South America back on track
Signs of economic recovery in South America has once again enthused energy in the air cargo sector in the region, as industry players hope to look at the extension of the positive environment. They, however, will have to take strategic decisions from time to time to ensure sustainability.
After enduring a prolonged spell of depression, Latin America’s economic recovery is finally gaining momentum amid the recent trends in the world economy, favourable financial markets and the upswing in trade. Sans Venezuela that is still reeling under the situation and might take time to come out of it, recession in most of the countries like Brazil, Argentina, and Ecuador are finally coming to an end. According to International Monetary Fund (IMF), consumption and exports were the main growth drivers in Latin America in 2017.
After growing 1.3 percent last year, the IMF now expects Latin America’s economy to rise by 2 percent in 2018 and 2.8 percent in 2019, boosted by recovery in Brazil. In its latest economic growth forecast, it predicts Brazil’s economy to grow 2.3 percent this year, up from an earlier estimate of 1.9 percent. Chile and Ecuador’s revised growth forecasts from 3 to 3.4 percent and from 2.2 to 2.5 percent respectively, also contributed to the IMF’s new figures for Latin America. The growth forecast for Mexico, Latin America’s second largest economy, remains at 2.3 percent.
Naturally, the growth trajectory that started scaling in 2017 has furthered the air cargo business in the region. The latest data released by IATA on cargo traffic in February states that Latin American airlines posted the fastest year-on-year growth for a second consecutive month as February traffic jumped 9.8 percent compared to February 2017, up from 8.1 percent growth in January. Demand also continued to recover from the impacts of the severe 2017 hurricane season. Capacity increased by 8.9 percent, and load factor rose 0.6 percentage point to 81.5 percent.
LATAM Cargo, one of the major players in cargo transportation to, from and within Latin America is optimistic as it looks at the extension of the positive environment. “So far we have seen a positive evolution of overall volumes into the region and we forecast to see the same in the second half of the year, although at a slower pace than during 2017 and the first quarter of 2018,” says Andrés Bianchi, CEO, LATAM Cargo.
“Business in 2017 was good, we saw a recovery throughout the year in terms of both demand and pricing on the most important import markets into the region. On the other hand, South American export markets were relatively flat, but overall we had a positive year. Furthermore, we were able to rebalance our portfolio more towards bellies than freighter operations which enabled us to improve our profit margins. In numbers, we saw around 1 percent annual growth in revenues, but with more accelerating throughout the year: 3 percent on the 3rd quarter and 9 percent on the 4th quarter year over year.”
Meanwhile, expressing similar sentiments, Copa Airlines Cargo senior director Jaime Alvarez says, “After years of difficult balances between supply and demand, we are experiencing a positive trend for the air cargo business in the region. We cover all of the Americas, and our network allows us to feed through Panama hard to reach destinations. Our belly capacity has been growing with bigger aircraft and more daily frequencies which allow us to serve high volume segments such as Miami, Mexico, Bogota, Lima, Quito. We have also implemented a few freighter operations to support that network with additional capacity to Central America and Colombia.”
The one particular country on which many foreign, as well as regional players, are betting today is Brazil. The country, which once earned a reputation of being an economic powerhouse, almost took a nosedive with eight back to back quarters of contractions impacting international trade massively. But after two long years of slumber, in early 2017, there were signals that the economy had indeed began to recover.
Florida’s Miami Airport, which acts as a major gateway to Latin America for international trade says that it handled $59 billion worth of imports and exports in 2017, which was an increase of 3 percent. It attributed the growth firstly, to a significant increase of 10.7 percent in high-tech exports from MIA to all regions and secondly to an increase of 12 percent of imports and exports from Brazil to $12.2 billion.
“When it comes to strictly Latin America, MIA handled 707,755 tonnes worth $30 billion in 2017. That is 69 percent and 51 percent respectively of all air trade moving through MIA. Today MIA handles 63 percent of all the air perishables entering the United States. If you break down perishables into its 3 major commodity types: flowers 89 percent, fruits and vegetables 65 percent and seafood 47 percent imported into the US by air enter via MIA,” informs Emir Pineda, manager aviation trade & logistics - Miami-Dade Aviation Department – MIA.
“Latin America is our number one market. We currently have 1,373 weekly departures to 80 non-stop destinations in Latin America and the Caribbean. That is more than any other airport in the world,” Pineda further adds.
Regional airports are also aware of the growing expectations and are investing into improving infrastructure to attract more cargo operators. Briefing on the same lines, Marcelo Mota, director of operations of Viracopos International Airport says, “Viracopos has continuously invested in improvements in the cargo terminal, such as the technological improvement of logistics processes. Ever since it took over the operation of the Viracopos, the Viracopos Brazil Airports concessionaire has been continuously investing to improve its infrastructure, security and the systems to expedite the release of the terminal’s cargo.”
The Viracopos Cargo Terminal (TECA) is one of the busiest in Brazil and is the largest in FOB imported cargo value in the country. In addition to having a large and modern structure to handle, store and release cargo, it is responsible for handling nearly 40 percent of all imported air cargo in the country.
