New products, new markets for Korean Cargo

After facing the biggest demand fall in aviation’s history in 2009, businesses restarted again in 2010 with airlines ending last year slightly ahead of early-2008 volumes albeit with a dismal 2.7 per cent profit margin. Following the global financial crisis, air freight volumes reached their post-recession peak in May 2010, largely driven by re-stocking. But the joy was short lived and from about July this year, global freight markets began stagnating with a 0.4 percentage point demand decline over previous year levels, contracting by a further 3.8 per cent in August as economic uncertainty in the US and Europe clouded the global economic outlook. The downturn saw the International Air Transport Association (IATA) slashing its full-year volume growth projection from 5.5 per cent to 1.4 per cent and grimly foretelling what likely lies ahead. Airlines are expected to uplift 46.4 million tonnes of cargo in 2011, down from the previous forecast of 48.2 million tonnes, reflecting the languid state of the industry. “It appears unlikely that a revival in air freight will begin before 2012,” IATA’s director general and CEO Tony Tyler warned. This scenario, played out in virtual carbon-copy across the industry, is New products, new markets for Korean Cargo Faced – like virtually the entire air cargo industry – with innumerable challenges including rising competition, slowing US demand and the European debt crisis, fuel costs and foreign exchange fluctuations, Korean Air Cargo has returned to basics of focusing on quality, new products and emerging markets. Wong Joon San reports. exemplified by Korean Air Cargo’s own experience. The carrier’s cargo division transported 1.8 million tonnes in 2010 achieving a robust 14 per cent increase over 2009’s low point. But this year from January to September a different picture emerges with Korean uplifting 1.28 million tonnes – a decrease of five per cent over the same period in the previous year. And the situation worsens in the second half with the July to September period seeing cargo down further at 5.9 per cent down on the same period a year earlier as demand for South Korea’s electronics products flags with the the global economic lethargy. This ultimately pushed Korean Air into a third-quarter net loss of 524.3 billion won (US$457.5 million) – compared to a net profit of 550.7 billion won in the same quarter a year earlier – due to a combination of higher fuel prices, slowing exports and currency adjustments. And while the first half of the year saw South Korean exports on the rise, “the forecast for the last half of this year is rather unclear due to the economic downturn in both US and some regions in Europe, which has increased uncertainty with continuation of high fuel price and foreign exchange fluctuations,” says Park Bum Jung, vice president, Cargo Strategy & Development Department, at Korean Air. “However, as we have overcome this kind of uncertainty in the past, Korean Air will continue to improve its performance by developing emerging markets where high growth is expected, and also by establishing detailed counterplans to meet the changing business environment,” he explains.

Korean economy

According to Dublin-based Research and Markets’ ‘South Korea Freight Transport Report Q4 2011’, the Korean freight sector is predicted to see steady growth over the medium term, with similar GDP and total trade growth results, with the highest growth levels over the medium term are set to be in the air and maritime sectors. But it also cautions that high oil prices continue to take their toll on the freight transport sector, particularly in an energy importdependent country like South Korea. Air freight volume is set to gain 7.05 per cent in 2011 to reach 4.08 million tonnes in 2011, the report says. Park says South Korea’s economy has recovered quickly since the global financial crisis in 2008, however, the growth slowed down in the second half of 2011. In 2012, Korea’s export growth is expected to be around 11.9 per cent, down from the 20.9 per cent previously forecast for 2011, due to the anticipated global economic slowdown. “In the long term, we expect the trade volume with developed countries to grow steadily with the South Korean Government’s signing FTA agreements with both the United States and EU,” he says. In October, in an unusually speedy legislative process, the US approved a free trade pact with South Korea which will help broaden the scope of the alliance. “If businesses in the two countries make active efforts, trade between the two countries is expected to increase by more than 50 per cent by 2015 and sharply expand investment,” South Korean President Lee Myungbak said in a speech at a meeting with American business leaders recently. Last year’s bilateral trade totaled US$90 million. Commenting on the US-Korea free trade pact, Park says: “Korean Air anticipates that passenger business division will not be influenced by the free trade agreement (FTA) directly, but we can look forward to get positive effect on cargo business division. We look forward to increasing load factor of our cargo flights from the US, as imports are expected to increase. Also, we expect overall airfreight volume to rise due to the effect from expanding trade due to easier market accessibility,” he says. Park points out that electronics devices, which comprise the largest portion of air freight between the US and Korea, are already enjoying customs-free passage for 89 per cent of those commodities, according to an Information Technology Agreement between the two countries. A further nine per cent increase to 98 per cent after the conclusion of the FTA will not lead to a sharp increase in air freight loads, but “we expect auto parts to have a positive effect from the FTA,” Park adds.

