To represent, lead and serve the airline industry

The Air Cargo outlook: trends, opportunities and threats

Michael Vorwerk – President CNSApril 2011Health and Personal Care Logistics Conference / Spring 2011www.iata.org/economics

IATA Introduction

Founded in 1945, the International Air Transport Association (IATA) is the industry’s global trade association

With 225 members in more than 130 countries, IATA represents 93% of international scheduled traffic

IATA’s mission is to represent, lead and serve the air transport industry

IATA delivers standards and solutions to ensure successful air transportation

Introduction

Cargo Network Services Corp. Established in 1985 to support the Air Cargo

Industry in the USA Located in Miami Key Services

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Introduction continued

I

A m

N ot

A n

E conomist

I’d rather talk about ….Did you know? Every fifth drug is temperature-sensitive

20% of the world’s best selling pharmaceuticals are temperature sensitive

$ 130 billion of the total pharmaceutical market ( about $ 650 billion ) is represented by temperature sensitive products

The share of temperature-sensitive products will rise the next years

Biological’s + 15 %Chemical based+ 10%

Nearly 100 % of all vaccines and 68 % of all products sold by biotech companies need to be stored and transported between 2 to 8 ºC

43 % of all diagnostics and about 11 % of all products from large pharmaceutical companies have to be handled with the same precautions

There is a correlation between product price and temperature-sensitivityand that some biological’s, vaccines and hormones can reach a package price of up to $ 6000.- or you can fill a LD3 Container with up to $ 20 million of product value.

Industry Overview

“Prediction is very difficult, especially about the future”Niels Bohr

Squeeze on cargo profits started late 2010

Source: US BTS

Profitability of US Cargo Only AirlinesSource: US BTS

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

% o

f R

even

ues

Operating Profit Margin

Net Profit Margin

Heads of cargo confidence losing altitude

Source: IATA

IATA survey of heads of cargoSource: IATA Survey

0102030405060708090

100M

ar

20

06

Se

p 2

00

6

Ap

r 2

00

7

Oct

20

07

Ap

r 2

00

8

Oct

20

08

Ap

r 2

00

9

Oct

20

09

Ap

r 2

01

0

Oct

20

10

We

igh

ted

Sco

re

Volumes - next 12 months

Yields - next 12 months

Travel markets strong trend but cargo?

Source: IATA

International air freight and passenger volumesseasonally adjusted

160

180

200

220

240

260

2005 2006 2007 2008 2009 2010 2011

RP

K, b

illio

ns

9

10

11

12

13

14

FT

K,

bill

ion

s

RPK

FTK

Coincident indicators have slowed sharply

Source: IATA, SIA

Semi-Conductor Shipments and Air FreightSource: IATA, SIA

-34

-26

-18

-10

-2

6

14

22

30

38

46

54

% G

row

th,

Se

mi-

Co

nd

uct

or

Sh

ipm

en

ts

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

% g

row

th -

In

tern

atio

na

l FT

Ks

International FTKs

Semi-Conductor Shipments

Boost from business restocking is over

Source: IATA, Haver

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

0.8

1

1.2

1.4

1.6

Inv

en

tori

es

to

sa

les

ra

tio

8

9

10

11

12

13

14

15

16

17

18

FT

Ks

(b

illi

on

)

Inventories to sales ratio

FTKs

World trade rising rapidly once more

Source: IATA, Netherlands CPB

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

8

9

10

11

12

13

14

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bill

ion

FT

Ks

90

100

110

120

130

140

150

160

170

inde

x of

wor

ld t

rade

, 20

00=

100

International FTKs(left scale)

World goods trade volumes(right scale)

Business is spending on capital goods

Source: Haver

Capital spending intentionsSource: Haver Analytics

-70

-50

-30

-10

10

30

50

70

Q1-2004 Q1-2005 Q1-2006 Q1-2007 Q1-2008 Q1-2009 Q1-2010 Q1-2011

Ne

t ba

lanc

e in

tend

ing

to in

cre

ase

in

vest

me

nt

-15

-10

-5

0

5

10

15

Ne

t ba

lanc

e in

tend

ing

to in

cre

ase

in

vest

me

nt

UK business(left scale)

