Bellies FULL to bursting

Gulf airline cargo managers are all smiles as their fleets grow, airports expand and economies soar. But increased competition and capacity mean there’s no room for complacency.

Working in the Middle Eastern air cargo industry is like opening a menu and finding that the dishes keep changing. The governments of Dubai, Abu Dhabi and Qatar have been busy laying out their tables, accommodating growing transit and destination business at the world’s crossroads. But now they’re hungry for more, spending billions on fleet and airport expansion in the next five years.

A recent study by the Sydney-based Centre for Asia Pacific Aviation says that Boeing and Airbus expect the Middle East market, the fastest growing globally, to expand by 5.5% and 6.2% per annum on average until 2025. That may prove conservative, if record oil prices, unprecedented liquidity and the region-wide economic boom, all of which are helping the Gulf’s airlines fly high, continue.

It’s very much a “chicken-and-egg” scenario, with a mutually dependent relationship between investment flooding into airlines and investment into hubs across the region.

Abu Dhabi and Doha are expanding rapidly, while Dubai is taking it to another level with US$82 billion earmarked for its aviation sector in the next decade. Dubai World Central International Airport, set to receive its first flight late next year, will have 16 cargo terminals on completion, capable of handling 12 million tonnes a year.

It might take a few years to reach those kinds of volumes – last year Emirates SkyCargo carried just 10% of that figure (1.2 million tonnes), although this was up 13.5% in 2005 – but everyone knows Dubai is a byword for visionary planning.

Gulf Air cargo operations

Just think how far Emirates has come in 22 years. Today, the cargo division holds capacity in 97 passenger aircraft, plus 11 freighters – three A310Fs, five Boeing 747-400Fs, one Boeing 747-200F and two 747-400ERFs – and oversees shipments to 94 destinations in 60 countries. Asia, particularly Greater China, is a key market, accounting for 41.2% of airline revenues in its 2005-06 financial year.

Des Vertannes, Executive Vice President Cargo, Etihad Airways, on the rumour that Etihad and Emirates are moving towards a merger

"If they [Emirates] have something which is the best in the industry, then talking to them to share in not a bad thing- but we haven’t gone that far in cargo. If we ever went into some form of alliance, it would have to be something significant"

Etihad Crystal Cargo, which only turns four in January, has hit the ground running, with volumes trebling to 70,000 tonnes in 2005 and this year it has launched seven routes, each time offering shippers widebody capacity.

Much like Dubai, Abu Dhabi is busy working on a new airport, which will have a 1m-tonne capacity cargo terminal – but that’s unlikely to be ready much before the end of 2011.

“What we have to do before then is to enhance the existing facilities at the south side,” says Des Vertannes, Executive Vice President Cargo for Etihad Airways. “The first one has happened, the automation programme, which concluded in July – that immediately increased capacity to 300,000 tonnes.

We’re hoping to add an extra wing to the building by next summer, by the time that’s completed and integrated with the other buildings, that will take capacity to 475,000 tonnes.”

Qatar Airways Cargo introduced a third freighter in September, and has launched seven new cargo-only destinations – Algiers, Tunis, Milan, Istanbul, Karachi, Colombo and Johor Bahru in Malaysia – which join Amsterdam, Frankfurt, Khartoum, Dubai, Nairobi, Bangalore, Chennai, Lahore and Dhaka in the cargo network. On top of this, shippers benefit from the airline’s rapidly expanding passenger network which now stretches to 78 cities.

The latest Airbus A300-600F, a converted passenger aircraft, arrives at a time when ground facilities are going places – Doha International Airport now has a 40% larger warehouse containing import and export, cold storage and freezer facilities.

Qatar Airways Chief Executive Officer Akbar Al Baker says that cargo represents a vital component of the airline’s global operations. “We are building our cargo operation to key markets around the world using Doha as a key hub,” he says. “We will, over the next two years, increase our cargo operation further as more A300 freighters are introduced and the first of our two new Boeing 777 freighters are delivered. These are scheduled for delivery from Summer 2009.”

Qatar Airways’ General Manager Cargo John Batten says with the addition of the new cargo aircraft and more destinations, Qatar Airways will be able to offer cargo agents and freight forwarders a wider choice of cities for their shipments.

