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Cargo

Transpacific headwinds

Air carriers have been caught in a crossfire of a United States and China trade war. Ian Putzger looks at the implications for the Transpacific freight market
 

Airlines are finding they must be creative or up their game to staunch market decline.

 

All Nippon Airways (ANA) is preparing to boost capacity to the US. In October the Japanese carrier plans to start service between Tokyo and Chicago with the new B777-200F aircraft. The first of two 777 freighters ordered last year arrived in late May and is currently plying the Tokyo-Shanghai sector.

 

Another Asian carrier that is set on a transpacific expansion course is SF Airlines, which has applied for traffic rights for three weekly frequencies between Hangzhou and New York. It hopes to start the operation in September. This would supplement dedicated B747F capacity across the Pacific that SF Express operator obtained last October through an ACMI agreement with Atlas Air.

 

ANA and SF Airlines are outliers at the moment. Few carriers are looking to launch or add flights across the Pacific, given the state of the market. While there is universal agreement that the current downturn is a global phenomenon (IATA statistics for May show a 3.4% contraction of demand worldwide), the transpacific arena has been particularly hard hit.

 

International FTKs between Asia and North America were down almost 8% in May, according to IATA. As the Asia-Pacific region accounts for over 35% of global FTKs, its weakness is the major contributor to the global downturn, the airline body noted.

 

“We have observed a slowdown and lower export volumes from the Asia Pacific region in the market since April due to subdued demand and uncertainties resulting from the trade tensions,” reports Kelvin Leung, CEO DHL Global Forwarding Asia Pacific.

 

“The US and China are recording pronounced losses and sharply declining trade volumes,” he adds.

 

 “The tariffs are definitely having an impact on us. Our volumes to the US out of China are down,” reports Vito Cerone, Director of Marketing and Sales, of Air Canada Cargo.

 

While the trade conflict between China and the US is widely identified as the biggest drag on the market, the weakness is not confined to the trade lanes between the pair.

 

“Not only cargo volume between China and the US but also between Japan and China showed rapid decline due to trade friction between China and North America,” notes Fumika Yamaguchi, spokesperson for ANA Cargo.

 

Throughput at major gateways across the Asia-Pacific region has slowed. The Airports Council International registered a 5.5% drop in throughput in the first quarter. Singapore Changi’s throughput fell 5% in May, while Hong Kong reported a drop of 7.3%.

 

The Association of Asia-Pacific Airlines reported a collective 6.5% decline for its members in May, which brought the tally for the first five months of 2019 to a drop of 6.2%. International load factors fell 4.3% in May.

 

China Airlines suffered a 2.9% drop in cargo revenues in the January-May period, as load factors dropped 4.9 points.

 

Cathay Pacific’s cargo volume contracted 3.9% in May and revenue tonne-kilometres were down 2.6%. The carrier’s tonnage is down 5% for the first five months of the year.

 

“After two very good years on the transpacific market in 2017 and 2018 we are now experiencing some headwinds, which is exacerbated by trade tensions between the US and China,” remarks John Cheng, Head of Cargo Markets and Products at Cathay Pacific.

 

Korean Air, which saw FTKs slump 9.4% in the first quarter, blamed the global economic slowdown and the US-China trade tension for its fortunes. To stem the decline in yield, the airline is focusing more on high-value segments, such a live animals and temperature-controlled traffic.

 

Singapore Airlines signed a three-year deal to lease temperature-controlled pharma containers from SkyCell. The units are equipped with sensors to feed data to a cloud for monitoring.

 

“The expansion of our THRUCOOL quality corridor network and lease partnership with SkyCell demonstrate our commitment to providing quality-assured dedicated cold chain services when transporting time– and temperature–sensitive shipments,” stated Chin Yau Seng, SIA Senior Vice-President Cargo.

 

Cathay is also stepping up its game trialing Bluetooth technology for next-generation track and trace of cargo by fielding active and passive containers from five different suppliers for an array of temperature ranges. In addition, it burnished its credentials with CEIV Pharma accreditation.

 

“Transpacific remains one of our top trunk routes, and we are cautiously optimistic about its future prospect. On the other hand, we are vigilantly monitoring the changes in demand flows. As a network carrier, we will just need to be flexible to make adjustments in our flight deployment to match supply with demand,” remarks Cheng.

 

“ANA has seen robust demand for automotive parts going from Japan to North America. High-tech cargo decreased owing to the US-China tension, but the airline expects new demand for 5G-related products, as Japan will start 5G service next year,”  Yamaguchi remarks.

 

As elsewhere, e-commerce also remains strong, but yields in this segment are usually not too appealing. “You need the right revenue mix,” comments Cerone, “You have to find creative ways to fill your flights.”

