With US air imports of car parts down by 36% in 2019, what is the outlook for 2020?

Last November, we took a look at US automotive industry production trends and the impact that was having on airfreight and on demand charter volumes. With new economic, inventory data having just become available, we assess what has happened since then and provide some discussion on what could be ahead over the coming uncertain months. 2019 Review Overall imports of car parts by airfreight into the United States were down by 36% in 2019. This comes after two years of strong demand as well as pre-tariff fear fuelled growth, where imports were up by 17% and 23%, respectively, in 2018 and 2019 (see Figure 1). Most air imports of car parts are from Asia and Europe. The respective market shares have varied over the past decade with Asia anywhere between 38% - 50% of the total and Europe between 35% - 50%. China, Germany and Japan are the most important import countries, respectively accounting for 23%, 19% and 10% of total imports in 2019. Interestingly, most of the drop in 2019 was a consequence of lower German and not Chinese exports. It is worth noting that while car parts represent an important commodity for the airfreight business, around 98% of parts sources abroad come by sea or cross the border by truck from Mexico and Canada. Figure 1 - Airfreight Auto Parts Imports into the US, 2009 – 2019, in Thousands of Metric Tonnes

2019, did however, see a substitution of Asian and particularly European car part imports for Mexican origin parts (see figure 2). We did however, witness a drop in imports from Mexico in the latter half of 2019, partly as a result of the GM strike in October. Figure 2 - Vehicles and Parts Truck Traffic from Mexico and Canada to the US Jan 2015 – Dec 2019, Monthly Tonnes and 12 Month Moving Average Production Although the demand environment for new cars was weak in 2019 and is expected to continue to be weak in 2020, motor vehicle assembly figures have not fallen through the floor. While production data shows a noticeable impact of the GM strike in October 2019 figures, monthly production figures have so far been tracking consistently at about 11 million units (see Figure 3). Figure 3 - Motor Vehicle Assemblies Jan 2019 – Jan 2020, Monthly Data and 12 Month Moving Average

Different segments are showing different trends (see Figure 4). As customers have favoured SUVs over sedans, automobile production figures have been trending downwards, while light truck production figures have been showing a moderate upward trend. Medium and heavy truck production figures were showing strong growth, but demand dropped off substantially in the 3 rd quarter of 2019. Figure 4 - Motor Vehicle Assemblies by Category Jan 2019 – Jan 2020, Monthly Data and 12 Month Moving Average

Meanwhile home grown US parts production has followed a moderate downward trend since the beginning of 2019 (see Figure 5) Figure 5 - Motor Vehicle Parts Jan 2015 – Jan 2020, Index of Industrial Production (in $)

2020 Outlook Demand for both scheduled airfreight as well as on demand charters for automotive (as well as other manufacturing sectors) is strongly correlated with inventory to shipment ratios. The Just-in-Time production model favoured across the auto industry leads to low inventory levels at assembly locations. While this reduces inventory carrying costs it means there is less of an inventory buffer when production is invariably disrupted. This is generally good for demand for airfreight, express and on-demand freight. The flipside is that when inventories are higher there is less demand for such services. Inventory to shipment ratios have consistently been trending upwards for the last years in the automobile manufacturing, but also in the light truck and utility vehicle, and heavy duty truck segment (see Figure 6 and Figure 7). Until either inventories go down or the demand environment improves, this is unlikely to change and the demand for airfreight services is expected to be subdued. Figure 6 - Auto and Light Truck IS Ratios, Jan 2015 – Jan 2020, seasonally adjusted

Figure 7 - Heavy Duty Truck Manufacturing IS Ratios Jan 2015 – Jan 2020, seasonally adjusted

However, given that much of the decline in 2019 was a consequence of an inventory build up in previous years, we do not expect a significant drop in 2020. Given the current drop in passenger and lower hold cargo capacity on key intercontinental lanes, freighter operators are in a good position to profit from a situation where there is still demand but less capacity to serve it. This is a similar situation to during the 2003 SARS crisis but this time passenger capacity reductions have taken place on a larger scale.

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What aircraft age restrictions mean for freighter fleets in Asia, Africa and the Middle East

2020: The year of the freighter?

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