilitation may help to improve this situation.

-1

0

1

2

3

4

5

6

US Japan Euro Area ASPACexcl Japan

LatinAmerica

MiddleEast North

Africa

Sub-Saharan

Africa

World

% c

hang

e ov

er y

ear

1. Forecasts for GDP growth Source: EIU

201220132014

-28

-22

-16

-10

-4

2

8

14

20

26

32

38

% c

hang

e ov

er y

ear

4. Freight Traffic GrowthSource: IATA, ACI

Domestic Freight Volumes (ACI)

International Freight Volumes (ACI)

International FTKs (IATA)

-3

-2

-1

0

1

2

3

UnitedStates

EuroArea

Japan China India Russia BrazilDiff

eren

ce in

% G

DP

over

pre

viou

s ye

ar

2012 2013 2014

2. Goverment Cyclically Adjusted Fiscal BalanceSource: IMF

Tigh

teni

ngLo

osen

ing

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

% c

hang

e ov

er y

ear

5. International Freight growth by major routesSource: IATA ODS

Within Far East

Europe - Far East

North Atlantic

North and Mid Pacific

-40

-20

0

20

40

60

80

-40

-20

0

20

40

60

80

% b

anks

% b

anks

3. Bank credit conditionsSource: ECB, Federal Reserve

European Banks

US Banks Tighter Credit Standards

Looser Credit Standards

0.5

0.6

0.7

0.8

0.9

1

1.1

1.2

6. Ratio of World Trade to Domestic Industrial Production

Source: Netherlands CPB

IATA Economics: www.iata.org/economics 3

Cargo eChartbook – Q3 2014

Demand Environment & Drivers The demand environment for air cargo remains supportive, but recent months have shown diverging

developments across regions. World trade volumes have recovered after weakness earlier in the year (7), and that is largely due to a rebound in Emerging Asia trade activity. However, there is evidence of weakness in European trade, reflecting the impacts of the Russia-Ukraine crisis. Business confidence continues to signal expansion in manufacturing activity, but rates of improvement still track at a slower pace than those seen toward the end of 2013 (8). There has been no change in inventory to sales ratios (9) suggesting businesses still have no immediate need to reduce their reliance on quick transportation of cargo.

Demand drivers remain positive overall, but are also showing signs of regional divergence. In China, consumer confidence remains stable, and there has been further increase in optimism about the economic outlook in the US. By contrast, European consumers have become more pessimistic over recent months, reflecting the adverse impacts of the Russia-Ukraine crisis (11). Nonetheless, demand drivers remain improved on a year ago, and this continues to support stronger demand for air-freighted commodities, as indicated by expansion in semi-conductor shipments (10). Capital expenditure intentions of companies in the UK and Japan remain positive on balance, but have declined slightly in Japan (12).

90

100

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9

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11

12

13

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15

inde

x of

wor

ld tr

ade,

200

5=10

0

Billi

on F

TKs

7. World trade in goods and air FTKsSource: Netherlands CPB and IATA

(Seasonally Adjusted)

International FTKs(left scale)

World goods trade volumes(right scale)

-26-22-18-14-10-6-2261014182226303438

-34

-26

-18

-10

-2

6

14

22

30

38

46

54

% g

row

th -

Inte

rnat

iona

l FTK

s

% G

row

th, S

emi-C

ondu

ctor

Shi

pmen

ts10. Semi-Conductor Shipments and Air Freight

Source: IATA, SIA

International FTKs

Semi-Conductor Shipments

-40

-20

0

20

40

60

% G

row

th Y

oY

JP Morgan Manufactuerers PMI (+2 months)

International FTKs

8. Purchasing Managers confidence survey and Air Freight Demand

Source: IATA, Markit/JP Morgan

-35

-30

-25

-20

-15

-10

-5

0

0

20

40

60

80

100

120

Bal

ance

exp

ecte

ting

impr

ovem

ent,

net %

Bal

ance

exp

ectin

g im

prov

emen

t, in

dex

11. Consumer confidenceSource: Haver Analytics

China

Europe(right scale)

US

8

10

12

14

16

18

0.8

1

1.2

1.4

1.6

FTK

s (b

illio

n)

Inve

ntor

ies

to s

ales

ratio Inventories to sales ratio

FTKs

9. Total Business inventories to sales ratio and FTKsSource: US Census Bureau and IATA

-15

-10

-5

0

5

10

15

-70

-50

-30

-10

10

30

50

70

Net

bal

ance

inte

ndin

g to

incr

ease

inve

stm

ent

Net

bal

ance

inte

ndin

g to

incr

ease

inve

stm

ent

12. Capital spending intentionsSource: Haver Analytics

UK business(left scale)