 

For Air Canada, one solution is a stronger focus on traffic flows between Asia and Latin America, which has generated good loads in both directions.

 

Faced with buoyant demand in this trade lane, especially from Latin American exporters, LATAM Cargo has cultivated interline arrangements. In February it started freighter flights between Sao Paulo and Chicago, where it connects with freighters of Air China and Cathay.

 

Although there have been no disruptions due to the China-US standoff, inbound flows have slowed somewhat, in line with a generally softer import market in Latin America, reports Gabriel Oliva, Vice President for North America, Europe and Asia at LATAM Airlines – group. “We expect better demand flows in the second half of the year from Asia due to increased consumption in the high season,” he comments.

 

One forwarder that specialises in perishables predicts continuing growth of exports from Latin America, citing the rapid expansion of Chinese imports from the region. As tariffs hurt US perishables traffic to China, the Middle Kingdom is looking for alternative sources, he says.

 

“If I had more lift, I could get more perishables from Latin America,” remarks Cerone.

 

Air Canada has felt the impact of Chinese tariffs on US produce and protein. During the cherry season it tends to truck shipments from the US Pacific Northwest to its flights departing Vancouver, but this flow has weakened to China. Chris Connell, Senior Vice-President North America of Commodity Forwarders, a subsidiary of Kuehne + Nagel, says that US growers have tried to pivot away from China to other markets, such as Taiwan and Korea, although the Chinese market is too big to be replaced by these.

 

As Chinese import duties on US lobster soared from 15 to 40%, Chinese importers turned to Canadian exporters instead, which gave additional momentum to the already expanding lobster flows from Halifax to China. Halifax International Airport clocked up 8.5% growth in volume last year, driven by lobster shipments and other fish and seafood going out across the Pacific.

 

This traffic has drawn in freighters, including several Asian carriers. Korean Air runs up to three freighters a week through the airport on their return from US points to Asia. Suparna Airlines 747 freighters call at Halifax twice a week, and SkyLease, which provides dedicated lift to a Chinese-owned seafood forwarder based in Halifax, also shows up twice a week.

 

To keep up with growth the airport is planning to extend the cargo apron by adding five parking positions for widebody freighters and an ‘Air Logistics Park’. The apron work should be done next year, while the first new cargo building is expected to come on stream in 2021.

 

On the other side of the Pacific Vietnam is getting a lot of attention in the wake of the concerns over China-US relations. Vietnam’s exports to the US climbed 29.7% in the first four months of this year. While the bulk moved by ocean, the share of airfreight climbed from 31% to 33.6%.

 

Neel Jones Shah, Senior Vice-President Global Airfreight at Flexport, reckons that Vietnam’s strong growth will continue. Like other logistics executives, he has doubts as to how far the country’s logistics infrastructure can cope with this. He would like to have freighter capacity into Vietnam, but the operating economics are more challenging than Flexport’s dedicated 747 freighter flights between Hong Kong and the US.

 

Notwithstanding such bright spots, the overall outlook remains bleak. Even if China and the US bury the hatchet, it will take time to restore confidence and growth, noted IATA in its market assessment published in late June.

 

“Whilst the trade dispute between the two countries has been a looming, growth impeding threat, the lag effect on the real economy is looking to manifest itself now in trade forecast date,” remarks Leung.

 

The latest update of DHL’s Trade Barometer predicts a slight contraction of global trade in the third quarter of this year. The US and China are leading the downward charge, showing the steepest declines in business confidence with drops of 11 and seven points respectively. The US outlook for air trade is down eight points, while China’s outlook declined six points.

 

Under these circumstances, forwarders have not been in a rush to line up capacity for the peak season.

 

“While we do not currently foresee any issues securing capacity for the fourth quarter, we are constantly monitoring the situation and remain in close contact with our customers so as to be able to react flexibly and swiftly, according to market changes and provide solutions for our customers,” comments Leung.

 

Shawn McWhorter, Americas President of Nippon Cargo Airlines, reckons that demand will perk up down the road. “We are still in discussions with our customers about how much space they want for the peak, which means the forwarders are at least looking for additional space,” he remarked.

 

ANA sees interest in the capacity expansion that its new 777 freighters will bring across the Pacific. “Now we are offering our customers block space agreements, including our Chicago service, since they would like to secure stable space for the peak season,” remarks Yamaguchi.

 

ANA and United Cargo have been jointly marketing their combined transpacific capacity in both directions since last year. Together they muster 377 nonstop flights a week serving 16 destinations, plus flight and truck connections within Japan, the US, Canada and Mexico.

 

They are also working on broadening the scope of cargo covered by their joint venture beyond general and express cargo to sectors like oversize shipments and perishables, Yamaguchi reports.

 

In light of downward rate pressure in the current market conditions, a larger share of higher yielding cargo should be quite welcome.


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