“One of our advantages is that we’re not too big so we don’t have too much freighter capacity which means we’re able to balance the flights and trim it to suit the conditions,” he adds.
His mood, like pretty much all in the air cargo industry is, at the same time, incredulous at how the global economy appears to worsen by the day and yet oddly calm, with even the slightest flicker of optimism. Perhaps it’s a foible of the airline industry where its veterans have long ago learned the art of ‘grinning and bearing it’.
When Shahari Sulaiman took over as cargo boss at MASkargo in September 2007 he could never in his wildest imagination have foreseen the global economic meltdown now underway. Just one day into his job he gave a press briefi ng at Asian Aerospace 2007 in Hong Kong where he outlined his plans for the cargo arm.
Although new to the top job, he was not new to air cargo having working in MASkargo for a number of years, and while his tone was confident, his plan was clearly cautious.
Limited network expansion with a potential hub to be established in Turkey to tap Eastern European volumes, potential tie-ups with another carrier and no immediate fleet expansion. The focus would remain primarily on the core markets of China, Europe and Australia. In hindsight this conservative strategy may well turn out to be the cargo division’s saving grace.
It was, in essence, a prudent focus on what MASkargo had been doing all along, but doing it better. At the time, the carrier and its cargo arm had finally seen the sun break from behind the clouds after coming through a desperately needed, but fairly painful year-and-a-half longrestructuring exercise led by the very business savvy MAS chief executive,Idris Jala.
That exercise, which began when Jala joined in December 2005, cleaned up a problem-riddled and inefficient airline operation, restoring it to profitability where it has remained ever since. The turn-around was so successful in fact, that the carrier posted record profits in 2007.
Profitability tested
But that profitability is going to be sorely tested this year and next, as the fall-out from the global economic calamity gnaws at the heart of the aircargo industry.
Already this year, the MAS group saw its third quater net profi ts plummet a bone-jarring 90 per cent, due largely to the surging oil prices earlier in the year. Crucially though, the group did remain profi table even if only with a meagre RM38 million (US$11 million) profit.
Industry sources tell Payload Asia that freight rates, as of mid-December are less than 50 per cent of what they were a year ago.
“The situation is pretty severe. A lot of companies are in survival mode for the next year. Have you been watching China?” he asks with clear incredulity.
“It’s really frightening what we’re seeing there. The production numbers just keep dropping and the news out of the US is not good – Christmas shopping, apparels are down 20 per cent, electronics is also down over 20 per cent.”
His concern over China is clearly well founded as the country is not just a key driver of the global economy, but MASkargo’s biggest market, accounting for about 30 per cent of its revenue.
Fleet expansion put off
Cautiousness is now not simply the watchword, but the mantra. Earlier plans for fleet renewal of MAS’ cargo fleet have now, wisely, been put on hold. “We’ve delayed any commitments for at least 6 to 8 months because of the economic situation, after that we will really look at it again,” says Sulaiman.
Currently MASkargo operates a fleet of seven freighters comprising two B747- 400s on dry lease and four B747-200 Classics also on wet lease along with oneA300-600 on wet lease.
But in an era of oil price instability, operating B747 classics has become a tough proposition. Sulaiman concedes that when oil reached US$140 a barrel, “that was a really scary month”.
The cargo boss will undoubtedly breath at least a small sigh of relief when one of the Classics is returned by end- 2008. Although fuel prices have fallen to the lowest level in nearly four years, the immediate relief will be in the form of capacity reduction.
This year alone MASkargo trimmed capacity by about 5 per cent and is aiming for a further reduction of nearly 8 per cent next year. “It’s important to protect the bottomline, lower volumes are okay as long as we make money,” he says.
The capacity cuts – along with a 5 per cent rise in volumes – this year helped improve the load factor by nearly 6 per cent in the first half of the year with an improved yield of nearly 3 per cent.
But the second half was a whole diff erent story. Volumes dropped 10-15 per cent year-on-year in the third quarter and particularly worrying, this happened during the traditional peak season.
“Its been challenging, we’re supposed to be in the peak season which is the fourth quarter and last year was ‘super peak’ and I think a lot of cargo companies benefited from it. But this year unfortunately we don’t see anything close to it.”
“We’re not even talking about recovery, the problem is they’re talking about two years down the road. The road to recovery is not very clear at the moment because the full extent of the global crisis has not been felt. We haven’t hit the bottom yet,” he said adding that the last time things were this grave was following the bursting of the tech bubble in 2001.
“To see this happening during the peak season is giving us this very cautious approach towards our businessnext year.”
Flat volume growth in ‘09
Sulaiman said he expects volume growth to be flat in 2009, with a slight pick-up in the second half which willproduce a marginal volume growth.
“Next year I anticipate still being profi table, but it’s hard to be a star in this environment,” he says with a laugh demonstrating he hasn’t lost his sense of humour, yet.
“We are operating more efficiently. Although we reduced our capacity but we are still getting the same revenue or slightly higher revenue. We have to manage capacity very well – it’s critical in moving forward,” he adds.
One key factor that helped in this downturn was a decision during the restructuring phase to invest nearly US$12 million in new IT systems.
“We made a conscious decision about three years ago to improve our information management system to manage the business, so we are in a better position to manage the complexities now,” he said.
That investment has probably paid for itself, as Sulaiman says MASkargo has already seen a four per cent improvement in its yield as a direct result of the new revenue management system.
For now the carrier will maintain its current network, relying on Amsterdam as its key gateway to Europe along with secondary hubs at Frankfurt, Basel and Malpensa (Milan).
The carrier uses Tashkent, Uzbekistan as a technical stop between Asia and Europe, which nearly a year ago had been slated as a hub from which to expand within the CIS countries with the aim of developing the ‘silk road’ into Europe.