Japan business(right scale)

IATA Economics: www.iata.org/economics 4

Cargo eChartbook – Q3 2014 Capacity & Competition Improvements in freight load factors have moderated in 2014 (14) due to increases in capacity through the

passenger business (13), but aircraft utilization rates are showing some signs of improvement (14). The freighter fleet has been stable (13). However, with an expected 14% increase in 2014 of deliveries of new twin-aisle aircraft with belly hold capacity, there could be some downward pressure on aircraft utilization rates ahead – more than 7% will be added to the existing widebody fleet.

Air freight rates are stable but have not improved on a year ago (17). Demand for Asian goods moved by air remains stable – there has been no growth on this key air freight market when compared to the pre-crisis peak (16). By contrast, sea freight rates are showing some improvement. Demand for container shipping has been strongest in the Americas and Asia (18).

2500

2700

2900

3100

3300

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3700

3900

Num

ber o

f airc

raft

13. Cargo fleet compositionSource: IATA, Ascend

Freighter fleet in service Widebody pax fleet in service

End of month totalsEnd of year totals -40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%Asia to EU by seaEU to Asia by seaAsia to EU by airEU to Asia by air

16. EU Trade with Asia% change from pre-crisis peak June 2008 -

Seasonally adjusted monthly data in tonne(Source: International Transport Forum)

37%

39%

41%

43%

45%

47%

49%

51%

53%

7.0

7.5

8.0

8.5

9.0

9.5

10.0

10.5

% a

vaila

ble

freig

ht to

nne

capa

city

Ave

rage

dai

ly h

ours

flow

n

Freight Load Factor

Freight aircraft utilization

14. Freight load factor and freighter aircraft utilization(Seasonally adjusted)

(Source: IATA, Boeing)

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

% c

hang

e ov

er y

ear

17. Ocean container and air freight rate growthSource: Drewry, CASS

Ocean container

Air freight

0

50

100

150

200

250

300

350

400

2007 2008 2009 2010 2011 2012 2013 2014

Num

ber o

f Airc

raft

15. Twin Aisle Aircraft Deliveries by Airline RegionSource: Ascend

OtherMiddle EastNorth AmericaEuropeAsia Pacific

-10

-8-6-4-202468

10

North America Europe South East Asia Middle East Latin America

% G

row

th, Y

ear-o

n-Ye

ar

18. Container Shipping Volume Growth by RegionSource: Drewry

Jun-13May-14Jun-14

IATA Economics: www.iata.org/economics 5

Cargo eChartbook – Q3 2014

Revenues, Costs & Profits Air freight yields appear to have stabilized, and are showing slight improvement on a year ago (19). This

could help reduce downward pressure on profitability, but cargo business financial performance remains weak (22 & 23).

Jet fuel prices have eased slightly since the most recent mid-year peak. Although there has been concern over supply disruptions, the demand outlook has also weakened, particularly in Europe, and that has caused crude oil prices to slip. Nonetheless, jet fuel prices remain high at around $120/bbl (20). While nominal wage rates have stabilized in Europe and China, they are showing some increase in the US as a result of improving employment conditions (21).

Consistent with some improvement in demand conditions in Q3 compared to H1, heads of cargo surveyed in July 2014 expect stronger growth in traffic volumes over the next 12 months as well as some increase in cargo yields (24).

0.0

0.3

0.6

0.9

1.2

1.5

1.8

2.1

2.4

0.00.40.81.21.62.02.42.83.23.64.04.44.8

US$

per

kilo

US$

per

kilo

19. Air Freight Yields (US$ per kilo)Source: IATA CASS

SE Asia-EuropeSE Asia - Europe (incl. Other charges)Global total - LHSGlobal (incl. Other charges) - LHS

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

% o

f Rev

enue

s

22. Profitability of US Cargo Only AirlinesSource: US BTS

Operating Profit MarginNet Profit Margin

20

40

60

80

100

120

140

160

180

200 20. Jet Fuel and Crude Oil Price ($/barrel)(Source: Platts, RBS)

Jet fuel price

Crude oil price (Brent)

-30%

-20%

-10%

0%

10%

20%

30%

40%

-15

0

15

30

45

60

75

2000

2001

2002

2003

2004

2005

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2007

2008

2009

2010

2011

2012

2013

E

2014

F

% G

row

th

Rev

enue

s (U

S$ b

illio

n)

23. Global Airline Industry Cargo RevenuesSource: ICAO, IATA

Cargo Revenues

% Growth

0

3

6

9

12

15

18

21

0

1

2

3

4

5

6

7

% G

row

th y

-o-y

in n

omin

al w

ages

(Chi

na)

% G

row

th y

-o-y

in n

omin

al w

ages

21. Nominal Wage GrowthSource: Thomsom Reuters DataStream, Haver Analytics

USAEuropean UnionChina P.R.