Oman Air, for years one of the more discreet regional operators, is now spreading its wings after chalking up a US$7.5 million profit in 2006, up almost three times the amount of 2005, thanks to more capacity and better yields driving net income. The airline started flights to the centrally located Indian city of Lucknow in May, complementing services to Mumbai, New Delhi, Kochi, Hyderabad, Thiruvananthapuram, Chennai, Jaipur and Chittagong.

Embracing competition The upsurge in capacity and increased competition is good news for everyone, forcing all carriers to raise their game – that, at least, is the public message. Privately, operators must be feeling more pressure on rates and yields.

Can margins be maintained amid rising competition, increased capacity and spiking fuel prices? That’s the billion dollar question. Habib Fekih, President of Airbus Middle East, says orders for Airbus A380s in the region will reach about US$18 billion by the end of 2007. So far Airbus has sold 64 double-deckers in the Middle East, each costing about US$250m.

Etihad, while backed by the wealthy Abu Dhabi government, is at pains to stress that it must stand on its own two feet and has no incremental revenue streams – unlike the diverse Emirates Group, for example.

“What’s important now is that the executives of Etihad are challenged to deliver a return on investment,” says Vertannes. “Our goals are fixed to make sure that we don’t take the money ploughed into the airline and waste it, in the belief that it doesn’t matter because there’s either more cash or other parts of the airport that can be tied to the airline to produce incremental incomes. We don’t have that luxury.”

Etihad pulled out of Colombo earlier this year, a “big, brave decision” showing that the company isn’t afraid to shirk tough questions and deploy assets on different routes.

Far from encroaching on competitors’ toes, Vertannes believes any growth in the UAE will benefit Abu Dhabi. “If Dubai World Central is going to be successful, then people who fly there will spill cargo,” he says. “Whether it will go to other operators, or 45 minutes down the road to us, we’re bound to reap the benefit. Also, if there are carriers operating in Dubai that are serving markets that Etihad doesn’t, it means I can attract business from my network to feed into those aircraft. I’m pretty excited by it, it’s a huge opportunity.”

Left: Emirates SkyCargo operations, Right: Ram Menen, Divisional Senior Vice President, Emirates Cargo

He doesn’t rule out Etihad even operating freighters out of Dubai World Central one day.

“It depends on what our customers want. We have the ability to do it.”

While excited about the opportunities, Vertannes acknowledges the stiffer commercial climate, with Emirates and Qatar Airways expanding, and Oman Air now starting to emerge from a small regional carrier to an international one.

By the end of this year Etihad Crystal Cargo will have three freighters – two A300-600Fs and one MD-11

“Then there’s the beast in the wings that people always overlook time and again – Saudia. The biggest market in the region is Saudi. Saudia is low key but it has a huge fleet, they are beginning to privatise parts of the business, they will become a huge threat to Etihad in future.”

By the end of this year, Etihad will have a 30-strong passenger fleet with three freighters – two A300-600Fs (the third went back in June) and one MD-11, which entered the fleet a month ago.

“That gives us a significantly bigger aircraft with far greater range, operating on key markets of China and Europe – the return from China also stops in Mumbai,” says Vertannes. “The two A300s serve the Asian subcontinent and north-east Africa (Addis Adaba, Khartoum) and also Milan Malpensa. The 90-tonne, MD-11 also goes to Hahn in Germany, which is a temporary hub for us. We will have to consider what we want to do in future in terms of a strategic hub in Europe, for the time being Hahn has worked incredibly efficiently.”

The challenge for rapidly expanding Etihad is finding a partner which can bring something different to the airline. “The choice is there – selecting the right one is a tougher test than might seem to be the case externally,” says Vertannes. “You have to find someone who will think inventively. In all cases, before we launch services, we select GSAs, bring them to Abu Dhabi for quick familiarisation – inevitably, we could do more to train them, but needs must. We are a bit stretched, so as long as we have the basic awareness of strengths.”

Prakash Nair, Manager of Network Cargo Sales Development with Emirates, laughs at rumours that “come out every month” that Emirates is buying another airline and says he enjoys having other players in the region like Etihad and Gulf Air. “It keeps the competition up,” he says, “and it’s good for the customers.”

A recent IT collaboration between Etihad and Emirates on the passenger side sparked the merger rumour mill, but it came to nothing. “If they [Emirates] have something which is the best in the industry,” says Vertannes, “then talking to them to share is not a bad thing – but we haven’t got that far in cargo. If we ever went into some form of alliance, it would have to be something significant.”

