Freight Expectations

For years – and especially recently, when rocketing oil prices helped fill the treasuries of the region’s states – air freight has benefited as Gulf nations invest in infrastructure and embark on a building bonanza, sucking in imports to feed the frenzy.

The drying up of international liquidity has hit world airfreight markets hard, but – for the moment at least – regional players remain cautiously optimistic.

They are among the few who can see a glimmer of light in the situation. Worldwide, air cargo is plummeting, reports the International Air Transport Association (IATA).

The organisation’s cargo statistics for 2008 recorded a drop of 4% worldwide compared to 2007 as world economies started to tip downwards. Out of six IATA regions, only the Middle East showed an increase, of 6.3%, an indicator of the region’s economic strength.

However, air cargo’s decline worsened dramatically towards the end of the year, as IATA’s director-general and CEO Giovanni Bisignani pointed out in an address to the association’s World Cargo Symposium in Bangkok in March.

Qatar Airways’ fleet of three dedicated A300-600F freighters will be joined by cargo variants of the Boeing 777 from 2010

“The industry is in crisis and nobody knows that better than our cargo colleagues. Cargo demand has fallen off a cliff. After a shocking 22.6% decrease in December [compared to December 2007] it dropped a further 23.2% in January [compared to January 2008].”

As 35% of the value of goods traded internationally is transported by air, air cargo is a barometer of global economic health. “The continued decline in cargo markets is a clear sign that we have not yet seen the bottom of this economic crisis,” said Bisignani.

In December 2008 IATA forecasted 2009 freight volumes to fall 5%. Combined with a decrease in yields, this would result in a 9% drop in freight revenues to $54 billion.

“Unfortunately, the shocking fall in demand that followed is making these projections look optimistic,” Bisignani told the Bangkok gathering. IATA believes it is too soon to call a bottom in the air freight market. Manufacturers are still shedding inventory and cutting production, which is expected to lead to further falls in freight volumes.

As with 2008’s annual figures, IATA reported that January 2009’s best regional performance came from the Middle East, where the drop in cargo freight-tonne kilometres was a relatively modest -6.1%, compared to -19.3% for North America, -23% for Europe and, most spectacularly, -28.1% for Asia-Pacific.

It remains to be seen just how severely the worldwide economic slowdown will affect  the region. Although some emirates have been badly hit – Dubai’s property and construction boom has been seriously dented by the evaporation of world liquidity – others such as Abu Dhabi and Qatar, whose treasuries benefited massively from the wave of high oil and gas prices of recent years, are still strong.

According to the World Bank, growth in the Middle East North Africa region will be 3.9% in 2009, a substantial shrinkage from 2008’s 5.8%. However, it believes Gulf states’ huge budget surpluses accumulated over recent years will allow them to ride out the worldwide slump, even if some projects are temporarily shelved or scaled down.

The Qatari national carrier believes the breadth of its network will offset any softness in cargo business in an individual region

One of the nations likely to be least affected is hydrocarbon-rich Qatar, whose government predicts its economy will grow by a remarkable 10% in real terms this year.

Against that backdrop, Qatar Airways’ vice-president cargo sales, Vikram Singh, believes that the airline’s expanding network – currently 19 freighter destinations plus 83 for passenger flights – will contribute to a “satisfactory” year.

“We are not reliant on one or two trade lanes. We have enough flexibility to access business from different parts of the world to compensate for slightly softened demand that might occur in one particular market.

“On the majority of our routes we continue to have good loads and are generally expecting a solid performance.

“Although 2009 will be a challenging year for the global industry we are confident of growing our business and have no plans to reduce capacity. In fact, we intend to expand our network in 2009.” The airline has grown its freighter network from 10 to 19 destinations in the past two years.

Referring to the 6.3% cargo growth in the Middle East recorded by IATA for 2008, he said Qatar Airways Cargo expects 2009 will hold similar growth.

“The Middle East is still one of the fastest-growing regions in the world and high demand remains. Regional air freight has grown at an average of 5.1% yearly over the past two decades.”

British Airways is tapping into the expanding Saudi economy by resuming flights from Riyadh and Jeddah after a four-year gap
 
Qatar Airways currently operates three dedicated Airbus A300-600F freighters. To cope with anticipated continued growth it has ordered Boeing 777 freighters with the first two deliveries in 2010, which will give the airline the ability to serve long-haul cargo destinations in Asia and the US, said Singh. Up to seven 777Fs are anticipated; as the additional 777Fs arrive, the future of the A300-600Fs will depend on market dynamics.

Similar expansion of the freighter fleet is expected at Emirates Airline. Currently operating seven Boeing 747-400Fs and a single 777F, it has three more 777Fs and five new-model Boeing 747-8Fs on firm order, with similar numbers on option.

Peter Sedgley, Emirates’ senior vice-president, cargo commercial operations, points to still-expanding local GDPs as a source of optimism. He also believes that Emirates’ quality of service and customers’ brand loyalty will help the airline weather the economic storm.

At the time of writing he was awaiting the latest statistics, but it looks as though traffic from China, particularly the manufacturing powerhouse of Shanghai, could be down as much as 30% on a year previously, he said.

That obviously has an impact on Emirates’ cargo business. However, Emirates SkyCargo volumes were still around 11% up on last year.

