Freight Falling

With the global economic downturn slowly making its way to the Middle East
region, the air freight industry is making cautious decisions for the future

If anyone knows air cargo, it is Daniel Fernandez, Secretary General of the International Air Cargo Association. And, although he remains positive, he seems to know tough times are ahead.

“If you’re looking for leading indicators of economic activity in the future, air cargo is a pretty good indicator,” he explained during an interview at the International Air Cargo Forum and Exposition in Kuala Lumpur last month. “Obviously things are a little slow right now, because the world economy has slowed down because of the credit crunch. Companies are pulling back because consumers are pulling back, and then air cargo starts to go down.”

Daniel Fernandez, Secretary General, International Air Cargo Association

Perhaps many in the industry could already see it coming. While regional carriers boasted 12.1 per cent growth, international freight traffic dropped by 0.8 per cent in June, the first decline the industry has seen since May 2005, according to Giovanni Bisignani, IATA Director General and CEO. “The airline sector is in trouble,” he warned at the time. “Losses this year could reach US$6.1 billion, more than wiping out the US$5.6 billion that airlines made in 2007. Falling demand and rising costs are re-shaping the industry.”

In the Middle East, many who are not yet feeling a drop in demand, seem certain that they will. “The impact will come by January or February,” says Mohy Shenashen with Egyptair Cargo. “We’re just expecting it, because we can feel it in Europe. Demand is going down.”

Des Vertannes, Executive Vice President Cargo, Etihad, was keeping positive at the IACA World Air Cargo Forum in Kuala Lumpur. “For Etihad, I am pleased to say that because we have so many projects in Abu Dhabi, the UAE and GCC and because we are part of everything on the Abu Dhabi 2030 Plan, we haven’t got time to show any compassion,” he said in an interview. “We’re too busy coping with what is going on in our world. At the moment, we look as if we are immune to what is going on in the rest of the world.”

Other carriers also aren’t so concerned. “Royal Jordanian is a small niche player, so we are not going to big volume markets like China,” says Ingo Roessler, Vice President Cargo, Royal Jordanian Airlines. “The biggest drops are in those places. Also, to and from the USA we have a small capacity on our passenger services. I would reckon that we will be able to fill that come hell or high water, because there is sustainable demand throughout the year to and from Jordan.”

Oil prices

Emirates is insisting its worst is over. The Dubai-based airline announced an 88 per cent drop in net profit to US$77 million for the six months of its current financial year ending last September 30 from US$643 million during the first half of 2007, but blamed the losses on high oil prices. “Crude oil prices averaged US$122 per barrel for the first six months of the financial year, up from an average of US$67 for the same period last year, whilst the differential between crude and aviation fuel was also up from an average of US$16 per barrel,” the company said in a statement.

The sudden drop in oil prices should solve the industry’s problems, right? Not necessarily. Airlines who hedged over the past year are still paying for the prices they hedged at, and cannot afford to bring their prices down as quickly as oil prices fell. An airline which leveraged fuel at US$100 when it was trading at US$140 in the summer, was screwed in October as oil prices fell to the US$50 range this month. “Some airlines have hedged at very high prices,” says Roessler. “The actual oil price is down and everyone keeps looking at the news saying, ‘You have to reduce the prices!’ But we’re still paying for the hedged prices. Thankfully RJ only hedged in a moderate way. But we still hedged and so did everyone else.”

“If you look at some of the major American carriers, we are talking about losses due to hedging in the area of half a billion dollars,” he continues. “This means that the airlines are not able to pass on more benefits to the market.”

The future

“The oil price is falling, but what we save in fuel, we lose in revenue,” IATA’s Bisignani told the crowd at the Annual General Meeting of the Arab Air Carriers Association (AACO) in Tunis. “This industry will lose US$5.2 billion this year.”

“Even the Middle East is not immune,” he added. “The region’s carriers posted 18.1 per cent traffic growth in 2007. This year, August growth plummeted to 4.3 per cent. Profits of Middle East carriers will fall from US$300 million in 2007 to US$200 million this year. Only a handful of carriers will be profitable, while the majority bleed red ink. The region’s fleet is set to double to 1,300 aircraft over the next decade as we enter a period of global economic uncertainty. The challenge of matching capacity to demand will be difficult.”

He also issued a harsh warning to country’s wishing to privatise their airports, for example Jordan, Saudi Arabia and Egypt who have given concessions to run their airports to management consortiums. “Just look at what happened in Quito. The concessionaire ignored ICAO principles and raised rates by 128 per cent to pre-finance airport construction. You don’t want this type of monopoly abuse here. As you privatise, strong independent regulations to enforce ICAO principles and delivering cost-efficiency are a must.”

Bisignani called for MENA governments to offer greater commercial freedoms for air transport. “Airlines need to operate like any other business – with a level playing fieldand the freedom to access markets and global capital,” he said. “In MENA, we have seen pockets of progress, including open skies agreements and domestic liberalisation. Now the region’s governments must think bigger and act faster.”

Yet Bisignani’s speech left room for hope. “The industry crisis highlights the need for change,” added Bisignani. “MENA has some great advantages – strong oil economies, top notch infrastructure and fuel-efficient fleets. The crisis is a turning point. We must deliver significant change with efficiency and commercial freedoms. If we can do that, I am confident that we can weather this perfect storm and emerge as a stronger and more profitable industry.”

Others seem hopeful for the long run as well. Boeing, in its World Air Cargo Forecast 2008/2009 has said that world air cargo growth will expand at a 5.8 per cent annual rate over the next two decades, with worldwide air freight traffic tripling through 2027.

“Our research tells us that long-term economic growth, freighter fleet renewal and moderating jet fuel prices will stimulate air cargo traffic growth,” said Randy Tinseth, Vice President of Marketing at Boeing Commercial Airplanes. “These positive prospects will prevail despite the industry’s concerns about our current economic challenges. World GDP is projected to average just higher than three per cent during the next 20 years.”

Fernandez agreed. “Things are slow now, but there is a difference between a structural change and what we would call a cyclical change,” he explained. “In other words, there are things that fundamentally change the industry, like 9/11, where from that point on we had to take on the additional burden of security. Fundamentally, that changed the industry; whereas economic downturns are cyclical. This is not an industry in retreat.”