Burning Fuel

What
LOG.Middle East’s first round table
Who
Sujit Subramanian, General Manager, Middle East & Africa, Lufthansa Cargo Charter, Dirk van Doorn, Middle East Business & Product Development Manager, DHL Express, Bill McKnight, Transport Consultant, A.T. Kearney, Kathryn Semcow, Editor, LOG.Middle East
Why
To answer the question, “How are you dealing with rising oil prices?”
Where
Radisson Media City, Online Room
When
Monday, June 16, 2008

Left: Dirk van Doorn, Middle East Business & Product Development Manager, DHL Express, Sujit Subramanian, General Manager, Middle East & Africa, Lufthansa Cargo Charter and Bill McKnight, Transport Consultant, A.T. Kearney

KS: Let’s start with the service providers. Dirk, how are fuel prices affecting your business?

DV: We’re taking a bit of a hammering on that side, but to some degree we’re passing a lot of those increases in price back to the customers as best as we can. We have the Rotterdam Fuel Index, which we link directly back to the customer by saying, “This is the rate per kilo, or the cost for the aircraft,” and then quote the rate. The Rotterdam Index is a floating surcharge and is public information, so no one is trying to pull the wool over anybody’s eyes.

The other part you’re going to start seeing is airlines working much more closely together. I think the era of big 747s going east and west, north and south, and everyone having their own plane with their own flag is going very quickly. For example, in the US, DHL has just made a huge announcement that we are getting rid of all our aircrafts and outsourcing them to UPS, primarily for domestic inter-US linehaul. You can’t have two or three big carriers all travelling in the same direction, and not everybody filling up their aircraft, especially at the rate which fuel is going up.

SS: Dirk, your core business is the courier business. I come from the airline side, so for us when we talk about fuel, it can range anywhere between 40 per cent and 60 per cent of our operating costs. Our customers are forwarders, and forwarders know the business, they know how airlines operate. Still, it becomes all the more difficult for us to pass on the fuel surcharge increase to our direct customers. But Dirk, is it easier for you as a courier company to pass on the increase to your end customer?

DV: It doesn’t hurt that your CEO had an interview in the newspaper yesterday, saying that Lufthansa managed to hedge its fuel prices between US$80 and US$83. If I were a freight forwarder, I would be pointing that out to you right away.

But, to answer your question, you’re right. To a large degree, customers accept that when they read in the press, or hear on the business channels, or read LOG.Middle East magazine, that fuel is going up, and they accept that there is going to be a repercussion somewhere down the line.

SS: You mentioned hedging, which is true, everybody hedges fuel by buying at today’s price and saving it for the future; but airlines also have to pay a huge fee for hedging. If I say I want to buy fuel for February, 2009, at a price of US$85 per gallon, I pay a premium to that. This is a big risk from the airline’s point of view. It also means the airline needs to have that much financial strength. Only the top five airlines can afford to do fuel hedging. So many of the small airlines are disappearing before you know it.

DV: There is going to be a lot of consolidation in the industry. We’re already starting to see a lot of that in the passenger market. I think the cargo market is not far behind. You will either die or you will be bought. In the US market, they’re going to feel the biggest pain.

BM: They are well on their way already. If you add up the announced capacity reductions between now and the end of the year by United, American, Continental, Delta and the other American airlines, you are basically taking out the equivalent of an airline. That is like a major US airline coming out of the marketplace.

This is a horrible situation, not only for the passengers, but for the shippers as well; as the reduction in capacity gives the airlines pricing leverage.

The problem is, even when you take this capacity out, it still doesn’t get you to profitability. All of this capacity reduction is like putting a bandaid on major surgery.

DV: In terms of this region, I think the Gulf market will only become more and more difficult. Everyone wants to play in the Gulf, but the Gulf is only so big. A lot of guys are trying to come in, but I’m not sure everyone is going to end up making money.

SS: We see a lot of forwarders consolidating, and I think we will start to see this on the airline side soon.

BM: It’s hard to imagine exactly what the solution is. What the airline industry is facing right now is basically the result of the western world failing miserably to have an energy policy, globally or internationally, that works. This situation was not that hard to predict.

DV: One thing we’ve started to do is have discussions with our customers about how urgently they need their delivery – can their next-day delivery be deferred? The moment the word ‘deferred’ comes into the equation, you can actually transfer the delivery from air to road, where clearly the operating costs are reduced. DHL Express has built a huge road network in the Middle East, to some degree at the expense of our airline. This network, to an extent, is actually mitigating some of the cost increases.

KS: ‘Fuel efficiency’, what are the possibilities? Is this a buzz word, or does technology make a difference in any of this?

SS: To a large extent, yes. If you compare the aircraft manufactured by Boeing and Airbus 10 to 15 years ago, to the aircraft they are building now, in terms of fuel consumption per hour, you will see a vast difference. Fuel efficiency is the deciding factor today in the airline business. But, again, it is a chicken and egg scenario. Only the airlines who have the money can buy these aircrafts, and they will keep getting stronger; and the weaker airlines will settle for the second-hand planes, and keep losing money.