“The exclusive area of 1,560 square metre inside TECA is the most complete special security structure for high-value cargo in Latin American airports. The site has all physical and technological infrastructure used in similar operations at the most important airports around the world, including a special area with controlled temperature, which houses pharmaceutical products and other cargo that requires this type of environment. The Viracopos High Security Terminal was built and is operated by Brink’s, which already operates in this segment in several countries, ensuring the proper logistics management for high-value cargo,” shares Mota further.
The airport has also signed a contract with IATA to start the CEIV Pharma certification process. These infrastructural investments have led to enhanced business for the airport that has received many new customers in the past year. Among the new ones are Saudi Airlines, Air Bridge, National Airlines, Silk Way West Airlines and Antonov Bureau.
Foreign players are also increasingly showing interest in the region, not only in Brazil but in countries like Colombia and Ecuador, which are major flower exporting markets in the world. At the foothills of the Andes, with abundant light and mild climate, the zone is considered to be one of the best places in the world to grow flowers. The industry exports significant volumes into the US and Europe and remains heavily reliant on the utilisation of freighter aircraft.
Quito International Airport, the busiest in Equador informs that 95 percent of its export cargo is flowers, apart from other perishables like vegetables, fish and exotic fruits. The import commodities include clothing, technological equipment and pharmaceuticals.
“A vast majority of our operations is flowers. On average, we move 12,000 tonnes of flowers per month. Ecuador is well known for having the world's best roses and in the past five years the ‘florícolas’, flower farms in Spanish, have added additional care in the treatment of their products with higher standards,” said Andrew O’Brian, CEO of Quiport.
“Valentine's and Mother's days are some of our flower export high seasons. On low season we have a monthly average of 12,000 to 13,000 tonnes, while during our high season we have peaks of up to 17,000 tonnes of flowers being shipped from our airport. For the Russian Women's day, we also have an important uptick where we have an average daily handling of 800 tonnes daily during two weeks, in relation to the low season average of 400 tonnes daily,” O’Brian added.
The airport has implemented electronic mechanisms like IATA’s e-AWB to improve its processes and make the management of cargo more efficient.
Enrique Falcon Deville, Director South America of AFKLM Martinair Cargo, one of the customers of Quito Airport says, “AFKL’s number one product from every corner of Latin America is perishables; fresh cut flowers (mostly roses), fruits (mango, pineapples, cherries, berries, avocados and from Brazil mainly papayas), vegetables (mostly asparagus), fish (mostly salmon) and even lobsters. We also transport live animals (horses, tropical fish), automotive, engines, valuables (gold, silver) and express. Main import products to Latin America are: general cargo, pharmaceuticals, dangerous goods, express and also fresh.”
However, despite the pick-up in economy and air freight, there are many challenges that still exist in the region and therefore, the air cargo players need to take strategic decisions to stay afloat. The perishables industry, for instance, says it is struggling with low margins and the high price of air freight, which it has to pay both ways. Many for this reason are considering sea freight.
Defending the pricing strategy, Falcon Deville says, “What we have witnessed over the last few years is that air export volumes in the region for perishables grew, competition increased and airline rates had a downward trend, mostly due to a rather low fuel cost. It is only in the last few months that we see again rates picking up.”
“Indeed, if we compare air freight and sea freight the perception is that air transportation is more expensive. However, the type of perishables and the seasonality allows producers to have a quicker time to market for their products and a more efficient distribution by using air transportation. Dealing with perishables is always challenging. Seasonality obliges us (the airlines) to create extra capacity only during the peaks and this has an additional cost. But also weather can be a big influencer in the cost of transportation. In times of bad weather conditions and lower production volumes, airlines need to assume lower load factors, which translates into empty capacity and higher cost for the offered kilogrammes,” he added.
The airline has adopted a disciplined capacity policy under which during times of heavy demand, especially for perishables, the airline created mechanisms to increase its offer through interline partners. “In the last Valentine’s and Women’s holidays we offered around 1000 additional tonnes of capacity for the transportation of roses into Europe thanks to our interline operations via Curaçao Airport and Queen Beatrix Airport.”
Meanwhile, on the other hand, regional player LATAM Cargo recently sold its last two B777 freighters to Atlas Air as the 777 had turned out not to be the optimal choice for the airline. Bianchi says LATAM Cargo aims to contribute to LATAM Group’s profitability by maximising cargo transport in the belly of passenger aircraft. To accomplish this, LATAM Cargo is focused on developing and delivering an attractive proposition for cargo clients. “60 percent of the cargo is carried in the belly of passenger aircraft, and 40 percent in dedicated freighters. The latter aircraft seek to complement LATAM Group’s passenger capacity. To accomplish this in the most effective way, LATAM Cargo carried a restructuring process in order to standardise its fleet around the Boeing 767-300F aircraft, given the advantage they have when operating the main markets within South America and between this region and overseas. With this end in mind, during 2017 we moved to complete the face-out of the Boeing 777-200F fleet, with the retirement of the last two airplanes of this model,” says Bianchi.
It is important that air cargo players take such strategic decisions from time to time to ensure profitability. However, it is also noteworthy that air transportation is also heavily reliant on the evolution of global trade. Recently, concerns have been raised over the trade protectionism attitude adopted by few countries. Experts believe that any relevant restrictions to global trade that may impact volumes, could potentially have an impact on cargo operations. For a recuperating region like Latin America, it is important that trade policies remain accommodative as any fallout would upset a robust global economy that might hamper the spirit of the region. ?