Holding your nerve
We speak to Ram Menen, head of Emirates' cargo division, about the crisis afflicting the aviation industry and how he plans to navigate the operator through the next few months.
It will come as no surprise to observers of the world economy in general and the airfreight industry in particular that even the most successful operators are expressing their doubts and concerns about the environment in which the aviation market now finds itself.
Embroiled in a crisis that has claimed the scalps of players both on the cargo and the passenger side, industry analysts are reluctant to offer predictions as to a possible end-date to a series of issues - labelled by some as Ã¢â‚¬Ëœthe perfect storm' - which seems more likely to get worse before it gets better.
The IATA prediction that the industry would suffer an overall loss of US$2.3 billion - and this based on the assumption that a price of Brent crude is valued at $106.5 - starts to look worryingly optimistic when one considers that the recent oil price has rarely dipped below $135 and in mid-July hit a new peak of just over $147.
"For every dollar the price of fuel increases, our costs go up by $1.6 billion," warned IATA CEO and director-general Giovanni Bisignani back at the beginning of June. Given that no analyst would bet against the oil price breaching the $150-a-barrel ceiling, plus the ever-expanding concerns of the environmental lobby, the abyss now facing airline executives can seem on occasion to be bottomless.
But are we looking at a sustained slump, or simply a particularly deep trough in what might be termed the inherently cyclical movements in global economic currents? Air Cargo Middle East & India last month took the opportunity to speak to one of the airfreight industry's most successful operators, Emirates' divisional senior vice president for cargo, Ram Menen.
The Emirates Group in its entirety reaped record industry profits during 2007, and its cargo arm, Emirates SkyCargo, played no small part in the boom, with revenues rising by 20% to $1.8 billion. However, these bumper results were offset in the second half of 2007 by the oil price hovering in the region of $90, considerably less than today's highs.
"We have previously dealt with one challenge at a time," observes Menen. "Right now we are looking at navigating our way through multiple problems simultaneously. For us, the most important thing is trying to keep our costs under control; with the kind of insanity afflicting the oil price and the resulting escalation of costs, it is currently very difficult to plan for the oil price."
On the upside, it would seem SkyCargo's margins leave it better placed than many to weather the current storms. Indeed, the company has pointed towards two significant factors that it feels should aid its revenue base still further: the implementation of SkyCargo's dedicated $327-million Cargo Mega Terminal (CMT) and the service entry of the B777 freighter later on this year. Furthermore, Emirates' extension of its network to a number of new cities throughout 2008 will also help SkyCargo to grow its business organically in those locations.
It's therefore clear that SkyCargo's long-term business plan is yet to be affected by the current turmoil. But has the operator felt any need to rein in spending on other fronts?
Your guess is as good as mine in terms of what is going to happen with regard to costs in the future," continues Menen. "There are a lot of things that we want to invest in, but we are currently holding back a little bit - the emphasis is now on managing issues moment by moment.
We have done that in the past, we're doing it right now, and we will inevitably have to do the same in the future. Like I always say, we take the machine off auto-pilot, become cowboys, feel the terrain and move on. It will come back - it always does."
It seems clear that the cargo executive is keen to accentuate the positives. Middle Eastern operators have dominated the headlines when it comes to buying new aircraft and Emirates recently committed itself to an order of 140 wide-bodied planes in 2007.
At July's Farnborough Air Show, Etihad signed deals with both Airbus and Boeing to the tune of a reported $20 billion, outstripping its rival in terms of contract value, if not in terms of numbers of aircraft. Yet it is important to remember that these contracts are for the long term - until 2020 - and that regional players are looking beyond the short-term crisis. "We are quite optimistic that the market will come back - the question is when?" says Menen.
"Oil prices in the past have always been supply-and-demand driven, whereas now it is speculative trading that is driving the price up. When this is the cause for cost increases, what we are talking about is pure gambling.
"There's no sure way of managing the price. We do hedge fuel, but hedging in itself is legalised gambling. Do you hedge at $150 and still hope it will come down at some stage?
When you are inching into unknown territory, your hedging becomes very short term. Sometimes you even come out of the hedging process purely because you don't expect the price to go any higher and you think it will recede," explains Menen.
However, the general global impression is that the Middle Eastern air giants are better placed, both in terms of location and alleged government support, than their peers elsewhere in the world to deal with the current uncertainty. Does Menen believe this is to be true? "Not really, as the inflationary effects in the Gulf are hitting us hard," he argues.
Added to that, we buy our oil on the open market so we are subject to the same prices as everyone else. For us, we have to raise our productivity in order to bring costs down. The advantage for us is our geocentric location - having India and China so close by is both a strength and an opportunity."
Other than airlines managing their own cost bases and attempting to improve productivity organically in a tough economic environment, there seems to be little that executives can do to influence the oil price.
One option, backed by Menen, was the recent open letter sent by the CEOs of 12 US airlines to their customers blaming what they see as conniving on the part of speculators for price hikes and suggesting that national governments need to take steps to curb the rampant manipulation being witnessed on the markets. "It's not just air transportation that's being hit, it's people's livelihoods," indicates Menen.
"Matters could end up going to catastrophic proportions if they are not controlled or managed. I understand that governments themselves are in uncharted territory, but there is a need for national legislatures to take active leadership."
There certainly seems to be a case to argue that the air cargo industry acts as a bellwether for the world economy in general. "We generally see movement in an economy about three months in advance by the flow of cargo - especially infrastructure development equipment - through a particular country's ports," says Menen.
This natural advantage enables airfreight operators to spot potential shifts and change before those shifts occur in order to allow clients' business to continue seamlessly.
"For example, if the dollar stays low, the procurement patterns and outsourcing that the US has undertaken in order to reduce its costs will act against them as import expenses are now ramped up," explains Menen.
"So they might actually return to in-country sourcing - i.e. from centralisation to de-centralisation and back to re-centralisation. So these are the structural changes that could potentially take place."
Factoring in the current problems only adds to the constant efforts of companies like SkyCargo to keep pace with the changing role of the airfreight industry. Whereas operators previously had simply to deliver a package to one location to another, the science of supply chain management has evolved to the extent that inventory management and logistics are now crucial weapons in the armoury of air cargo players.
Providing a speedy time to market is also vital. "Because the shelf-life of many products is becoming shorter - for example, the different generations of the IPhone - you only have x amount of months or x amount of units you can ship in order to recover your research and development costs," outlines Menen.
"Any time stock goes into a warehouse it is costing you money, so the entire cost of research and development is actually coming out of the first batch you have produced.
The first batch will go by air, the second by sea-air and the third by sea. So once your air stock is depleted, your sea-air comes into play and so on and so forth. So in the future, we are going to be seeing a lot more of these sea-air conversion points."
So SkyCargo certainly has the confidence to take its business plan forward despite the uncertainty playing havoc with other operators around the world, and the key is that the vital fundamentals remain in place. By providing freight to customers in the fastest possible time, industry players are sure to add value to their clients' business.
"We are passionate, we are die-hards and we still have some cowboy tendencies," says Menen. "The future is bright, and when you go through this kind of scenario, a lot of the navigation comes from your gut. Sadly, everything we had forecast at the beginning of last year is likely to be pushed back by about three years.
"It's a question of whether you have the nerves to hang on until the better times come back. In our book, there's only one thing you should never lose, and that's a sense of humour," Menen concludes.