Despite its turbulence, winds are shifting for air cargo
By Karen E. Thuermer
Big news on the air cargo front: President Obama signed a bill that would protect U.S. flights from having to pay for carbon emissions credits when flying in and out of Europe.
"It never made a bit of sense for European governments to tax our citizens for flying over our own airspace -- and with the passage of this law we've got the tools we need to prevent it from happening and protect American jobs," said Sen. Claire McCaskill, D-Mo., a co-author of the bill.
As if the continuing global recession has not enough to create havoc within the air cargo industry, sustainability issues exacerbated by the European Union Emissions Trading Scheme (EU ETS), has been another rock thrown at an already bruised airline industry.
“I’ve always seen this as money grabbing,” stated Brain Fried, executive director of the U.S. Airforwarders Association. “It’s a cap and trade scheme, although the EU has always billed it as a way to draw attention to global warming.”
Airlines for America (A4A), formerly known as the Air Transport Association of America, as well as the International Air Transport Association (IATA) and the National Airlines Council of Canada (NACC), have maintained that the EU ETS violates international law.
“This includes the sovereignty of the United States. It imposes an illegal, exorbitant and counterproductive tax on U.S. citizens, diverting U.S. dollars and threatening thousands upon thousands of jobs,” A4A wrote in a statement.
Worse, A4A points out that none of the monies collected by the EU is required to be used for environmental purposes. “By contrast, the initiatives that the U.S. airlines are undertaking (buying more fuel efficient aircraft) are resulting in real environmental improvements,” it stated.
Fried sees the scheme hurting everyone. “It hurts our airline partners because we fly our freight on those airlines,” he said. “It also creates an issue for air freight forwarders because they are buying cargo on a per pound basis on those flights and EU ETS increase cost.”
The airlines are still reeling from hard times. In fact, air cargo forecasts indicate that 2012 will be nearly as dim as 2011.
IATA may have revised its industry profits outlook for the passenger and cargo industry from $3 billion to $4.1 billion. But the figure is still down significantly from 2011 when airline’s made a cumulative profit of $8.4 billion.
“This is a $1.1 billon revision on revenues of $636 billion,” Tyler said. “So the net profit margin will be 0.6 percent instead of 0.5 percent. “
In other words, airlines are operating within miniscule margins by keeping their heads above water better than industry analysts thought, but in a very difficult operating environment.
The culprit: the global recession and ongoing politics. In the United States, it’s government sequestration and the “fiscal cliff.” Plus manufacturers are holding onto their cash, and delaying decisions to make purchases, hire or expand. Consumers are cracking their wallets a little wider this holiday season, but the dark clouds remain.
In Europe, unending financial woes and the troubled EU currency show little resolution. In Asia, China’s economy is softening. And in Latin America, especially Brazil and Argentina, inflation is escalating.
These factors, combined with high fuel costs, diminished cargo volumes, the cost of security and other challenges, make for a troubled air cargo environment.
What’s more, air cargo itself feeds the economy since it is the heart of a value chain that supports 32 million jobs and $3.5 trillion of economic activity.
“It’s an important industry that is critical to global business,” Tyler stated.
Beyond the Data
A host of subsequent trends are emerging and also impacting the industry.
Alliances between airlines on international markets have become a dominant feature. Shippers desire seamless service on international markets ‘from anywhere to anywhere’. However, no airline is able to efficiently provide such a service on its own aircraft, and few city-pairs can generate sufficient traffic to justify a daily non-stop service.
Consequently, airlines have sought partners to help provide the network and service coverage required. While various alliances between carriers have been formed over the years, many have involved regulatory disputes.
There has also been a rash of mergers and consolidations. One recent example is the merger between Chilean airline LAN and its Brazilian counterpart TAM.
“Consolidation will continue, in view of the low profitability of the airline industry and the capital required to renew fleets and to stay in business,” stated Christian Sivière of Import Export Logistics Solutions in Montréal.
Meanwhile, airlines continue to reduce capacity, a move that has stabilized load factors at relatively high levels and provided some support for profitability in the face of high fuel prices. Lufthansa Cargo, for one, switched capacity from Asia to more profitable routes in North America and added new destinations such as Detroit. Air France has canceled freighter service to Shanghai and is now focusing on markets in West Africa, the Indian Ocean, North America, Mexico and Japan.