With ambitious plans to become one of the leading integrated freight forwarding and logistics solutions providers in the region, Empost has been expanding its services into a one-stop freight forwarding and logistics solutions provider. The government-owned operator has plans to operate up to 50 aircraft by 2012.

Its freighter network will be implemented in four phases, covering cities in the Indian subcontinent, Middle East and Europe by the end of 2008.

Empost launched international services on May 6 with six flights a week from Dhaka to its hub in Al Ain and onward to Istanbul and Amsterdam. It has struck up a European trucking network to offer shippers transhipment throughout Europe.

“Empost is the first scheduled freighter operator to choose Al Ain International Airport as its regional hub,” said His Excellency Abdulla Al Daboos, Director General of Emirates Post and Chairman of Empost. “This move will place Al Ain on the global map.”

Abu Dhabi-based all cargo aircraft operator Maximus Air Cargo, specialising in the cargo aircraft business and associated logistics solutions, was granted its UAE Air Operators Certificate (AOC) by the General Civil Aviation Authority (GCAA) in June.

It has been operating since 2005 with an owned fleet of AN-124-100 Ruslan, Airbus A300-600RF, Ilyushin IL-76TD Candid and the recently added Lockheed L-382 Hercules cargo aircraft.

Airlines are not only feeling the heat from within, but outside from among their own customers. As more companies start to mobilise production, there’s more pressure to speed up the supply chain.

“If you look at the retail industry, you have new brands that bring fashions to the high street which are changing every one or two months, when they may have been going to market every four or six months before,” says Vertannes. “The growth of airfreight is being stimulated by this need to condense the supply chain. But you’ve also got now the fast ships – shipping lines no longer focus on port-to-port, but the whole speed of process. Airfreight is competing with a vigorously improving intermodal industry.”

 
Gulf Air

Etihad Airways expects to have 41 widebody aircraft by 2011 and 12 narrow-body planies by mid-2009

Technological challenges The biggest challenge for the airfreight industry worldwide is cost control, believes Vertannes. “Over my lifetime, whenever a carrier grows kilos, it grows heads and grows costs,” he says. “If you look at what’s happened to revenues and yields, yields have always come under pressure, so unless the industry can automate and implement
some of the opportunities discussed by IATA, such as it’s e-freight initiative, then we’re always going to struggle to contain costs.”

The industry must try and make the interaction between its customer base, the forwarders and logistics companies, more paperless – but it takes two to tango, says Vertannes.

“In our supply chain, it’s not just forwarders, but customs, police, security. There’s a lot of effort going in to see if we can find a path but my suspicion is that there are elements slowing the process, because there’s money to be made from manual. For me, that’s a concern.”

From next year, Etihad Crystal Cargo customers will be able to get their tariffs online, book online, track and trace shipments and print barcode labels. “Track and trace is there today, but everyone has it – and yet most airlines still have reservation sections who deal with post-flight calls. The reason is that the integrity of track and trace is still not 100%. It’s got to apply for every single transaction. If you have gaps, it’s going to provoke calls.”

Speaking at the recent 2007 FIATA World Congress in Dubai, Ram Menen, Emirates’ Divisional Senior Vice President Cargo, echoed the call for unity and expected the UAE to be part of the second wave of countries participating in IATA’s e-freight pilot project. “All the players within the supply chain are peas of the same pod. It is very important that we have a common voice in dealing with the challenges that lie ahead.”

Courting integrators There was a time when airlines and integrators wouldn’t speak to each other, but those days are long gone with widespread co-operation now prevalent. Emirates SkyCargo and TNT Express signed a new agreement in May which saw the cargo carrier lease a Boeing 747-400 ERF freighter – complete with 124-tonne payload capacity – from TNT Airways’ European fleet. It initially serviced the Milan-Dubai route before embarking for Dusseldorf.

DHL Express has become the first member of Gulf Air’s recently launched Global Incentive Agreement Programme. As part of the strategic partnership, Gulf Air will provide the international logistics company with a number of incentives to transport its airfreight. This should help Gulf Air boost its annual volumes and expand its cargo division, which currently makes up only 13% of the airline’s total revenues.

“As the airfreight industry becomes increasingly globalised, through mergers and acquisitions, it’s now common for freight forwarders to form tripartite partnerships with other members of the logistics chain,” says Sam Okpro, Gulf Air’s acting head of cargo. The airline is looking extending the agreement to DHL Global Forwarding and Aramex.