FROM MAGAZINE: Asia: the next promising market

Asia is fast emerging as the next destination for the air cargo market after Europe and North America. Carriers are capitalising on the robust growth in Asia, especially Southeast Asian countries such as Cambodia, Vietnam, and Indonesia. The economies are seeing growth due to a substantial migration of manufacturing trade from China to these countries.

Twinkle Sahita

Aviation industry globally has been on a growth path for the last five years. Though in some regions the reported growth is inconsistent and with no great profit margins, the industry is trying different permutations and combinations to attain higher growth rates. Interestingly, according to the latest report released by the International Air Transport Association (IATA), airlines in Europe and Asia-Pacific region have posted the strongest growth in March accounting for two-third of the industry-wide increase in demand.

In March, manufacturing production of major Asian economies expanded consistently, thanks to the continued rise in new business orders. This supported the export-import activity, in turn benefitting the air cargo sector. E-commerce contributed majorly in boosting airfreight shipments as more and more people were turning to tap the gift of technology with the concept of ‘click-pay-delivered’ model. According to a monthly report by the Association of Asia Pacific Airlines (AAPA), March saw the region’s carriers register a healthy 12.7 percent increase in international air cargo demand, as measured in freight tonne kilometres (FTK). These facts and figures very well indicate that Asia’s air cargo market has been growing at a robust rate.

Andrew Herdman, director general, AAPA, said, in a statement, “Air cargo markets experienced a strong start to the year, with a firm 9.6 percent increase during the first quarter of 2017. Elevated consumer and business confidence levels in some developed and emerging market economies translated into increased orders, thus supporting demand for airfreight shipments.”

Air cargo benefits from the lift in demand
Asia is a very important region for many carriers. Not only does the region encompass matured and established manufacturing markets such as China and India but also rapidly growing markets such as Vietnam and Cambodia. The air cargo carriers are capitalising on this accelerated growth of the air freight market in the emerging Asian economies.

“The air cargo industry in Asia is very promising. For MAB Kargo, Asia Pacific is our strongest trade lane - accounting for 66 percent of our total tonnage in Q1 2017,” said Ahmad Luqman Mohd Azmi, CEO of MAB Kargo.

“The e-commerce industry is emerging in Asia, and demands are increasing. This is also an area we are focusing on. Additionally, the government is setting up a logistics hub at the KLIA Aeropolis as part of the Digital Free Trade Zone. As such, MAB Kargo intends to tap into this, as we believe it would be very beneficial to MAB Kargo as a cargo carrier.” Last year, MAB Kargo has expanded its footprint in the east of China with new freighter service to Guangzhou from its home base Kuala Lumpur International Airport.

“At the moment we do not have plans to expand or upgrade our fleets. Any planned growth will be through partnership and expansion of Malaysia Airlines' belly capacity,” added Luqman.

According to Airports Council International world airport traffic rankings, Shanghai Airport (PVG) ranked as the third busiest airport in terms of cargo traffic handled in 2016. Shanghai airport’s main cargo terminal operator continued its growth in the initial months of 2017. The company handled 152,411 tonnes of airfreight in April this year, that is a 9.6 percent year-on-year increase. Pudong Int’l Airport Cargo Terminal (PACTL) said, “We have a very good beginning of this year and cargo volume grows by 11.30 percent to 56.41 tonnes from January-April 2017.”

Not to miss the growing opportunities in the region, Doha based Qatar Cargo also started its services to the Cambodian capital city Phnom Penh. A330 freighter with 60 tonnes cargo capacity each way was put into operations in this route.

Garments, which constitutes the largest portion of Cambodia’s manufacturing sector accounts for 80 percent of the country’s exports.

In addition to the A330, Qatar Airways Cargo also carries more than 70 tonnes of belly-hold cargo on the daily wide-body passenger flights to Phnom Penh via Ho Chi Minh City, Vietnam every week. The introduction of direct freighter services on this route offers exporters increased capacity and flexibility to transport their commodities to Qatar Airways’ global network of more than 150 destinations via its hub in Doha. “Intra-Asia air cargo has grown considerably over the years, and we have observed the substantial migration of manufacturing trade from China to Southeast Asian countries such as Cambodia and Vietnam,” said Ulrich Ogiermann, chief cargo officer, Qatar Airways Cargo.

“Asia is a very important market for Emirates SkyCargo. We are a market-oriented airline, we continue to add capacity in major markets like Hong Kong, and China to serve customer needs,” said Ravishankar Mirle, Emirates vice president, Cargo Commercial, Far East and Australasia. Emirates SkyCargo also tapped this growing market of Phnom Penh a year ago by offering 80 tonnes of cargo capacity on the route. From Phnom Penh, cargo is transported via a trucking network to reach other cities and regions in Cambodia. The freight division of Emirates looked at the healthy growth potential in this market, with main imports to Cambodia expected to include fabric and leather while the main exports are textiles and garments.

