Airfreight weighed down by crisis

7 March 2009

THE plummeting cargo traffic across the board – be it land, sea or air – is a direct reflection of the current state of global trade that has come to a near standstill as a result of the global slowdown.

Airfreight or the air cargo industry is particularly vulnerable to the current downturn simply because it is the most costly mode for the movement of goods between countries. It also explains why producers worldwide have not wasted any time substituting air cargo services to cut costs to survive during this slowdown.

According to recent data from the International Air Transport Association (IATA), air cargo volumes in January fell at a staggering rate of 23.2% year-on-year (y-o-y) after posting a shocking decline of 22.6% y-o-y in December last year.

Obviously, the critical Christmas peak did not occur as traditionally expected.

Asia-Pacific carriers, which represent 43% of the market, led the cargo decline with a 28.1% y-o-y drop in January, followed by European carriers (-23%) and North American carriers (-19.3%).

The current performance of the air cargo industry, which carries about 35% of the value of goods traded internationally, is closely linked to the challenges faced by one of its key customers, that is, the semiconductor industry.

Reports from the US-based Semiconductor Industry Association indicate global chip sales declined 29% y-o-y in January and 22% y-o-y in the month before.

IATA says global airfreight volumes have typically grown quite closely in line with world trade volumes of manufactured goods.

With production and demand for electronic goods and garments having dropped dramatically over the past few months, IATA says the prospects for the air cargo industry in 2009 is indeed worrying.

Most air carriers are expected to report further losses in their cargo divisions this year. And airlines from Asia, whose key cargo-revenue driver is the Trans-Pacific market, are expected to continue leading such losses.

Slicing capacity

Given the gloomy prospects, capacity reduction will be more intense among the major operators this year in an effort to maintain their load factors and yields. However, IATA expresses its concern that the demand for cargo services is collapsing faster than airlines could reduce their capacity. Hence, it believes most airlines will not be able to hold up their load factors and yields this year.

The management of Malaysia Airlines (MAS) had earlier alluded to at least another 20% reduction in cargo facility this year, following a cut of 23% y-o-y since the fourth quarter (4Q) of financial year (FY) ended December 2008.

The aggressive cut in capacity had actually helped to hold up MAS’ cargo load factor at 65.6% in 4QFY2008, with yield at 90.4 sen per load tonne km, compared with the load factor of 64% and yield at 91.8 sen per load tonne km in the corresponding period a year ago.

Nevertheless, the capacity cut and the declining demand for air cargo services have resulted in the decline of MAS’ cargo revenues for 4QFY2008 by 22% y-o-y and 12% q-o-q to RM517mil.

The cargo division of MAS also reported an operating loss of RM14.1mil for 4QFY2008, compared with an operating loss of RM75.4mil in the preceding quarter and an operating profit of RM64.8mil a year ago.

Recently, Malaysia Airlines Cargo Sdn Bhd (MASkargo) – the wholly owned subsidiary of MAS through which it offers its cargo services – told StarBiz that the company would focus on controlling costs and improving efficiency, besides reducing its cargo capacity to deal with the current downturn.

It added that the company’s emphasis is on protecting its bottom line rather than pursuing market share.

Opportunities in crisis

AirAsia group does not have a designated cargo business, but it has the capacity to carry cargo in its passenger aircraft.

With the inception of AirAsia X’s maiden flight between Kuala Lumpur and London very soon, the group will commence cargo services to and from Europe.

AirAsia X CEO Azran Osman-Rani tells StarBizWeek that he believes cargo could be another area of growth for the low-cost carrier. There are still businesses that need to use air-cargo services to ship their products to their clients overseas, Azran explains, adding that the cargo business is expected to contribute 5% to the company’s revenue.

An analyst from a foreign brokerage says AirAsia group has a unique business model and tends to benefit from the failure of other airlines.

Hence, he believes that the air cargo is another opportunity that the budget airline could tap into with encouraging results due to its price competitiveness.

Analysts say even with the decline in global trade, air cargo is still an important component of international trade logistics networks and it is an essential mode of transportation for goods that are time-sensitive.

The dismal outlook aside, analysts believe intra-Asia air cargo services could be the silver lining for the industry.

They are hopeful that the stimulus plans implemented by the Chinese government could translate into actual spending by the local people there; and hence, revive the huge and once-booming consumer market in the third-largest economy in the world. With a population of 1.3 billion people, China offers vast opportunities for trade and has the potential to lead the revival of trade in the region.