Air-cargo profits take a dive in flat belly landing
Reeling from fines for their part in a global cartel, airlines are finding it tougher to make a dollar from the freight market as their margins are squeezed. Matt O'Sullivan reports.
Cathay Pacific chief executive John Slosar does not mince his words when he talks about the airline industry's version of the canary in the coalmine.
"I think the canary probably passed away a long time ago, mate. We are looking for a new one at the moment," Slosar laughed on the sidelines of a recent airline conference in Cape Town.
Mr Slosar might be a raconteur but his remarks about the air-cargo market underline the challenges facing airlines trying to earn a dollar from a part of the industry known for its wafer-thin margins.
While passenger travel worldwide is growing about 5 per cent a year, it is a different story for the air-cargo market. It has shrunk since peaking in 2010, and for the past year cargo volumes have been flat with no sign of an upturn.
"Not only is the [air-cargo] market weak but freighter utilisation continues to fall," International Air Transport Association chief economist Brian Pearce said. "Load factors have stabilised but at low levels. This makes it very difficult for airlines to generate profits from their cargo businesses."
The air-cargo industry is just emerging from a dark chapter in its history - the busting of a global air-cargo cartel last decade. So far, 13 airlines, including Qantas, Emirates, Singapore Airlines and Cathay, have been fined almost $100 million in Australia for their part in the rigging of rates on international routes.
That episode might be drawing to a close, but the air-cargo industry remains gripped by challenging trading conditions that show no sign of easing.
What is surprising about the trend is that it is occurring at the same time as online shopping has created a boom in parcel freight. And some dedicated air-cargo operators are reaping the rewards.
Several years ago, global logistics group DHL Express was hiring significant amounts of belly space on commercial jetliners to ferry freight to Australia. Now, DHL has its own Boeing 767 freighter planes flying five times a week between Sydney and Tokyo - its main hub for freight from regions including Europe and the US - largely due to the boom in parcels.
"Online retail has surged. It is growing at 20 per cent a month and it is just not stopping," senior vice-president of DHL Express Oceania Gary Edstein said.
While it is a mini-boom for companies such as DHL, commercial airlines are not feeling the effects.
Mr Edstein believes the freight market is flat for airlines partly because air-cargo companies such as DHL are not using the belly space of commercial jetliners nearly as much to carry their goods. "We are taking freight off their bellies," he said. "It comes down to us wanting more control. We want to operate our own network ... [so] we are not dependent on passenger flights."
Industry insiders say the weak freight market is also due to airlines increasing capacity on routes worldwide. Put simply, a surge in flights creates even more space for cargo.
Deutsche Bank analysts say the air-cargo market, particularly on major export lanes in Asia, is weak and they expect a further increase in capacity as more supply becomes available.
Airlines are set to expand their fleets of large aircraft, which will "add more belly capacity in an already oversupplied airport-to-airport airfreight market".
"We believe the near-term airfreight outlook is bleak, given the wide-body passenger airline capacity additions, and we would not be surprised if airlines accept low airfreight rates to fill any unused belly capacity," the analysts said.
It is forcing some airlines to park planes. Last month, Singapore Airlines' cargo division grounded a Boeing 747-400 freighter aircraft due to a "continuing capacity surplus". The jumbo will be in storage until next May at Victorville, the world's largest aircraft parking yard at the south-western edge of the Mojave Desert in California. It is the second freighter aircraft the airline has put in temporary storage in the past eight months.
Airlines' ability to make a profit is not helped by stubbornly high fuel prices. Jet fuel prices in Singapore have been trading in a band between $US110 ($121) and $US140 a barrel since December.
Both Singapore Airlines and Cathay Pacific have a large exposure to the freight market. Earlier this year, Cathay announced plans to buy three new Boeing 747-800 freighters, which have a list price of about $US1 billion. The purchase will boost Cathay's fleet of Boeing 747-800 freighters to 13.
Qantas is less reliant on freight than its regional peers. Its freight division has five planes, including a Boeing 767 used on the trans-Tasman route, and several 737s.
Qantas carries 5 per cent of the total airfreight between China and the US. Its freight division booked a pre-tax profit of $22 million in the first half of the financial year, down from $38 million previously, which was blamed on a weak domestic market and strong competition. But the international operations of the freight business were said to be strong in the first half.
Qantas executives agree the air-cargo market is weak, particularly in Europe. But the company is quick to point out that it does not have a large direct exposure to the European freight market. The airline's main focus is the US-Australia and China-US trade routes, which have been more robust.
Cargo does tend to track the world economy, and in some people's minds precedes it.
"Cargo is still, frankly, in the doldrums. We are now into our probably third year of month-on-month declines," Mr Slosar said. "Cargo always responds to the world economy, generally, so that somehow suggests the world economy is not firing on all cylinders."
Airlines worldwide are expected to post a higher combined profit of $US12.7 billion in 2013. But is the weakness in the air-cargo market that is holding many back.
The reporter travelled to Cape Town courtesy of IATA.
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