Cargo carriers’ road to recovery

Asian cargo carriers are gearing up for long-term growth, despite a gloomy near-term outlook. Emma Kelly reports.

28th Jan 2011


While international passenger traffic is rebounding after the worst economic crisis of recent decades, recovery in the international freight market appears to have stalled, even in the normally buoyant Asian region.

Nevertheless, while the events of the past couple of years have dented the local airfreight industry and forced some airlines to put cargo growth plans on hold, others are still proceeding with expansion of their cargo fleets, new facilities and cargo joint ventures on the back of long-term optimism for the sector. The near-term prospects, however, are not good, according to the International Air Transport Association (IATA), which describes recent freight figures as “worrying”.

IATA Director General and Chief Executive Officer Giovanni Bisignani says: “Freight activity has fallen 6 percent since May’s post-crisis peak. What we see in air cargo markets is inevitably reflected in the broader economy.” As international air cargo accounts for 35 percent of the value of goods traded internationally, it is a leading indicator of economic activity.

The Association’s figures for September 2010, showed international passenger traffic grew 10.5 percent year-on-year in the month – significantly more than the 6.5 percent gain recorded for August. By contrast, however, international freight traffic recorded a 14.8 percent year-on-year increase, significantly less than the 19 percent rise recorded in August.

Seasonally adjusted figures show that, compared with August, passenger traffic expanded by 2.1 percent while freight markets contracted by 2.1 percent, says IATA.

Confidence weak

The association says freight markets were expected to weaken towards the end of the year, but the drop for September was larger than anticipated.

“Consumer and business confidence remains weak in many parts of the world. Re-stocking lifted freight markets earlier in the year, but this has not been followed by spending to solidify the economic recovery. Compared with September 2009, freight capacity increased by 11.9 percent, below the 14.8 percent increase in volumes, pushing cargo load factors to 52.4 percent,” says IATA.

Carriers in the Asia-Pacific region contributed most to the drop in September figures, IATA said. While airlines in the region recorded a 15 percent increase in freight demand over the previous year, that was significantly less than the 22.3 percent growth recorded in August. This took the region’s carriers back to the pre-recession levels of early 2008 and, with their 44 percent market share, contributed the most to the global drop in freight demand.

“While September’s passenger growth is reassuring, the accelerating decline of air freight, including in Asia, is an early indicator of some turbulence ahead,” says Bisignani. Since September, the situation has worsened, with IATA now reducing its full-year cargo growth forecast to 18.5 percent, from its previous 19.8 percent outlook.

“The post-recession rebound drove a rapid expansion for cargo earlier in the year but it ran out of steam by the third quarter. Since May, overall volumes fell by 5 percent. This will only pick-up when consumers have bought the products that are already on the shelves,” says Bisignani.

Most profitable region

Asia-Pacific carriers are expected to post the largest profit in 2010 – at US$7.7 billion, decreasing to US$4.6 billion in 2011. While it remains the most profitable region in the world, based on a strong economic growth of 6.6 percent (outside Japan), IATA points out that carriers in the region are particularly exposed to fluctuations in cargo markets.

“While this accelerated improvements in 2010, the region’s carriers will also be disproportionately affected by the expected slowdown in cargo [in 2011],” notes IATA.
Despite the gloom, a number of airlines in the region are planning for the upturn and looking to capitalise on growth areas in the region, particularly China.

Singapore Airlines Cargo (SIA Cargo) and EVA Airways are both looking at China Cargo Airlines as the springboard for building their Chinese freight activities. SIA Cargo announced in late December that it will purchase a 16 percent stake in the Shanghai-based carrier for nearly US$50 million, subject to regulatory and other approvals. The move followed an announcement by Taiwan’s EVA Air that it will also acquire a 16 percent stake in the Chinese operator, after divesting its existing stake in Shanghai Airlines Cargo International.

Under the deal, China Cargo will be restructured as a limited-liability Chinese-foreign equity joint-venture company. China Eastern Airlines will own 51 percent of China Cargo (down from 70 percent now), China Ocean Shipping will hold 17 percent (down from its current 30 percent), while EVA Airways’ Concord Pacific unit and SIA Cargo will own 16 percent each.

China Eastern, EVA and SIA Cargo are already linked through cargo ventures, with China Eastern being majority owner of Shanghai Airlines Cargo, in which EVA held an interest, and also majority owner of Great Wall Airlines, in which SIA Cargo has a stake. Changes at China Cargo Airlines are expected to result in a merger of its cargo operations in order to respond to new competition in the market, particularly from of a new cargo joint venture between Air China and Cathay Pacific.

China Cargo operates 13 freighter aircraft, including three Airbus A300s, two Boeing 747-400s, three Boeing 777s and five McDonnell Douglas MD-11s. It serves a global network of 26 cities from Shanghai, throughout Asia, China, Europe and the United States.

For SIA and EVA, the deal gives them access to the booming Chinese freight market and comes at a time when Singapore’s role as a cargo hub for the region is declining.