Carriers continue to retire freighters or exit that segment of the industry altogether. Jade Cargo quit the market in June due to ongoing weak demand in the Chinese market. Air France Cargo is disposing of one Boeing 747-400ER freighter, which will reduce its fleet to two 747-400s and two Boeing 777 freighters. That’s down from a 12 cargo aircraft in 2009.
This year Cathay Pacific pulled three 747-400BCFs from its service. Cathay Pacific Group slipped into the red for the first half of 2012, reporting a new loss of US$120.5 million. The carrier, however, is adding three B747-8Fs over the next several years, bringing a total of 10 B747-8Fs to its fleet. Also on order are eight B777 freighters, which are scheduled for delivery between 2013 and 2016.
“Carriers have no choice but to renew their fleets with more fuel-efficient aircrafts, and this will continue to create over capacity during this period of low market growth,” commented Sivière.
Middle East Factors
One of the bright spots remains the Middle East, where Boeing projects airline traffic to grow 6.4 percent, compounded annually, during the next 20 years. Revenue passenger-kilometers will more than triple by 2031, supported by healthy development of long-haul, short-haul, and domestic travel.
In its long-term forecast, Boeing points out how the "Gulf 3"--Emirates, Qatar Airways, and Etihad Airways--provide the largest part of the region's long-haul service, operating under "sixth freedom" agreements to connect two foreign countries via a stop in the carrier's home country.
“Favorably placed to connect Asia, Africa, and Europe, the Middle East is relatively new to the sixth freedom business model, which has been proven by both European and Asian carriers,” it stated.
Against this backdrop, IATA indicates Middle East carriers experienced the strongest traffic growth at 11.2 percent year-over-year during the first half of 2012, although this was surpassed by a 12.4% rise in capacity. Etihad Crystal Cargo experienced an historic 22 percent year-over-year growth in freight tonnes carried during that time period with revenues jumping 13 percent. The Emirates Group posted a net profit of $629 million in 2011-- its 24th consecutive year of profit. Emirates added a staggering 22 new aircraft to its fleet, its highest in any single year, and ordered 50 additional B777-300ERs. It also added 11 new destinations and increased capacity to 34 cities, a record for the airline.
Middle East carriers are also shaking up global alliances. In September, Qantas Airways announced that it was entering into a 10-year alliance with Emirates that will see Dubai replace Singapore as the stopover point for its European services. The deal, which severs ties with British Airways and the OneWorld Alliance, is part of an effort to shore up losses from the Australian carrier’s diminishing international business.
Emirates President Tim Clarke hails the agreement, calling it “perhaps the start of a new thinking as to how the airline industry understands traffic flows across the planet.”
How air carriers operate and what shippers want, however, should be cause for a reality check.
There are times, commented Hughes Van Espen, Project Manager of Brussels-based Biolog Europe, where companies want to share freight data with each other and negotiate their own shipments and rates with carriers – particularly in the case of small shipments that might be flying to the same locations.
“Baxter Healthcare and Pfizer, which have operations in Belgium, are really pushing for this option,” stated Van Espen.
Consider this scenario where both might have small shipments. By sharing data with each other, they can make their own consolidation and better pricing for shipments, he explained.
It’s an interesting concept being promoted by Biolog Europe, a third party outsider with no monetary ties to airlines or freight forwarders. It also suggests that for air cargo to remain a viable option, shippers and their logistics operators need to be more innovative, break down barriers, and consider new options. The old models may simply no longer work.
Shippers are already shifting to more innovative transport schemes such as air-sea freight that combine time and cost advantage.
Fried also suggests that the smaller niche player who thinks outside of the box might be able to exploit areas that big freight forwarders cannot or do not want to pay attention to. One example is trade show shipments.
“It’s an area FedEx and UPS don’t like and don’t want,” Fried said. The reason: it does not fit into their prescribed network. The customer does not always come first.
Certainly every aspect of air cargo is changing. With technology also playing a key role, it’s possible that once the industry gets on the other side of the downward recession, the industry will be one quite different than that of pre-2008.