Rising from the East
With air cargo volumes experiencing strong growth in the Middle East and Indian subcontinent, European carriers are preparing to battle local players for a share of this lucrative market.
The fast-paced economic growth of the Middle East and Indian subcontinent brings with it opportunities for airlines to develop their services in order to expand their market share. When it comes to meeting the rising demand for air cargo services in these regions, many of the leading European airlines are keen to develop their services in an increasingly profitable market.
According to Chris Morgan, lead analyst at Datamonitor, IATA figures for 2006 show the Middle East having the largest aggregate year-on-year rise in Freight Tonne Kilometre (FTK) of 21.0%, considerably higher than the growth of its European counterparts of 2.6%. It’s no wonder that air cargo in the region is becoming a very serious business for many of the big European carriers.
“BA World Cargo is a very important part of BA’s business,” says Sean Doyle, financial controller at BA World Cargo. “The cargo business has been growing year on year for the last five years and areas where it’s growing tend to be here in the Middle East and Asia Pacific.”
Since 1998, BA has invested approximately US $1 billion into its air cargo service, including six gateways in the Middle East. As well as flying a combination of 777s and 747s frequently to and from the Middle East, its India service has grown from 19 passenger flights to a whopping 42 a week, all with bellyhold cargo capacity, since April last year.
Throw in a freighter coming into the Middle East from the US en-route to Hong Kong, a couple of freighters a week going into India from Frankfurt, and eight freighters a week coming out of Hong Kong over India, and you can understand why the company confidently believes it’s got a good spread of capacity across India and the Middle East.
“Capacity has significantly grown across India in the last year. The guess is it’s grown at 70-100% in capacity with the volumes of export tonnage out of India growing by 8-9%,” explains Baba Devani, vice president, sales & customer services, BA World Cargo.
With so many providers entering this promising marketplace, even the established European carriers are being increasingly challenged to differentiate themselves from competitors by supplying customers with higher service levels – in terms of network range, specialised products and services on offer, and of course, reliability.
When it comes to nailing the competition in the region, BA World Cargo is confident that it remains in the top quartile. Boasting one of the largest single carrier networks, BA World Cargo carries a lot of freight on its passenger network, but also has three wet-lease freighters. In addition, it has just spent around $29 million in developing a new premium handling facility at Heathrow.
“To be the most profitable, we’ve got to make sure that we are delivering the right level of customer service,” explains Devani. “We’ve got a good offering on the general freight product, and although we had a good offering on the fast rate product we had some limitations because we were operating in a facility that wasn’t designed for that. Moving into a new building has enabled us to accept all customers’ fast freight; we’ve teamed up with Envirotainer to deliver a cool chain product; and we’re also back in the transfer air mail segment.”
The other key challenge for BA World Cargo, and the air cargo market as a whole, relates to accelerating fuel prices. With experts warning of a further potential rise due to the maturing of existing hedging programmes, many European carriers rely on the increased revenue generated in the Middle East and Asia Pacific to help offset the acceleration in fuel costs. “Our fuel bill in the quarter was up 60%; you’re talking about a [US $950 million] increase year on year in BA’s fuel cost,” says Doyle. “The revenue picture is not only about revenue growth, a lot of it is to help offset a massive escalation in fuel costs.”
Research from IATA suggests that wholly freight carriers are better able to cope with the rising fuel prices than their passenger/freight counterparts by transferring some of the costs on to shippers using higher freight charges. However, for the Luxembourg-based all-cargo airline Cargolux, profit margins in the region have also been feeling the pinch of the soaring jet fuel costs.
“Undoubtedly, our margins have been affected negatively by the sharply increased fuel prices,” admits Robert van de Weg, senior vice president of sales and marketing at Cargolux. “But in terms of overall market growth, we expect to outgrow the general average of 6% global growth due to the booming economies in the area”.
With what it sees as a strong reputation for high quality, long-range scheduled and charter air cargo transport, the carrier presently covers 60 gateways worldwide, with an expanding network of scheduled freighter services out of Luxembourg across the world. In addition, trucking services to and from the surrounding area are offered, as well as interline services in co-operation with Emirates Airlines to various destinations in the Middle East region and to India.
Cargolux is further enhancing its position in the region by upgrading its capacity through the recent acquisition of modern Boeing 747-400 freighters, with a further order of 10 B747-8 freighters and purchase rights for 10 additional airplanes. Additionally, its modern storage facilities at the Luxair Cargocentre in Luxembourg boast an annual capacity of 750,000 tonnes, with the latest handling equipment, various cool rooms for perishables, a vacuum cooler for flowers, and an appropriate live animal area.
By being a cargo only airline, Cargolux believes it can avoid many of the challenges encountered by other split passenger/cargo carriers in the region. “As an all-cargo airline, it is easier to concentrate on following the moving and growing cargo demand,” says van de Weg.
This can include avoiding cargo switching charges for transfers from passenger planes to assigned freighters. All-cargo airlines can also remain unscathed by the weak passenger numbers along certain travel routes. “Currently, there is a mismatch between passenger and cargo routes,” elaborates Morgan of Datamonitor. “While the latter is seeing its fastest growth rates in all of the Asia-Pacific trading lanes due to the exports emanating from that region, passenger numbers on these routes are not rising as quickly.”
One of the biggest challenges in the region for another leading European carrier, Lufthansa Cargo, relates more to the imbalance of cargo loads, depending on the inbound and outbound routes. “We have a lot of cargo coming in from the Far East or from Europe, and from the states, but we don’t have a lot of local production or local export to make a round trip very profitable,” says Gunnar Loehr, Lufthansa’s cargo manager for the Middle East. “We also see this situation in regions where there is a lot of export but very little import.”
Despite having one of the largest freight networks worldwide, the carrier mainly uses the region as a transit market for its freighters. “In Sharjah, we touch down on our way to and from the Far East,” he explains. “So as far as the freighters are concerned, the Middle East is not an originating market.”
But, as well as owning its fleet of 19 freight aircraft, the carrier enjoys the added capacity of transporting cargo in around 900 passenger aircraft of both the Lufthansa fleet and its partner airlines. “Of course we do carry cargo in the belly of the passenger aircraft and there has been some more development in this market – with our new stations in Bahrain and Doha opening only last year,” adds Loehr. “We now also have an additional flight from Dubai to Munich seven days of the week – meaning a total of about 51 flights a week”.
Regardless of being leaders in air cargo when it comes to network and product range, Loehr believes that Lufthansa Cargo, like many other European carriers, is still not on par with the airlines based in the Middle East region. “As far as our movements here are concerned, we are comparable to the European carriers who also have their links into the Middle East. We are not so comparable to those carriers who have their own base here such as Emirates, Etihad or Qatar Airways,” he concedes. Loehr’s statement is backed by Datamonitor statistics on air cargo growth, demonstrating the 29.2% year-on-year percentage change in revenue for Emirates, compared to Lufthansa’s 11.5%.
With the increasing number of world-class airlines competing for a stake in the region’s thriving air cargo market, the biggest challenge the established European carriers face is battling the growing competition for their lion’s share. This is made more difficult by possible uncompetitive practices as some carriers rush to grab market share.
As BA World Cargo’s Devani warns, “There are a number of carriers out there for the market share, just to carry the largest number of CTKs, and those who want to have an airline because it’s the thing to do. Competing in that environment can be extremely challenging because it brings with it irrational pricing behaviour and the irrational deployment of capacity.”