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  • ANALYSIS: Is the weakness in the cargo market a temporary dip or a long-term trend?

ANALYSIS: Is the weakness in the cargo market a temporary dip or a long-term trend?

"Our approach has primarily been to build our existing... large palletised bellyholds and combi capacities"

Pierre-Olivier Bandet

SVP marketing, revenue management and network, Air France-KLM-Martinair cargo

Air cargo is often seen as something of a lead indicator for the global economy, but those looking for encouragement from recent air cargo figures would have been disappointed. Year-on-year figures for June and July remain stubbornly negative, and in late August, carriers were reporting no sign of the normal autumn peak season being about to start.

Particularly worrying was continued weakness out of Asia, for the past couple of decades the main engine behind air cargo growth. A wide range of carriers and airports in the region recorded significant falls in cargo traffic in June and July - Seoul airport was down by 5.7% year-on-year in July, while Singapore Changi dropped by 4.5% in the same month. Cathay Pacific decreased by 7.1% and Korean Air fell by 6.5% in June. IATA logged Asian carriers as a whole as being down by 3.5% in June against a global average fall of 0.8%.

Even more worrying is the fact that cargo capacity continues to outpace demand. In the first half, it was lifted 2.1% according to IATA against a 2.6% fall in traffic, and in nearly every region the picture was the same. In Asia, for example, cargo traffic dropped by 7.1% in the first half while capacity was cut only 1.7%, and in Europe traffic fell by 4.3% while capacity increased by 1.2%.

Part of the reason for the discrepancy is that passenger traffic continues to show unexpected buoyancy. It rose by 7.5% in the first half of 2012, according to IATA, while passenger capacity was lifted 4.9%. Although there is not an exact correlation between passenger capacity and the belly (cargo hold) capacity of passenger aircraft (A380s add passenger capacity and reduce belly capacity, for example), that still suggests more lower deck capacity was added during the period - exactly what the air cargo industry did not need.

This and the market weakness leave freighter operators in a dilemma. Cathay Pacific, which was delighted to secure 10 early slots for the 747-8 freighter, is now struggling to adjust its cargo capacity to the new reality. It has taken delivery of seven new Boeing freighters in the past year, with another to come in October, and to make room for them in its fleet it has had to get rid of 747-400BCFs (Boeing freighter conversions) that it acquired only a few years ago.

One was scrapped earlier this year, and two have been parked, while three were leased to Hong Kong Airlines. That leaves the carrier with just three BCFs, along with 12 factory built 747-400Fs. And that may not be the end of the disposals. "The difficult question is how many wide-bodied freighters do we need in five, 10, 15 or 20 years' time, especially given our growing belly capacity?" asks the carrier's director of cargo, Nick Rhodes. "Pick any number between 15 and 30 and you can make a case for it."

Air France-KLM (which includes Dutch freighter operator Martinair) has also been trimming its fleet. Air France will dispose of a 747-400ERF next year, bringing its fleet down to two 777Fs and two 747-400ERFs, and the group is looking closely at Martinair's fleet of seven MD-11Fs and six 747-400Fs.

This is the continuation of a policy the group has had in place for the past three years of focusing on profitability rather than volume in its cargo business. "Our approach has primarily been to build and develop on our existing Air France-KLM large palletised ­bellyholds and combi capacities," says Pierre-Olivier Bandet, senior vice president marketing, revenue management and network for Air France-KLM-Martinair Cargo.

"One has to keep in mind that the natural capacities offered by our bellies are quite significantly cheaper - around 30% - than full freighters. So we focus on these, and only introduce freighters when it clearly makes sense to do so."

FALL IN DEMAND

Other carriers have responded to the current market weakness by idling rather than eliminating capacity. Lufthansa Cargo's freighter capacity was cut by 13% year on year in July, compared with a decrease of just 3% in belly capacity. This has been achieved by reducing utilisation of its 18-strong MD-11F fleet, however, rather than parking aircraft. "We are focusing entirely on a demand-driven capacity management to protect our bottom line," says Karl Ulrich Garnadt, Lufthansa Cargo chief executive. "What we have really learned from the 2009 economic crisis is to be very flexible to market demand."

