Fresh blood is shaking up the air freight market, and changing trade patterns emerging. But how much of a threat will they be to established carriers?
There is nothing like going back a decade to get some perspective on how differently companies are faring in a particular business sector. In air cargo, an analysis of traffic figures between 2000 and 2010 suggests that the established players are losing ground to new rivals.
Over that period, Lufthansa Cargo saw its traffic, expressed in freight-tonne kilometres (FTK), rise by 25.2%, with Air France-KLM up by 25%, British Airways up by 9.9% and American Airlines up by 9.2%. Over the same period, Emirates saw its cargo traffic rise by 445%, while Air China was up by 180% and Cathay Pacific increased by 148%.
That meant that between 1999 and 2009 Emirates rose from being the 35th-largest cargo carrier to the seventh largest, while Air China rose from 28th to thirteenth and Cathay from eleventh to fifth. FedEx Express - once considered the great threat by conventional cargo operators - remained the world's largest cargo carrier for all that time, but its FTKs have only grown 30% over the period.
The rise of a handful of Middle Eastern and Chinese carriers might not be that surprising, one might think, given economic developments in those parts of the world. But the picture is even more striking when focusing on just the last few years. Here while large European and US players endured sluggish air freight growth or even declines since 2006, Middle East and Asian operators prospered as Emirates freight traffic grew by 41%, Cathay by 35% and Air China by 37.9%.
Even during difficult times, it seems, the rising stars continued to rapidly gain ground.
Is this a simple case of Asia rising and Europe and the USA declining, however? Certainly, the European carriers as a whole have seen consistently sluggish growth since the global economic crisis of 2008, at least as reflected in IATA traffic figures.
It has even become fashionable for European cargo executives to bewail this apparent decline in their cargo business. "The era of the Europeans is over," said Robert van de Weg, vice president of sales and marketing for Cargolux, at a recent conference. "First US carriers dominated this business, then the Europeans, and now in the next decade it will be the Asians, particularly the Chinese and Middle Eastern carriers. They have the long term vision and the financial muscle. You need a long-term view to succeed in this business: you can't manage it cycle by cycle."
A Problem Shared
If this is a problem, however, it is a problem that the more established carriers in Asia also have. Japan Airlines - once a major cargo giant - exited the freight business in October last year, and analysis of the traffic figures for some other big Asian names show they have done little better than their European counterparts. From 2000 to 2010 Korean Air, Singapore Airlines and Malaysia Airlines all saw just over 30% growth in their cargo business. For 2006-2010 their figures are actually worse than those in Europe, with Korean Air down by 4.8%, MAS down by 5.7% and Singapore Airlines down by 17.7%.
The relative declines of the two southeast Asian carriers might be put down to a shift of manufacturing to China, but Korean Air, with its proximity to China, was supposed to have been a beneficiary of its rise.
The figures at the very least suggest that the Europeans are not the only ones to feel the heat from new competition.
The new competition does have to be put into perspective. There are some markets - India being one - where the Gulf carriers have taken a big chunk of business from European operators. On Asia-Europe routes they are also obvious competitors.
But there are still plenty of markets in which Europeans have an advantage over their eastern rivals, and some of them are rather lucrative ones. Van de Weg, for example, points to Cargolux's Boeing 747 freighter capacity across the Atlantic, which allows it to carry outsize and oil-related traffic from the USA to a whole range of Middle Eastern markets - Beirut, Kuwait, Riyadh - via its Luxembourg hub.
Gulf carriers, with their reliance on belly cargo feeds or regional freighters from their hubs to other Middle Eastern markets, can't match this through service, he says.
And though Emirates started a twice-weekly freighter service to São Paulo in November, and is thinking of adding a third, it doesn't offer such a massive advantage for an Asian customer compared with going via Europe. "You might as well fly via Europe - it is not much more fuel burn, and there is a huge market you can serve on the way," says van de Weg. "I don't think the Gulf carriers have any advantage in the South American market, though it is a market they may try to participate in opportunistically."
South America is a market of growing interest to Chinese and other Asian manufacturers - already Brazilians are starting to complain about cheap Chinese goods putting their local factories out of business. But whether direct air cargo routes will develop between the two anytime soon is an open question.
Traditionally, Miami has always been the transit and consolidation hub for Latin America, with Los Angeles playing a lesser role, and certainly there is a lot of Asian-origin cargo in southbound freighter flights from both places. Alvaro Carril, LAN Cargo vice president of marketing and sales, reckons it might be as much as 70% of cargo out of Los Angles and 40% leaving Miami, though since most of the cargo is reconsolidated in the USA it is hard to be sure.
Asian carriers have certainly been exploring the US end of this market. China Airlines was a pioneer, starting a freighter service to Miami back in the late 1990s, and was joined in 2009 by Cathay Pacific, which now has six freighter frequencies to the Florida hub. However, more direct Asia to Latin America flights would have to overcome several challenges.
