While cargo volumes were softening in the first half of last year, the dramatic plunge in the second half – particularly in December – still came as a rude shock, said Andrew Herdman, director general of AAPA, in an interview with Payload Asia.

“Our carriers represent a third of global FTKs, but I think it took people awhile to recognise that Asia would be as dramatically affected, if not more so than other regions of the world,” said Herdman.

“Even in the middle of last year there was talk of de-coupling and the idea that China and India would keep on growing, softening the blow. But this isn’t a financial crisis this is a global recession and trade is being hit very hard by the lack of consumer confidence worldwide.”

He added that its not entirely clear as to the source of this lack of confi dence because it included consumers who had no exposure what-so-ever to failing banks or the subprime crisis. But the subprime debacle and related developments rapidly undermined confidence, people stopped buying things and businesses reacted and “as a result air cargo just became part of that story,” said Herdman.

“The idea that the growth story continues is clearly in question,” he said in reference to China and India. “The contraction in trade is so sharp and overall it’s a tough outlook for cargo, even bigger for air cargo than ocean freight and there’s no suggestion it’sbottoming out.”

No visibility
A key problem, he notes, is the lack of visibility on when the global recession is going to improve, and along with it the air cargo industry.

“I don’t think anyone has any visibility because we’re outside normal expectations in terms of what you can compare this to. If we go back to the Asian financial crisis – it was regional, not global – you had a global route network so your network to Europe was Asian cargo carriers doing best they can still holding up, for example, but it was a regionalised impact.

“If you go to past global recessions they weren’t as severe as this and certainly you didn’t have this dramatic fall-off of trade. Worst of all, no one can point to the factors that are going to change the sentiment and get people buying things again,” Herdman added.

“The destocking effect, as people realised they were going to have too much inventory, was very sharp, but there must be a limit to how long that can continue,” he said.

“But even if it does bottom out we’re going to be looking at a level of trade which is well below what we’re used to so there’s going to be a lot of excess capacity.” But Herdman says Asian carriers have done pretty much all theycan in dealing with the problem.

Capacity cuts
In the initial stages, carriers reacted proactively by cutting cargo capacity as demand softened in the second half of last year. This saw third quarter load factors holding up because they were cutting it quickly enough. But this all changed in the third quarter, ultimately reaching its apex in December.

Add to this the traditional post- Chinese New Year slow season that extends from February through March and into April, and its potent mix.

“The truth is, maindeck freighter capacity was aggressively being cut, but not aggressively enough, so load factors inevitably fell in the last three months of the year. Now passenger capacity is being trimmed but its pretty modest, mostly by single digits only, so that won’t have much impact on the belly capacity from a cargo viewpoint.”

This means the bulk of the adjustment has to come from the freighters, which began in early January with the parking of freighters, some left on the tarmac at airports around the globe, others put into storage in the deserts of California.

“Grounding means you save the fuel and you can either do maintenance or defer the maintenance because utilisation of the aircraft has decreased,” Herdman said. In terms of disposing of aircraft, he notes it would be a tough market because of all the excess capacity around. Retirement is another trend that will be accelerated, a trend that was already established with the uneconomical B747-200 classics being retired during last year’s peaking oil prices.

A fair number of older narrow-body aircraft were also retired, particularly in the US. But as to what further steps the carriers can take, Herdman says, “not a lot”.

“The key call now is not about grounding freighters, it’s about what do you do with head count, which is the other major cost.”

Herdman notes there are various strategies, and cites Singapore Airlines which asked its pilots to take unpaid leave for up to two years, “which is clearly an attempt to preserve the jobs and the resource and hope that things pick-up in that timeframe.”

This along with hiring freezes and reduced working hours are all better options to retrenchment, because there is a high cost to cutting head count, Herdman notes recalling the situation less than a year ago where the industry was scrambling to deal with a shortage of pilots and skilled maintenancetechnicians.