Air Cargo: Challenges Ahead

China market confuses picture of the future

With the globalization of manufacturing and companies increasingly incorporating the movement of their parts and products by air, projections for the air cargo industry are optimistic. In fact, experts tracking the movement of airfreight globally, particularly Boeing and Airbus, project roughly 6 percent growth per year through 2025. So far this year, however, air carriers are not realizing this growth. In fact, some are reporting stormy weather ahead.

Certain factors and challenges are weighing heavily on the air cargo industry that now have a direct impact on capacity, yields, and rates. At the very top of the list are concerns about high fuel costs and the fact that capacity is growing faster than tonnage—the new 777-300 passenger aircraft, for example, offers a whopping 25 tonnes of space.

Carriers servicing China, once regarded an easy and lucrative market for outbound shipments, are particularly vulnerable. The Asian market, especially Hong Kong, has suffered as a result of overcapacity following a host of new market entrants, which has, in turn, seen prices drop and yields decline.

“One year ago, when you’d open the doors of freighters coming from Asia you’d find them full. Now that’s not happening. Now there’s pressure on yields both on the outbound and inbound into Europe,” says Nils Haupt, Lufthansa Cargo AG spokesman.

The good news is the industry is still growing. However, says Haupt, at 2.7 percent for First Quarter 2007, Lufthansa Cargo’s growth rate is less than expected.

Neel Shah, sales and marketing vice president for United Airlines Cargo, reveals that with volumes growing 2 to 3 percent so far this year, UA’s cargo figures are not in sync with industry growth projections. The reason he gives is pretty simple: It’s China.

“It’s getting harder and harder,” says Shah. “There’s a lot more capacity, and this has caught up with demand.” Where once opportunities in China seemed bountiful, now carriers like UA are having to scrap around to fill their planes. Having aircraft positioned on the right trade lanes helps, adds Shah; plus, United doesn’t operate cargo freighters. “If we did, it would be an uglier picture,“ he states. “We generate every dollar of revenue in the belly. It’s a very important piece of United’s overall profitability.”

Across the Pacific even carriers like Korean Air, which benefit from their geographic proximity to China, are seeing new challenges. “Our advantage of having China next door is temporary,” says Giulio Battaglini, marketing head of Korean Air. “Thus, maintaining a reasonable yield level is an important task.” He expects cargo rates to remain stagnant for the time being.

Building Global Links

To counter the problem, Julian Cobley, British Airways World Cargo (BAWC) network development manager, finds that in some markets, such as Asia, carriers are pricing for short-term cash and volume returns. “But this does not address the long term challenges that cargo carriers are facing,” he states.

Some carriers link various global markets to improve yields. BAWC, for example, offers flights between China and India. “We currently operate two weekly B747-400F services from India to China/Hong Kong and eight weekly B747-400F services between Hong Kong/China and India,” Cobley says.

Passenger carriers UA and American Airlines fly between Asia and South America via their U.S. hubs. “We can sell Shanghai-San Paolo with the quickest same-day connection. No one else can match it,” Shah says.

United Airlines’s global service is particularly beneficial to companies such as Intel that source components from China and move tons of microprocessors for final assembly in Brazil, adds Shah. “Its quick connections bring a unique value proposition to the market for such high-tech manufacturing businesses,” he says.

Emirates Airlines will make its South American debut by adding Brazil to its route network on Oct. 1, 2007, with six-a-week, non-stop services to Sao Paulo.

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