Competition

Regarding the sharp rise of Chinese cargo carriers, particularly Cathay Pacific Airways which bumped Korean Air out of top global air cargo carrier ranking slot last year, Park says: “The main reason that Cathay Pacific has taken top slot was the result of it being very aggressive in its fleet expansion and putting its efforts in operating long haul markets.” He points out that Korean Air’s main focus and efforts last year was to pursue cost efficient operations with increased productivity, which the airline successfully accomplished. “We will continue to seek to enhance our ultimate goal of qualitative growth rather than just expansion by providing our customers the right kind of supply chain solution through enhancement of service quality and diversified network such as Chengdu in China, St Petersburg in Russia, Cheong-Ju in Korea with a cost efficient fleet,” he says. “Also, we are looking for sustainable growth by developing emerging markets like Central and South America and Central Asia,” he adds. The carrier’s passenger division is also considering starting flights to South America as it adds new long-haul planes, but has not specified the destinations which are still under consideration.

Facing challenges

In order to overcome the current challenges, Korean Air Cargo plans to improve operational efficiency by focusing on profitable network and maximising its resources. Also, the airline is seeking to expand its network to emerging markets and to strengthen its network’s competitiveness. For example, Korean air cargo has begun regular freighter services to Pulkovo Airport (LED) in Russia, Zaragoza Airport (ZAZ) in Spain, Chengdu Airport (CTU) in China and on transatlantic routes in 2011. “Developing new products is becoming more important,” Ho says, and “Korean Air is making such effort continuously. Service products for temperature sensitive shipments, especially pharmaceuticals, is are a good example. Besides, responding to market demand, our airline is developing and revising many services for special cargo,” Park adds. Korean Air has seven B747-8F and five B777F aircraft which will join the carrier’s fleet up to 2016, significantly boosting Korean Air Cargo’s capacity, but no detailed operational plans have been confirmed yet. “Korean Air is well equipped as we have doubled our fleet in the last 40 years and have devoted experience in the air cargo business. And we will continue to focus on the business and devote our services to our valued customer using our competitive capacity and diversified network expansion. “In parallel we will enhance our service quality through 24 hour cargo monitoring service which will enable us to deliver to our customers more accurate information in a timely manner for maintaining our premier position in the Korean market,” Park says. In the US security is another significant challenge, but as a key market for Korean Cargo, the air carrier complies with the Transportation Security Administration’s Approved Security Programme known as ACISP (All-Cargo International Security Programme) for all-cargo aircraft. Additionally, each Korean Air Cargo warehouse in the US has a contractual arrangement with screening companies to conduct the cargo screening in accordance to the MSP/ACISP requirements.

China market

As competition rears its nasty head, Korean Air remains strongly focused strongly on key markets, particularly China, one of its most important along with its own home market. To increase its market share, Korean Air launched a regular cargo flight between southwest China’s city of Chengdu and Seoul on 20 July. The service will use a B747- 400F aircraft routed Seoul-Chengdu- Singapore-Seoul. Park says the new air route will allow international cargo dispatched from Chengdu to reach destinations around the world much faster than previously. The freighter service is targeting demand from China’s new IT production base located in the Midwest of the country, which is home to top brands like Dell, Lenovo, Toshiba and Siemens etc, that have their manufacturing facilities there, Chengdu is the administrative, transport, economic, cultural center of Sichuan province in Southwest China. It is recently known as the production base for global IT firms, after their relocation from coastal areas in eastern China to the Midwest of the country. With the launch of the Incheon- Chengdu cargo route Korean Air aims to step up its efforts to advance into the Chinese market with the expansion to other cities in the midwest of China.