0102030405060708090

100

Wei

ghte

d Sc

ore

24. IATA survey of heads of cargoSource: IATA

Volumes - next 12 months

Yields - next 12 months

Incr

ease

Dec

reas

e

IATA Economics: www.iata.org/economics 6

Cargo eChartbook – Q3 2014 Air Freight Routes and Direction Table 1. International Freight Volume Growth by Route Area (Source: IATA ODS statistics)

% Growth in Freight Tonnes, year-on-year

Route Area Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14

Africa - Middle East 11.8% 6.8% 6.3% 17.1% 5.9% 5.9% Europe - Far East 9.3% 4.0% 8.8% 3.6% 8.0% 1.1% Europe - Middle East 4.0% 1.9% 1.3% -3.1% -4.2% -10.7% Within Far East 6.2% 2.2% 7.3% 7.5% 9.0% 8.9% Within Middle East 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Within South America -0.5% 9.0% -3.2% -8.1% -5.7% -8.2% Mid Atlantic 9.3% 10.2% 0.3% -5.2% -1.9% -8.3% Middle East - Far East 18.9% 8.3% 12.6% 7.2% 5.5% 3.3% North Atlantic 4.8% 8.1% 10.5% 7.4% 8.3% 2.8% North America-Central America -0.6% -8.2% -1.2% 9.2% -2.9% -8.8% Europe - Africa -0.5% 2.4% 4.8% 5.7% 9.3% 4.4% North America– South America 5.4% 2.7% -1.8% -5.1% 3.7% -3.3% Far East - Southwest Pacific 0.2% -4.5% 4.9% -6.7% -4.0% -3.9% North and Mid Pacific 14.2% 5.7% 17.7% 16.1% 12.0% 15.1% South Atlantic 6.0% 1.5% 20.2% 16.0% 18.1% 20.1% Within Europe 6.5% 4.5% -0.6% -3.3% 1.7% -4.5%

Table 2. Outbound CASS Market Revenues (incl. fuel and other surcharges)

US$m Q2 2014

% Growth in Air Freight Revenues, year-on-year

Origin Region 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2

Africa 90 -2% 15% 14% -1% 6% -5% Asia Pacific 1583 -18% -18% -14% -8% -4% 7% Europe 2911 1% 2% 4% 6% 6% 7% Latin America & The Carribean 427 -1% -3% -6% -2% 0% 1% Middle East & North Africa 145 18% 18% 17% 14% 8% 9% North Asia 1664 -7% -1% 13% 21% 21% 23% North Atlantic & North America 1290 -7% -10% -8% -4% -2% 2%

Table 3. Inbound CASS Market Revenues (incl. fuel and other surcharges)

US$m Q2 2014

% Growth in Air Freight Revenues, year-on-year

Destination Region 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2

Africa 459 -8% -3% -4% -3% -1% 7% Asia Pacific 1819 -7% -7% -3% 2% 4% 5% Europe 1749 -11% -10% 0% 8% 7% 9% Latin America & The Carribean 760 -4% 1% -1% -2% -3% 12% Middle East & North Africa 660 1% -1% 2% 4% 6% -7% North Asia 834 5% -2% -5% 2% 3% 15% North Atlantic & North America 1696 -8% -4% 2% 6% 10% 5%

IATA Economics: www.iata.org/economics 7

Cargo eChartbook – Q3 2014

Glossary

ACI: Airports Council International

AFTK: Available Freight Tonne Kilometers

European CB: European Central Bank

EIU: Economist Intelligence Unit

CASS: Cargo Accounts Settlement System

FT: Financial Times

FTK: Freight Tonne Kilometers

PMI: Purchasing Managers Index

Netherlands CPB: Netherlands Bureau for Economic Policy Analysis

ODS: Origin-Destination Statistics

SIA: Semiconductors Industry Association

US BTS: US Bureau of Transportation Statistics

M-o-m Month over month percentage change

Y-o-y Year over year percentage change

IATA Economics

17th September 2014