Whether this trimming of capacity by key freighter operators is just a temporary expediency or a longer-term trend is something only time can tell. The latest market outlook from Boeing continues to predict a near doubling of the freighter fleet over the next 20 years, but it is interesting to compare the figures in that report with those in its 2000 world air cargo forecast. Back then, the freighter fleet was 1,676 aircraft and Boeing predicted it would rise to 3,200 by 2019. Twelve years later, the fleet has barely grown at 1,740 aircraft, and the 3,200 figure is now predicted to be reached by 2031.

That suggests a lost decade for freighter growth, but will fleet growth simply resume once the economy picks up? There is an alternative scenario, which would see somewhat lower air cargo growth, a continued rise in belly cargo, and a smaller role for freighters.

Bandet at Air France-KLM certainly admits such a possibility: "It is tempting to say that yes, if current trends continue over a longer period, the industry could end up in a situation where belly capacity can cater for most of the cargo traffic worldwide, and where full freighter becomes a niche market operated by a few dedicated operators," he says. "It is much too early to say if this scenario will materialise, but its likelihood seems to be increasing."

Rhodes too expects a gradual reduction in global freighter capacity and even some combination carriers reverting to just belly operations in the longer term. As Bandet points out, factors that would support this argument include the cavernous belly capacity of ­widebodies such as the 777-300ER, which airlines have ordered in large numbers, and the continued - although in some cases decreasing - imbalance between exports and imports on many cargo routes.

Set against this is the fact that some cargo can be carried only on freighters - either due to size or dangerous goods regulations - and when there is a sudden rush in demand, only freighters can cope. Ram Menen, divisional senior vice president cargo for Emirates, agrees that air cargo is in a particularly severe down cycle, but says it will inevitably end. "And the moment the market does come back, time comes into play. Shippers will want to get their goods to market quickly, and that will favour air freight. The winners will be those who are still in the market at that time."

Middle east exception

Menen can perhaps afford to be cheerful, because Middle Eastern carriers seem to be the one eye-popping bright spot in the current gloom. In the first half of 2012, they saw an 14.8% rise in traffic on 14% increased capacity. That suggests that maybe the problem is not just sluggish demand, but that the Gulf carriers are taking all the growth.

Menen defends the rise as being from a lower base than the figures for European and US carriers, although given Emirates' size these days that argument is perhaps wearing a bit thin. He attributes the growth to the continued increase in the region's passenger fleets, as well as Dubai's excellent location, able to serve relatively robust markets such as the Indian subcontinent and Africa as well as Asia-Europe and Asia-USA traffic.

While it is by far the biggest, the Middle East is not the only bright spot in the air cargo market at present. Intriguingly, Menen notes that exports out of Europe have held up well, something also reported by Lufthansa and Air France-KLM. All the carriers agree that the key market of China remains weak though: Rhodes at Cathay reports that exports from China and Hong Kong remained soft in July and August. "Even the most experienced forwarders in Asia are finding it very hard to read the market and predict whether there will be any sort of traditional peak," he says.

But peaks can be unpredictable. Garnadt points to an unexpected and quite sharp late peak last year shortly before Christmas, and a number of product launches coming up for the iPad, iPhone, and Google and Microsoft tablets might trigger that again this year.

Rhodes says the companies concerned keep details of such launches very close to their chests. "Plenty of rumours, but no real glimmers of hope, I am afraid," is his comment. Menen says that such launches are normally preceded by a rush for freighter charters, but has seen none yet. His conclusion: that existing capacity might absorb all the extra cargo.

Despite these cautions, this is exactly the way an air cargo recovery might come. History suggests that even a slight uptick in economic activity produces a big surge in air cargo demand, as happened at the end of 2010.

So in six months' time, the glory days could have returned to air cargo and all the questions about the viability of freighters might have been lifted. Or, in retrospect, the downturn could be seen as a turning point, as the time when the balance finally started to tip against all-cargo aircraft.

As the global air cargo market struggles with declining traffic and increasing capacity, the Gulf carriers are taking all the growth

Air France-KLM-Martinair Cargo is focusing on profitability rather than volume

Increase in Middle East carrier cargo traffic during first half of 2012

14.8%

Read how market uncertainty has prompted freighter operators to be cut back:

flightglobal.com/freighter

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