But for Andrew Herdman director general of the Association of Asia Pacific Airlines (AAPA), the current industry problems are market driven and it’s important to look at the demand side of the equation.
“What’s happened in the last five years we’ve been through a period unlike any other in the history of the industry where we had a global recession and if we look at demand curves over last 5-6 years the passenger business peaked before the recession at about 2008, dipped in 2009 and then resumed growth.”
With passenger demand growth that is almost 20 per cent bigger than before the recession and as carriers moved to add widebody capacity to meet this growth, belly capacity has and continues to grow in step. The cargo business on the other hand slid sharply during global recession, down about 30 per cent – a decline that is “unprecedented” Herdman notes, adding that the huge rebound in 2010 disappeared leaving the industry in a slide once again.
“So what we see over last three years is that the cargo business is stagnant and about at the level it was at in 2008. So there was no growth for five years and nobody anticipated that. Meanwhile, all the passenger aircraft coming into service – for good reasons – to satisfy customer demand growth that along with the freighters that continued to be delivered explains the excess capacity, not really excess capacity but lack of demand,” he says.
And as he notes the cargo situation is not like the passenger business where you can turn it around and try to stimulate demand. “It’s a demand driven business, you just have take what you can get,” he adds.
“So the consequences of that is we have far too many freighters, nobody knows what to do with them. A lot of freighters have been parked or sold for scrap. Not many sent to the desert but many are just parked and utilisation is way, way down.” And this is the natural outcome because the belly space has grown and any adjustment on the freighter side is even worse than the overall change in the freight demand which is down 20-30 per cent. “It’s soul searching time as to what is the correct model,” he says.
The optimal model? For Ram Menen, divisional senior VP Cargo at Emirates SkyCargo, it’s the belly flex model – freighters and bellies – that is the best model going forward and not because that’s the SkyCargo model he adds, “but purely because the changing paradigm is not driven by airplanes its driven by the market,” he says.
“Pure freighters – are they going to disappear? I don’t think so. We’re going through some tough times at the moment, but we shouldn’t be making future decisions based on what’s going on right now. These are the speed bumps, deal with it, but a combination of freighters and passenger bellies and most importantly trucks,” he sys adding that the ground-based cargo movers are “the best regional freighters”.
For Maxim Ivanov, marketing & business development director, Asia & Pacific for pure freighter operator AirBridgeCargo Airlines he too feels freighters have a place and again not simply because of ABC’s cargo model. “It is very relevant question because unfortunately I think some freighter operators will disappear from market before the end of the year because market is not performing because the consumer market is not performing.”
While he believes the market will certainly come back once consumer confidence returns and people start consuming and spending again the real question, he says, is not when consumer confidence will come back, “but will something change for freighters when it does come back.
“Now we face overcapacity and will this overcapacity go away if this consumer confidence returns and people start consuming and spending again? I don’t think so, because this problem of overcapacity has been around for quite some time.” While noting that overcapacity in China first reared its head in the China market in 2006/07, it’s a very big problem currently and “I think its time to look elsewhere in the market.”
So the question for Ivanov is that once the consumer markets come back, “will it mean that freighters are the right capacity and contribute the right margins”. The problem as he sees it, is not one of overcapacity, but how this capacity is managed. “Yes there is overcapacity in some markets, but there is deficiency in capacity in other markets and more importantly, capacity is not free to move from region to region, from market to market. My capacity is limited by those markets that I can fly, by commercial restrictions, by bilateral restrictions, by regulators, by governments and also yes I’m limited in my flexibility to operate especially with pure freighters.”
Agreeing with Menen, he says: “The question of survival is now before pure freighters. If you have belly cargo you are still on the safe side because you have this diversified product and if you are an integrator you can still benefit from the express product. But if you are a pure freighter operator your product is not so diversified so pure freighter operators will be the first to see some exits by the end of this year.”
The question for pure-freighter operators then “is how to address the whole operating model.” Ruling out any kind of government support Ivanov says all that remains is “to rely on our own effort, our own creativity to make this happen despite the conditions that exist.”
“It’s not a simple answer,” agrees Sathis Manoharen, regional head of Cargo, AirAsia/AirAsia X. “I agree with Ram I don’t think you’ll see freighters totally out of the market, but rather it’s going to be where these freighters are going to be positioned – there’s always some parts of the world where there is growth and others where there are slumps. Some models work in some parts of the world and some models will not work in some parts of the world.”
Manoharen notes that the cargo industry like many industries in the world tend to be behind the growth curve and when times are good there’s always going to be capacity put in as everyone jumps on the bandwagon. “By the time you actually get the freighters onboard the economy slows down and suddenly you realise there’s overcapacity – how to address this? I don’t think there is a silver bullet answer to this.”
As a freight forwarder, Alec Koh, council member at the Singapore Aircargo Agents Association (SAAA) said, “it would be a clear preference of the forwarding community for carriers to have both freighters, as well as belly capacity. Our business is basically to satisfy our customers and sometimes belly loading on certain sectors can be limited by passenger weight. With freighters the chances of placing cargo is much better.” And while he believes some freighters may well end up in the desert, they’re not going to disappear.