Meanwhile, Air China and Cathay Pacific Airways have received regulatory approval for their new cargo joint venture, which will also be based in Shanghai. Air China Cargo is 51 percent owned by Air China and 25 percent by Cathay Pacific, with China National Aviation subsidiary Fine Star holding the remaining 24 percent. The new venture will operate a fleet of eight 747-400 freighters, coming from Air China, and four, converted 747-400s from Cathay.

Busy market

Air China Cargo joins an already busy Shanghai cargo market, which is the biggest cargo market in China. Among Chinese competitors is Jade Cargo, which is itself expanding.

Jade Cargo was established in October 2004 as a joint venture between Shenzhen Airlines (which holds a 51 percent stake), Lufthansa Cargo (25 percent) and German finance institutions (24 percent). The carrier is based in Shenzhen and operates six 747-400 extended range freighters throughout Asia, China, Europe, the Middle East and most recently the United States.

Cathay’s investment in Air China Cargo is part of the Hong Kong-based carrier’s ongoing development of its freight business. The carrier is committed to develop Hong Kong’s airfreight hub role, for example investing HK$5.5 billion (US$707 million) in a new, state-of-the-art Cathay Pacific Cargo terminal at Hong Kong International Airport (HKIA).

The airline’s subsidiary Cathay Pacific Services was awarded the franchise in March 2008by the Hong Kong Airport Authority to invest in, design, construct and operate the new air cargo terminal at the airport under a 20-year agreement. The new facility, which will begin operations in early 2013, will be based on a 10-hectare site in the airport’s cargo area.

Work on the facility was originally due to begin in 2008, but was postponed due to the financial crisis. The terminal is being designed for annual cargo throughput of 2.6 million tonnes and will increase the airport’s total cargo capacity by 50 percent to 7.4 million tonnes. The facility will be one of the most advanced in the world, according to the airline, including a HK$1.4 billion mechanical handling system.

“Hong Kong’s position as the world’s leading international airfreight hub is a remarkable achievement, but we cannot afford to take our pre-eminent position for granted. A concerted effort to improve Hong Kong’s capacity and competitiveness is needed if we are to face up to growing competition from other airports in the region,” says Tony Tyler, chief executive of Cathay Pacific. “We are building a terminal that will be one of the biggest, busiest and most efficient in the world, employing state-of-the-art operational and environmental features,” he adds.

Freighter fleet

At the same time, Cathay Pacific is building up its freighter fleet. In early 2011, the airline is due to start taking delivery of 10 new 747-8Fs, underscoring Cathay’s long-term confidence in the local airfreight industry, says the airline.

Cargo capacity was cut during 2009 as a result of the global financial crisis, with five 747-400 converted freighters parked in the desert in California during the downturn. But these aircraft started returning to service in 2010 as the airline rebuilt capacity.

During 2010, Cathay launched a round-the-world freighter service, including the airline’s first transatlantic crossing, as part of its efforts to further develop Hong Kong’s position as a leading international air cargo hub. The 747-400F service operates twice a week, linking Hong Kong with Anchorage, Chicago, Amsterdam and Dubai.

Elsewhere in the region, other carriers are also building up their freighter fleets. Malaysia Airlines (MAS), for example, has firmed up options for two A330-200Fs for delivery in 2012.

Last March, the airline ordered two A330-200Fs plus two options for its MASkargo freight subsidiary, with the first aircraft to arrive in September 2011 and the second following in November.

“We are confident that the A330-200F is set to become a game changer in the mid-size freighter market," says MASkargo Managing Director Shahari Sulaiman. “The aircraft will enable MASkargo to efficiently match capacity closely to demand on many medium-lift sectors across our cargo network, and especially those operating via intra-Asia.”

Other carriers in the region are faring less well, however. In March 2010, Japan Airlines (JAL) announced that, as from the end of October, it would no longer operate dedicated freighter services as part of its business reorganisation. JAL said market conditions for the international cargo business are expected to remain severe and, to adapt to this,

Abandoning freighters

JALCARGO will shift from using a combination of dedicated freighters and hold space on passenger flights, to only utilising space on passenger aircraft – a new cargo-business structure that aims to secure a stable profit help financially troubled JAL return to the black.

The airline previously operated seven Boeing 747-400F freighters and three 767-300Fs. JAL had earlier tried to secure a merger with Nippon Cargo Airlines, but talks ended in March without an agreement.

Airframe manufacturers, meanwhile, remain optimistic of a long-term turnaround in the freight market. Boeing, for example, is predicting the global freighter fleet will grow from its current 1,755 aircraft to just under 3,000 by 2029. The Asia-Pacific region is expected to account for the bulk of demand for new, large freighters.

Boeing expects cargo traffic to grow 5.9 percent annually over the next two decades. Intra-China volumes are expected to top the growth chart, expanding 9.2 percent a year, with intra-Asia traffic expected to grow 7.9 percent and Asia-North America by 6.7 percent.

To meet local cargo demand, Boeing expects Chinese carriers to add about 330 freighters by 2029.
 

Asian Aviation at a glance