The Dubai based carrier has also seen a nearly fivefold increase in the volumes of exports of fruits including rambutans and lychees from Vietnam to Dubai over the last year. Vietnam is an important market for food exports and in 2016, Vietnam’s agro-forestry-fishery exports were valued at over $32 billion. The freight division of Emirates airline has been working closely with Vietrade- Vietnam’s Trade Promotion Agency to understand the requirements of Vietnamese exporters and to help develop export opportunities for Vietnamese produce in international markets specifically in the UAE and other parts of the Middle East. As a result of the collaborative efforts between Emirates SkyCargo and Vietrade, the volume of perishables exports from Vietnam to Dubai has increased considerably touching a record of 110 tonnes in January 2017. “Emirates SkyCargo started operations in Vietnam in 2008 and since then has played an important role in the growing trade between Vietnam and the UAE. By working closely with Vietrade and by building upon our expertise in shipping perishables, we developed air freight solutions that have helped increase the exports of premium fruits and vegetables from Vietnam to Dubai,” informed Mirle.

German based airline Lufthansa Cargo has also been keeping a close eye on certain markets in Asia. The carrier recently announced increased frequencies to Shanghai and Guangzhou. “We always keep a close eye on the market development in order to meet the customer demand. Over the recent past, we have seen consistent growth in demand for air cargo on these routes. Predominantly, we see the increase in standard, express and dangerous goods bookings on these lanes,” commented spokesman from Lufthansa Cargo.

Another potentially key market, Indonesia aims to join the existing league of Asian manufacturing economies. Eventually, air cargo industry will benefit from these developments. Indonesia’s air cargo sector grew by approximately 3.5 percent in 2016, according to BMI Research’s Indonesia Freight Transport Report. The International Air Cargo Association (TIACA) will work with the Indonesian National Air Carriers Association and other Indonesian freight companies to support the country’s air cargo industry, according to officials of the first Indonesia Air Cargo Summit held recently in Jakarta.

“Indonesia has a vibrant and developing air cargo community and we will be working closely with the industry here to bring TIACA expertise and training to support that growth,” said Vladimir Zubkov, secretary general of TIACA. “TIACA is focused on growing membership in the region and we are pleased to meet with our colleagues here to find ways of reaching out to the growing air cargo community here.”

“There is a huge opportunity for Garuda to grow its cargo business and we are enhancing our company’s cargo channel distributions,” said Sigit Muhartono, director of cargo at Garuda Indonesia.

Air Canada Cargo's new year-round direct service to and from Mumbai that starts July 1, complements their existing year-round service to Delhi. With daily service to Delhi starting soon, that's a total of 11 flights per week serving India, all operated with Boeing 787-9 aircraft.

Amidst these upward looking developments, there is some kind of uncertainty in the air. There are several happenings in Asian air cargo industry that have surprised the sector. In a major organisational shake-up announced recently, Hong Kong’s Cathay Pacific surprised the world by cutting 600 jobs across senior, middle management and non-managerial roles in its head office in Hong Kong. The airline reported losses for the first time in 8 years. The restructuring also affects the cargo division of the carrier. The official release says that to align with the head office re-organisation, Cathay Pacific will also restructure its Cargo department. “It will streamline the structure by removing the role of Cargo Director. The commercial and planning functions will report into the Director Commercial and Cargo and be overseen by the Chief Customer and Commercial Officer. The services function will report into the Director Service Delivery,” the release said. In April this year James Ginns, director of service delivery at Cathay Pacific, was appointed to replace Simon Large as Cathay Pacific’s director of cargo. The transition was expected to take place on June 1.

The airline recently reported positive momentum in cargo in April compared to the same period last year. Mark Sutch, general manager Cargo Sales & Marketing, Cathay Pacific, said, “Our cargo business continued to show encouraging year-on-year tonnage growth. Demand from Hong Kong and key Asian markets to North America, Europe and India remained buoyant. Intra-Asia movement was boosted by strong e-commerce traffic as well as the capacity reduction in the market. The yield has continued its upward trend. We recently announced an agreement with Atlas Air Worldwide to wet-lease two Boeing 747-8 Freighters, which will supplement capacity on our existing network. This will enable us to provide our customers with increased options and services from June when most market indicators are suggesting a solid year for air cargo.” Cathay Pacific’s home base Hong Kong Airport topped the airport traffic rankings of 2016 released by Airports Council International (ACI).