US & other markets

Korean Air Cargo also launched a twice weekly freighter service to Atlanta (ATL) in the US from Cheongju (CJJ) in Korea. CJJ’s cargo business has started on a comparatively small scale to Incheon, but it will be developed to become the second major air cargo complex in Korea, according to the carrier. In the middle of this year, Korean Air also began scheduled freighter service with a B747-400F aircraft connecting Miami International and New York JFK to Brussels (Belgium) and Navoi (Uzbekistan). Navoi airport is a newly developed location for Korean Air’s regional hub covering the Middle East, India and Central Asia, with a new cargo terminal and facility that includes refrigeration, cooler and warm rooms. Ever y week , twelve B747-400 freighters operate to and from Seoul, Brussels and Milan with a stopover at Navoi airport. In addition, Korean Air provides main-deck capacities with A300 freighter from Navoi to Istanbul (Turkey), Dubai, Mumbai, New Delhi, Bangladesh, Bangkok and Frankfurt. Trucking service is also available beyond Navoi to major cities in Uzbekistan, Almaty (Kazakhstan), Bishkek (Kyrgyzstan), Ashgabat (Turkmenistan) and Dushanbe (Tajikistan). Combined with A300 freighter service from Navoi, the new freighter operation will offer more options to US customers requiring main-deck cargo capacities to Europe, the Middle East, India and Central Asia.

St. Petersburg In March this year, Korean Airlines also started to offer a twice weekly cargo service to St. Petersburg, Russia from Seoul’s Incheon Airport. The service – on Wednesdays and Fridays – utilises a B747-400F. Russia’s economy recorded a 3.7 per cent growth last year and it is expected to grow by another 4 per cent annually over the next two years. Due to this steady rise in economic activities, a greater number of companies have decided to enter the Russian market through cities such as St. Petersburg, the second-largest in the country. One of the key growth engines of St. Petersburg is the automobile industry. Industry giants such as GM, Ford, Nissan and Hyundai have all set up manufacturing plants there and are increasing their investment in the region continuously. “With the launch of the new air cargo service on the Seoul/Incheon-St. Petersburg route, Korean Air will put its utmost efforts to contribute to the economic success of St. Petersburg and to meet growing air cargo demand in the CIS market,” Park says.

Korean Air Cargo’s operations

Currently, Korean Air Cargo offers cargo services via 114 passenger and 24 freighter flights. About 76 per cent of total traffic volumes are carried by freighters and 24 per cent by passenger aircraft based on the airline’s September performance. The airline’s major hubs are located in the global metropolitan cities such as at Incheon International Airport (ICN) in Korea, New York City (NYC) in US, Frankfurt (FRA) in Germany, Kuala Lumpur (KUL) in Malaysia, Shanghai (SHA) in China and other main airports around the world. Among these hubs, Incheon is the Korean Air Cargo’s main hub airport where it operates its own two cargo terminals. One of these, the largest in its operations, is fitted with the latest state-of-the-art equipment like ETV and various special facilities such as a cool room for accommodating various perishable goods and temperature sensitive pharmaceutical goods. These goods are controlled almost automatically by a cargo management system dubbed as TMS. Both the Korean Air cargo terminal buildings have a total capacity to handle about 1.7 million tonnes of cargo per year. Last year, the terminals handled a total of 1.5 million tonnes of cargo. The first cargo terminal has a 44,100 square metres area for handling Korean Air’s cargo while the second terminal has a 22,050 square metres area to handle foreign carriers’ shipments.

Market outlook

While Park expects the air cargo market to be stagnant through this year and at least into early next year, Korean Air Cargo is optimistic that the air cargo market will return to its normal growth track, with the added benefit for Korean being the free trade agreements that will be coming online. “Air cargo demand is affected by fierce competition as the supply in emerging markets is increasing and commodites such as LCD televisions are switching transportation modes from air to sea,” he says. “However, in the medium term, air cargo demand will steadily rise with the growing trend of free trade agreements such as Korea-US FTA and Korea-EU FTA and also the rising purchasing power of emerging markets.”