Japan business(right scale)

Mixed picture for the consumer

Source: Haver

Consumer confidenceSource: Haver Analytics

0

20

40

60

80

100

120

Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Ba

lan

ce e

xpe

ctin

g im

pro

vem

en

t, in

de

x

-35

-30

-25

-20

-15

-10

-5

0

Ba

lan

ce e

xpe

cte

ting

imp

rove

me

nt,

ne

t %

China

Europe(right scale)

US

Leading indicators very positive

Source: IATA, JP Morgan/Markit

Purchasing Managers confidence survey and Air Freight DemandSource: IATA, JP Morgan

35

40

45

50

55

60

65

70

PM

I V

alu

e (5

0 =

No

-Cha

ng

e)

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

% G

row

th, I

nte

rnat

ion

al F

TK

s

International FTKs

JP Morgan Output PMI (+ 2 months)

Business travel market remains strong

Source: IATA

Premium travel growth and business confidence

-30

-25

-20

-15

-10

-5

0

5

10

15

20

2006 2007 2008 2009 2010

% c

hang

e ov

er y

ear

30

35

40

45

50

55

60

65

Con

fiden

ce in

dex

Business confidence

Premium travel growth

Europe’s economic situation remains grim

Source: Haver

10-year government bond yields, %

0

2

4

6

8

10

12

14

97 98 99 00 01 02 03 04 05 06 07 08 09 10

Greece

USUKItalySpain

PortugalIreland

Germany

But optimism over ‘emerging’ markets

Source: EIU

Forecasts for GDP growth Source: EIU

0

1

2

3

4

5

6

7

8

9

US Japan Europe ASPAC exclJapan

Middle EastNorth Africa

LatinAmerica

World

% c

ha

ng

e o

ver

yea

r

2010 2011

Rising oil price is the major threat this year

Source: Platts, Bloomberg

Jet Fuel and Crude Oil Price ($/barrel)

20

40

60

80

100

120

140

160

180

200

Jan03 Jan04 Jan05 Jan06 Jan07 Jan08 Jan09 Jan10 Jan11

Jet fuel price

Crude oil price (Brent)

Futures curve

Fuel prices will squeeze airline profitability

Source: IATA

Global commercial airline profitability

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.019

95

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

E

2011

F

% r

even

ues

-20

-15

-10

-5

0

5

10

15

20

US

$ bi

llion

Net post-tax losses(right scale)

EBIT margin(left scale)

Despite Economic DevelopmentAirfreight always has a future

Ongoing Airfreight DriversWage Disparity: Low value work moving to low cost production areas

Maturing Markets: As emerging economies mature consumers demand more imported goods

Special Products: Live Animals, Perishables, Pharmaceuticals, & Valuables = Airfreight

Emergency Shipments: Rapid recovery from breakdown or crisis situations

Speed to Market: Protecting innovation from competitors

Capital Costs: Reducing inventory costs in the supply chain through faster delivery

Just In Time: Reducing inventory volumes & costs by destocking the supply chain

Current Airfreight Suppressors

Diversion to other modes: Shift of lower value items to sea / road / rail freight

Demand for low cost products: Consumer demand shifting to low cost products to preserve purchasing power

Further structural change: Only likely to occur if economical and/or regulatory environment will considerably

Automotive, 9%

Pharmaceuticals, 8%

Valuables, 2%Live Animals, 1%

Perishables, 1%Fashion Goods, 2%

Consumer Goods, 5%

High Tech., 12%

Capital Goods, 16%

Raw materials, 18%

Machinery, 26%

Source: Adapted from The Economist

This sums it up

REGULATORY

CONSTRAINTS

Thank-you

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