The cargo terminal operator of Hong Kong Airport has enjoyed a strong finish to 2016, beating 2015 tonnages by 1.7 percent and setting new terminal and ramp handling records. Hong Kong Air Cargo Terminals (Hactl) has handled 1,653,938 tonnages of cargo in 2016, up 1.7 percent on 2015.

“Hactl and Hacis (Hactl’s added-value logistics subsidiary) have been recording significant growth on the cargo tonnage. For the record performance, we are seeing that cargo markets are picking up. There are some commodities contributing to the cargo growth. One example is the electronic products like the mobile phones and also the e-commerce shipments which could in the form of general cargo or onboard courier. We are also seeing growth in other products such as pharmaceuticals,” said Vivien Lau, managing director of Hacis.

Another giant Asian carrier Singapore Airlines Cargo (SIA Cargo) announced its move to be eventually re-integrated as a division within Singapore Airlines. Seven Boeing 747-400 Freighter aircraft will continue to be operated, while the Cargo Division will continue to manage the passenger aircraft ‘bellyhold’ space for SIA, SilkAir, and Scoot. SIA Cargo was a Division of SIA until July 1, 2001, when it became a separate company within the SIA Group. At the time, it was in the process of growing its fleet to up to 17 747-400Fs, and it was better suited to carry out its expansion as a standalone all-cargo airline. “The airfreight market has since seen structural change, however, and SIA Cargo’s freighter fleet has been ‘right-sized’ in recent years to the current seven aircraft while the proportion of revenue from passenger aircraft ‘bellyhold’ capacity has increased significantly. Despite the smaller freighter fleet, SIA Cargo’s overall capacity, including that from passenger aircraft, still grew 4-5 percent in each of the past two financial years,” informed the airline company through a statement.

“SIA Cargo turned around from last year’s loss to record an operating profit of $3 million (+$53 million). Freight carriage grew 5.9 percent, outpacing the 3.8 percent capacity growth, resulting in a 1.3 percentage increase in cargo load factor to 63.2 percent. Notwithstanding the higher carriage, total revenue declined $89 million as cargo yield slid 10.7 percent. Expenditure declined more significantly, by $142 million, mainly due to lower fuel costs," added the airline company.

The airline's home base Singapore Changi Airport has handled 188,630 tonnes of cargo in the month of March this year. This represents a robust growth of 10.2 percent, compared to the same period last year. For the first quarter of this year, the airport has seen an increase of 6.2 percent in air freight, totaling 494,180 tonnes.

Also, it has been widely reported that Asia’s second busiest cargo carrier last year Air China Cargo and Guangzhou based airlines China Southern might merge into a single entity. The time will know what such mergers might bring in for the Chinese market that is enjoying its phase of e-commerce boom. However, both the airlines have not commented on this.

Challenges
Overcapacity and competition amongst so many existing players in the market are some of the biggest fears in the minds of Asian air cargo industry. Every company is taking efforts to maintain its competitiveness in the market. “So, too much competition may impact our business, especially when it comes to the Asia Pacific market. Hence, we must always ensure that we engage in healthy competition with other players in the industry and be aware of what they are doing in terms of price, promotion, facilities, and services mention Luqman of MAB Kargo.

“Apart from that, overcapacity is also a challenge that we face and hope to overcome.”

Major carrier Emirates SkyCargo also finds overcapacity as a major challenge in this market. The uncertainty of economic conditions and buying decisions in mature markets makes it challenging to plan capacity. Asia is the region for the factories of the world, capacity deployment increases and supply exceeds demand which consequently puts pressure on the market yields which have an impact on the route profitability.

“Our aim is to stay committed to markets we serve but external factors beyond our control make it that much more challenging for us to operate profitably,” adds Mirle.

For some airports, infrastructure also presents a challenge especially to handle cargo. Therefore, one of the major Asian gateways is looking at enhancing infrastructure in order to handle cargo more efficiently. Japan’s Narita Airport that continued to see an upward trend in the first quarter of 2017 in terms of cargo traffic has planned developments for the cargo division as part of NAA Group Mid-term Management Plan (2016-2018). It aims to enhance the airport’s value as an air cargo logistics center through several initiatives such as expanding fixed temperature warehouse capacity in order to enhance the quality of cargo handling, stimulating improvement of the quality of cargo handling at the airport such as by holding Forklift and Pallet Building Competitions, contributing to initiatives promoting exports of agricultural products and foodstuffs through cooperation with relevant stakeholders in municipalities around the airport.

OPENING IMAGE SOURCE: HACTL