Flexibility key
“At that point in time the strategy was right, but you can’t have a really rigid approach to business as things change and you must change your strategy and you must react to the market very fast,” Sulaiman said.
In Asia, MASkargo’s network includes Dubai, Madras, Dhaka, Jakarta, Bangkok, Saigon, Hong Kong, Taipei, Guangzhou, Shanghai, Sydney and Melbourne.
The carrier also makes substantial use of the belly capacity of its passenger counterpart, and currently derives about 55 per cent of its volumes from belly capacity and 45 per cent from its maindeck freight lift.
Another, perhaps unanticipated benefit, was leasing of an A300-600 freighter which MASkargo took delivery of in September 2008. The move was necessitated Sulaiman explains, because the passenger side downgraded their capacity to Saigon to a narrowbody aircraft which left precious little cargo capacity and “limited our reach in this region so we felt that the only way to offer our customers a wider reach was to have this medium sized freighter”.
Although it was a significant jump in capacity – from wide-body passenger belly to maindeck freighter – it was a conscious decision, otherwise we would be limiting ourselves to just Kuala Lumpur and maybe Australia. With this aircraft we can offer a lot more regional destinations.”
Shortly after it was put into service on the Kuala Lumpur, Bangkok, Saigon service, he commented that it was “a very interesting time to introduce this aircraft”.
But a more recent assessment from Sulaiman gives a brighter picture, as he says the aircraft has proven itself to be the right-size for the current market conditions.
“As volumes drop out of China and India we can use the A300 to feed into our network at Kuala Lumpur by increasing services around the region as well as enter new markets,” which it couldn’t do with an aircraft the size of a B747.
Indonesia has been promising, he added saying this was one possibility for expanding cargo services.
Asia will remain key
Looking ahead, the MASkargo boss is confident that the global market will rebound and with it the Asia-Pacific air cargo market which makes up 45 per cent of global air cargo volumes. The vast majority is related to either full production in China or unfinished products that are then shipped elsewhere, he noted.
He also said that the region’s percentage share of the global air cargo market is not likely to change in the medium to long term. “I don’t think that’s going to change, China will still be a very key player in this market, it’s just that there are some hard facts that face China now, in terms of the contraction of its manufacturing output.”
Another of the hard facts facing China is the fact many MNCs, who up until now have only put their manufacturing facilities in China, have now come to the realization that they should not be risking putting all their eggs in one basket, and are starting to spread their production facilities to other locations like Vietnam, Indonesia and Malaysia. Th is explains the interest MASkargo has in further developing its regional network to destinations like Saigon and Jakarta.
Looking ahead, one of key things effecting airlines in the region, although there are signs of an improvement he says, is the issue of liberalisation.
While ASEAN open skies will help the situation, MASkargo is already seeing some benefit from open skies because it is able to sell on its service from Kuala Lumpur to Saigon on the Bangkok to Saigon portion. But not all countries within ASEAN have embraced the liberalization to the same degree at this point in time Sulaiman adds.
“Where Malaysia is concerned, when most airlines fly to Kuala Lumpur, they have fifth freedom rights to fly to any other destination, but when we fly to say, China, we have limited rights.”
This is limiting trade growth and raising the cost of distribution in some countries he said.
“We can’t fly to any destinations in the US, only to some other specific destinations so that actually restricts thecapacity growth in certain regions.”
The sea connection
Another reality the air cargo industry is facing, particularly in this region, according to Sulaiman, is that shipping lines are getting more efficient and in an environment such as the current one, the issue of price versus cycle timebecomes more important to shippers.
“More and more airlines will have to look at intermodal kind of business in trying to be part of the total supply chain. This supply chain will not just be one mode, but sea and air, or sea, road and air, for instance.
“We cannot say that our product is just air anymore, you must look at the cycle time and whether you can meet the cycle time, its always a function of cost,” he added.
While many carriers see this as a serious threat to their business, MASkargo, on the other hand, has moved to embrace it by offering a special product to try and tap some of this business.
The I-PORT product essentially hinges around “an airport within a seaport” concept, in which MASkargo has extended its services to Port Klang, a major seaport on the Malacca Strait. Th e idea is to promote Port Klang/Kuala Lumpur International Airport (KLIA) as the load centre for sea and air traffic in the region.
A designated air-zone has been established in Port Klang to facilitate this through a collaboration with the Port Klang Terminal Operators. The I-PORT sees a hassle-free transfer of cargo from the seaport in Port Klang to MASkargo’s Advanced Cargo Centre at KLIA.
The service ensures an efficient customs declaration any additional documentation as all sea- to- air shipment from the seaports are sealed by the Customs Department, and loaded on to MASkargo’s scheduled trucks for outbound destinations through KLIA.
Cargo space and flights for the intended airport of destinations are pre-booked by forwarding agents at the MASkargo Air-Zone online handling office, known as “XPQ”, situated within the port’s Northport Container Yard Terminal.
Another unique product offering by MASkargo is the Animal Hotel. Opened in 1998, the same year KLIA began operations, the MASkargo Animal Hotel started as a centre catering to inbound animal shipments for staging and delivery. Th is changed in 2004 when the Animal Hotel became a one-stop-centre offering what the carrier describes as “6-star” service.
Catering to virtually any type of animal such as cats, dogs, horses, tigers, fishes, birds, reptiles and elephants, the MASkargo Animal Hotel is the sole Animal Hotel in Asia, and one of only three in the world. Th e animals are under the care of the MASkargo team of experienced handlers, and are provided with constant supervision, from acceptance to delivery during the transit.
The carrier also operates a Perishable Centre with MASkargo providing an “Unbroken Cool Chain” for optimum cooling conditions for up to 16 units ofULD at a time.