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Lufthansa, Frankfurt reel from night ban

Should the ban become permanent the German cargo carrier may even face the possibility of having to relocate its air cargo hub to neighbouring airports like Frankfurt-Hahn, Cologne Bonn, or Liepzig where it already operates its joint venture cargo airline Aerologic with partner DHL Express. But with the need to coordinate cargo movements between the bellies of Lufthansa’s passenger fleet and its freighters, this would involve large scale road movements – estimated to be nearly 30,000 annually. The total ban came as a surprise because it appeared a compromise had been reached earlier this year by the local Hesse court, which would have allowed the airport to operate 17 flights between 11 pm and 5 am while the original complaint was being heard by a higher court – Germany’s Federal Administrative Court in Leipzig. A spokesperson for Fraport – the airport’s owner and operator – Robert Payne, said that if the superior court comes to a different conclusion, that ruling will take precedent, but in the mean time the ban will stay in place until a final ruling from the higher court is issued. “It remains to be seen how the German Administrative High Court will decide,” Payne said. “We don’t know exactly when their decision is coming.” Immediately following the lower court’s decision, Fraport issued a statement outlining the challenges the ban now causes. “Implementation of this decision means cancellation of some internationally coordinated slots already allocated to the airlines, and there remain only 19 days until the start of the new winter 2011/12 flight schedule,” the statement read. “This creates a very difficult situation for the airlines, the cargo shippers, Fraport and, of course, the passengers, and it has implications for the worldwide network of flight connections.”

Lufthansa left scrambling

Of course hardest hit is the cargo market and none greater than Lufthansa Cargo, the airport’s largest cargo carrier which uses Frankfurt as its main hub. In the compromise Lufthansa had been awarded a generous 11 of the 17 night slots made available. Scrambling to come up with a temporary solution for the ban, which came into effect 21 October, only days before its winter schedule took effect on 30 October, Lufthansa Cargo said it had put together an emergency plan. “We’ve managed at great expense to keep our customer services comparatively intact,” commented Lufthansa Cargo chairman Karl Ulrich Garnadt. A number of flights have had to be relocated to daytime slots or to the early and late hours of the day. Individual connections – to China, for example – have been cancelled entirely. Other flights bound for China would have to stop over at Cologne/Bonn Airport for several hours after an evening departure from Frankfurt so as to fly on, as originally planned, at night-time in the direction of the Far East. “The night-flight ban has forced us to lay on a timetable, which in part is economically and ecologically absurd,” Garnadt emphasised. “We will be operating in future with unnecessary take-offs and landings, which will lead to more noise, higher fuel consumption and more costs running into millions.” Chairman of Lufthansa Group, Christoph Franz said that as a result of the restriction, freight was now being loaded onto trucks for transhipment by road to other airports where there is no night flight ban in place. This, he said, would use 1.5 million litres of diesel annually. The carrier is also loading five aircraft per day at Frankfurt before flying them to Cologne where they are held until international regulations permit them to take off. Franz said the five flights between Frankfurt and Cologne will burn an additional two million litres of kerosene per year. Franz went on to describe these moves as “economically and ecologically nothing short of grotesque”, but he added: “However, we are forced to act in this way in order to at least maintain some of our freight turnarounds and so that we do not lose our internationally negotiated fly-over and landing rights.” Meanwhile, Garnadt also noted that as result of the ban, at least one MD- 11 freighter is to be transferred from Frankfurt to Cologne/Bonn Airport from January. “The freighter will operate the indispensable overnight flights for the German logistics industry to North America, which can no longer be guaranteed from Frankfurt because of the night-flight ban,” he said.

Drastic signal for cargo industry

The provisional night-flight ban in Frankfurt is a drastic signal for the German logistics industry, Garnadt said. “As export world champion, Germany is reliant on dependable connections to ship airfreight to destinations around the globe. Frankfurt Airport plays in that respect a highly important role, since around 40 per cent of German exports are transported by air.” A blanket night-flight ban threatens to sever Germany from the global trade lanes, he added. “Closing the world’s seventh biggest airport for six hours each night and thereby decoupling it from the international goods flows constitutes a severe blow to the air traffic industry. No other transport mode is subject to such operational restrictions.” Earlier in August, Franz had warned that a ban on night time flights at Frankfurt airport would allow the Middle East to overtake Europe as a global cargo hub. Weighing in on the issue, The International Air Cargo Association (TIACA) warned that such night flight bans at major airport will come at a high economic and environmental price. “The imposition of a noise curfew doesn’t occur in a vacuum, it must be looked at holistically because banning night flights has wide ranging consequences,” said TIACA’s chairman, Michael Steen. “It means air services will be eliminated with negative impact not only on the airlines but shippers and all the businesses and consumers linked to the shipments. It also results in flights being re-routed over longer distances or flown at different times which can lead to greater congestion and emissions during daytime hours.”