LAN now has long-range 777 Freighters that could fly to Asia at least, but this would need a US stop en route, and would be a long and expensive flight. There would also be the question of where to fly to in Asia. "In Europe, we can serve Frankfurt and then truck cargo in from across the whole continent, but that is not true in Asia," Carril points out. "So where do we fly to? Korea? Japan? China?"
Asian-Latin American traffic would be also be all one-way, southbound, with manufactured goods. Brazil, South America's powerhouse economy, may be enjoying a boom on the back of trade with China, but northbound, that trade is all in basic commodities such as iron ore, ethanol and soy beans.
None of that goes by air, and the flower, fish and vegetable traffic LAN carries northbound from Chile, Peru, Colombia and Ecuador is unlikely to be enough to sustain a flight to Asia.
On the other side of the globe, the growing trade between China and Africa is easier to serve by air. This is a market that Emirates, Qatar Airways, Etihad and even Saudi Arabian Airlines are well placed to profit from. In the case of Emirates, it has both freighter services to Nairobi and Entebbe, and plenty of belly capacity on widebody passenger flights.
It is important not to exaggerate the potential of this market, however. Figures from airline business consultants Seabury show that the vast majority of African air freight - 957,000 tonnes of it in 2010 - was with Europe, while air trade with Asia totalled just 129,000 tonnes. Even allowing for trade that might be reconsolidated at Gulf airports such as Dubai, the volume only reaches 190,000 tonnes or so.
Nor does that proportion look set to change that dramatically, with Seabury predicting that trade to Europe will grow by 6% or so over the next five years, compared with 8-13% for various locations in Asia. That suggests a growing market for Emirates et al certainly, but that European carriers, who have traditionally dominated the African market, will continue to retain the major chunk of it.
A key reason for this is that trade between Europe and Africa is balanced by volume, with southbound manufactured goods and a large amount of northbound perishables - in particular flowers and vegetables from Kenya and Uganda.
On Asian routes, by contrast, trade is heavily biased towards imports into Africa. That makes Africa an excellent belly cargo market for Emirates or Qatar Airways, but not such a lucrative freighter proposition.
Markets such as Africa or South America in any case remain relatively small, compared to the big trade lanes in and out of Asia. It is here that the main prize clearly remains.
A question for the big European operators is whether they can remain competitive on these routes in comparison with their newer, more aggressive competitors.
As van de Weg highlights, a key issue here might be a willingness to invest in the cargo business in the long-term. Lufthansa Cargo and Cargolux have certainly faced that decision, with the latter about to become the launch customer for the 747-8 Freighter, and Lufthansa recently announcing an order for five 777Fs. Karl Ulrich Garnadt, Lufthansa Cargo's new chairman, says that capacity will be to expand its fleet of 19 MD-11Fs rather than replace them.
The opposite trend might be represented by Air France-KLM, which since the recession has adopted the position that it will only operate freighter capacity if it contributes to its bottom line.
The result has been a dramatic thinning of the Air France freighter fleet, the ending of KLM's freighter operations and a heavier reliance on subsidiary cargo carrier Martinair.
Michael Wisbrun, just before leaving his post as chairman of Air France-KLM Cargo (he became head of SkyTeam on 1 June) was unrepentant about that decision, even though it lost Air France-KLM market share.
"European carriers have shareholders and are judged by the market on their bottom line," he said. "The Asian carriers are supported by their governments and have different criteria when making capacity judgements." He suggested that both the Gulf and Chinese carriers will eventually have to come into line - "They will be confronted by competitive pressures, too: for example, the Indian carriers will be resurrected and will push back against Emirates" - but admitted that this could take a while. "It may take 10 years, but we will just have to sit out those 10 years," he said.
Cost Structure Key
One other view is that survival for the Europeans is all about cost. "At the end of the day, it is about who has the lowest cost structures," says Thomas Hoang, regional director of cargo marketing for Boeing. "This is not just about low wages, but the efficiency of the aircraft in your fleet. The Middle Eastern carriers have newer fleets and that is going to make it harder for the Europeans to compete with them."
Garnadt doesn't deny the importance of costs, but says it is also about being smart with markets - detecting niches, differentiating on service. "I am not saying we can afford to be high cost - Lufthansa Cargo has been surprisingly successful in reducing costs recently, and the result we achieved last year wouldn't have been possible without it - but segmentation of markets as well as costs is the way to the future."
European carriers do at least have one other key advantage - their sales connections in the European markets, which for all its sluggish growth is still a massive factor driving demand for Asian goods.
It is interesting that in China - everyone's favourite boom market - the government is worried that its homegrown carriers have not been getting enough market share. To remedy that it has nudged Air China towards a cargo joint venture with Cathay Pacific, and encouraged China Eastern to merge with Shanghai Airlines and Great Wall Airlines.
These new entities will be desperate to win more business from European customers - and that might be another threat for the European carriers in the future. But it can also be read as a tribute to the success of the European operators in penetrating the China market to date. Clearly if they are already doing well enough to worry the Chinese government, they must be doing something right.
More here on cargo developments and the possible impact of new capacity coming on stream