Airfreight ‘disconnect’ “This business is in a kind of disconnect,” argues Didier Lenormand, director of Product Marketing – Freighters at Airbus. While there is a converging trend between belly space, passenger demand and cargo capacity, there is a greater disconnect, he says.
“We have a disconnect between whole elements of the transport of cargo around the world which includes sea freight, air freight and of course on top of air freight are the integrators, so I think the issue is that if the airfreight business wants to be sustainable in the long term it needs to come back to its roots which is selling what makes air freight so specific and not just a simple element of transporting commodities around the world.”
For Lenormand, the air cargo industry should leave this to the sea freight business and try to “refocus more on the specificities of air freight which is speed and quality and getting more into the business of supply chain back into this business and not trying to deviate into these other directions.”
This means moving away from the transport of more commoditised freight airport-to-airport which is to a certain extent challenged by sea freight and instead focusing on the value of selling air freight which is more specific product offering with a better value add. “And in this respect it probably means looking at new trade flows,” he says
This includes tapping emerging trades such as the intra-Asia trade which is forecast to grow at around 6-7 per cent in the coming years as compared to the maturing Asia to Europe and US trades which are set to grow at around 3-4 per cent. And tapping these markets with the right sized freighter is also key, he added. But tapping other trades is not without its pitfalls, as ABC’s Ivanov points out. “Our utilsation is one of our most serious concerns because we are not free to put our capacity where we want it. Also demand does not always follow the same pattern as few years ago, it’s becoming more sporadic and hard to predict and freighter capacity is not really flexible enough to be in the right place at the right time when demand emerges somewhere.”
New markets Market access, or the cost of providing capacity economically in a market depends on how economically you can operate that airplane is says Menen. “If you fly long distances, if you are allowed to operate on the basis of 5th freedom access, then as an airline, as an airport operator, new forces come into play because the capacity provided becomes a lot more inexpensive.”
But for this to happen Menen notes it’s important to separate the passenger bilaterals from the cargo bilaterals, of which discussions are ongoing in Geneva with IATA and TIACA. “These processes are very, very time consuming because the countries and political aspects involved. Even if a country doesn’t give passenger rights, it should still give to cargo – market liberalisation very, very important.”
To help reach greater liberalisation Menen also advocates working with “our cousins on the ocean side,” because they have exactly the same problems just with different terminology. “We have already engaged with them to come to the common understanding that we have a common problem,” and it’s a problem which needs a global solution under the World Trade Organisation (WCO).
Diversifying China markets Taking the example of China’s ‘go west’ strategy the new markets of Chongqing and Chengdu which have been created out of nothing through the establishement of major electronics manufacturers like Foxconn and HP. But despite this core of IT-related cargo, it’s still not an easy market to serve notes ABC’s Ivanov.
The problem he notes, is because while there is a demand for freighters the new cargo market needs to build critical mass before freighters will be going out full. “We combine both cities in one flight and the demand is also quite erratic because Chongqing is basically a one man show – Foxconn – and not much else.” There’s also not much of a catchement area around these two cities, he said, adding that one week you can see 30 tonnes, while a week later it might only be five tonnes and if there’s a new product launch, it’s a full freighter.
These markets are still in their infancy and it will be maybe five years before traffic demand is healthy and stable, he adds. A very large population base in the two cities will provide a good passenger market to develop, but this will take longer he says, noting that the purchasing power is still quite low.
“The good thing about Chongqing and Chungdu is that the population in these two cities is larger than some European countries,” added Menen. “When you have this kind of manufacturing activity starting to come up, the passenger capacity starts building up so then you need to create balance between available capacity at what cost and how do you feed it in.
“It’s very complex situation to tap new developing markets there’s a period of time when you don’t have a critical mass and don’t forget when operating freighters you need critical mass.” In a developing market traffic is also only one direction and that also kills the economics of the freighters, Menen says adding that intelligent use of capacity is key.
For APAA’s Herdman he sees it as an example of an appropriate market response as freighters are deployed into these points in response to demand, but adds that key to this equation is the fact that passenger demand is being met with narrow body capacity, “so even as the market grows and you see frequencies increasing it doesn’t really add a lot of belly capacity.”
The freighter business, as Boeing’s Jim Edgar points out, is about very, very tight margins and “thus you have to approach the market, not conceptually, but we have to look at the network and look at profitability. So when an operator looks at a particular market they look at the network and the profitability of a certain freighter, not conceptually, but how much does it cost, high cost of fuel, percentage of operation, network, utilisation, tonne/km and what can fill it regularly. He cites the example of ABC who make the western China service a success by loadbuilding through western China on intercontinental routes.
Market impacts Another key factor that will have continue to have an impact on air cargo is the price of oil, not just because it makes operating aircraft expensive, but because it dictates consumer behaviour because of its impact on domestic economies, said Menen.
“Consumer spending is so interconnected with the price of oil. Unless consumers are buying, factories are not producing. In the US – the largest consumer market in the world – the biggest question is outsourced vs nearshore vs onshore.”
“I think these issues will change the paradigm. Globalisation and the globalisation of manufacturing is here to stay but what is likely to happen is the components are going to be manufactured in all these places and the finishing off of these products will be done in the country of consumption, or nearby the country of consumption. Let’ not put any plans on paper, wait and see because these are all going to end up effecting air cargo flows around the world.”