“The major concern we have is that there’s immense pressure on yields, which are being affected by currency fluctuations.” The fall of the euro and sterling against the dollar, the weakness of the Australian and New Zealand currencies and the continuing relative strength of the Renminbi are causing problems for the whole industry, he said.

While optimistic – “We’re retaining market share and watching costs like a hawk” – he accepts that “It’s going to be a very difficult next 12-18 months. From our point of view, it looks as though it’s bottoming out, but we haven’t been in this situation for many years, certainly not in my lifetime. World trade at the moment is at a pretty low ebb.”

As an example, he cites the problems afflicting the automotive industry around the world. Nobody expected it to dip as much as it has, and possibly 20% of global air freight is connected in one way or another with this sector, he said.

Similarly, there has been a fall-off in the electronics sector, with reduced movements of both computers and microchips. “Two years ago, people would buy a new computer ever six months because they wanted the latest technology. Now they are making do with what they have.” Oddly, shipments of discretionary purchases such as fresh flowers have remained upbeat – perhaps because people are buying small treats to cheer themselves up in the midst of the economic gloom.

Emirates plans to increase its cargo capacity by 17% in 2009

Sedgley has seen competitors cut capacity in the face of reduced cargo volumes, but Emirates is coping, he said. “We’re not expanding our network this year, but we are increasing capacity and redeploying equipment to take advantage of routes where high demand exists.

For example, Emirates has just introduced a second daily Dubai-Moscow passenger service, which provides additional belly cargo capacity: “The Russian economy has taken a bit of a thump but it still seems to be functioning OK.”

Similarly, freight to and from India is “still reasonably healthy”. The Indian market has shown “phenomenal” growth in the past two years, he says. Whereas Emirates until recently served just New Delhi, Mumbai and Chennai, it now has 10 Indian destinations served by more than 150 flights weekly, carrying more than 2,500 tonnes of cargo.

Emirates plans to increase its cargo capacity by 17% in 2009. Ram Menen, senior divisional vice-president, describes the forthcoming year as one of consolidation, and said the airline will bolster its presence in markets where demand is strong. It has stepped up both pure freight and passenger services to Lagos, Nigeria, and plans to introduce a service from Dubai to Durban, South Africa, in October.

Another airline planning cargo growth in the region despite the recession is British Airways, although Johnny Rubio, area commercial manager for British Airways World Cargo, said he is very cautious about predictions for the coming year.

Emirates SkyCargo operates seven Boeing 747Fs and has new-generation 747-F dedicated freighters on order

“Until the Americas and Europe begin to see a pick-up in demand in consumer goods and areas such as textiles and garments start to improve, we will continue to see decreases in volumes compared to the previous year.”

The recession in both continents has caused a downturn in the garment and textile sectors, which constitute the bulk of BAWC’s trans-shipment business in the Gulf.

However Rubio, while cautious – “I think it’s going to be a difficult year” – is not despondent over freight prospects.

In January BAWC added four Dubai – London rotations weekly and at the end of May it plans to re-start flights from Saudi Arabia to London with five flights weekly from both Riyadh and Jeddah.

The resumption of the latter flights after a four-year break is being driven by a combination of passenger and cargo demand and a June 2008 decision between Saudi Arabia and UK to increase the maximum number of weekly flights between them from 13 to 35 as part of a liberalisation of aviation market regulations. Cargo will be carried in the underfloor holds of passenger flights.

Rubio points to International Monetary Fund figures showing that Saudi Arabia’s annual exports – excluding oil and refined products – more than doubled to $33.5bn between 2004-8 as a sign of this market’s potential.

During the four-year hiatus in flights from Saudi Arabia, BAWC has been servicing cargo clients in the kingdom by running a road cargo feeder service to Bahrain, Kuwait and Dubai where loads can then be transferred to flights. The recent extra flights from Dubai have been reporting decent cargo loads in the mid-70% range, he adds. He believes this is partly because their early morning departure from Dubai gets them into London in sufficient time to make connections that day to Europe and the US.

Rubio reports that recent months have seen BAWC’s regional traffic down slightly in volume but up in value, partly because the carrier is emphasising premium express and courier services. These have shown an upturn after BA last year injected more resources into its London operations, he said.

In Abu Dhabi, meanwhile, Etihad Crystal Cargo is another carrier looking beyond immediate economic concerns and is drawing up plans to expand its operations.

At present it operates a single Boeing MD-11F and two Airbus A300-600Fs; three Airbus A330Fs are due to arrive in 2011, while major improvements are being made to increase ground freight capacity at Abu Dhabi airport.

Around 25% of Etihad’s cargo originates or terminates at its Abu Dhabi hub, with the remaining 75% in transit. The airline added Lagos, Colombo and Karachi as freighter routes in 2008 and grew its cargo tonnage by just over 20% in the first nine months of the year.

While the carrier acknowledges that market conditions are currently challenging, it believes that infrastructure developments in the Gulf will continue to drive expansion.

Backing this up, IATA quotes the respected Economist Intelligence Unit as predicting only a slight slowing of 2009 GDP growth (from 6% to 5.5%) for the Middle East North Africa region.

And Abu Dhabi, overshadowed in the past by Dubai, has in recent years started to become more assertive. In particular, it has been positioning its growing tourism industry in a different market sector from that of its brasher neighbour and is now undertaking infrastructure and construction projects rivalling anything proposed by its more freewheeling fellow emirate. This is likely to help sustain its air cargo figures.