TABLE OF CONTENTS Dec 2012 - 0 comments

Outlook 2013: Air cargo

Beleaguered airfreight industry fighting crosswinds of market volatility, changing shipping patterns, and movement to cheaper modes in 2013

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By: Ian Putzger
2012-12-01

For air cargo operators, 2013 will be starting with a bang – thanks to the implementation of Transport Canada's mandate to screen all cargo in the bellyholds of passenger planes taking off from Canadian airports. A few months back, there were still serious misgivings about the state of preparedness in the industry, but much progress has been made since, industry executives report.

"I think we are generally comfortable. There is a lot of awareness in the industry what is coming down the line," says Bill Gottlieb, president of David Kirsch Forwarders and one of the directors of the Canadian International Freight Forwarders Association (CIFFA).

He adds, though, that the authorities have yet to clarify some points of confusion. According to Jeff Cullen, chief executive of Bellville Rodair International and chair of CIFFA's airfreight committee, that may be more challenging than it looks, as some people on the government side "still have a lot to learn about the air cargo industry.”

Beyond the regulations, one major question mark is over how much freight will arrive at airline docks unscreened. Most small and mid-sized forwarders will not equip their facilities with screening equipment and rely on the airlines, Gottlieb predicts.

Lise-Marie Turpin, vice-president of cargo at Air Canada, expects more and more freight to be screened before it reaches the airport as forwarders and shippers become used to the new regime. "The best place to handle this is at the shipper's level," she adds.

In an effort to create a harmonized security regime with the US, the screening mandate will be extended to inbound air cargo down the road, which will require new adjustments from airlines, forwarders and shippers.

“At the end of the day, the quicker we become standardized, the better. Until then, there will be lots of moving parts," Turpin comments.

The increasing complexity of the security regulations will seriously challenge small and mid-sized logistics providers, who will find it hard to muster the requisite resources to deal with this, Cullen warns.

Automation will play a major role in this process. Security requirements are turning into a major boost into the industry's push for e-freight, which seeks to eliminate paper from the process, Turpin says.

Whereas large forwarders have established e-freight capabilities, smaller cargo agents lack the wherewithal to do so, she observes. In order to support the initiative with this clientelle, Air Canada has prompted Cargo Portal Services, which provides a channel for online bookings with several participating airlines, to develop a virtual e-freight Web site, where small forwarders can enter their air waybill data to be sent electronically.

Forwarders welcome the initiative, but point out that users end up keying in data twice, which constitutes both an additional effort and a potential source for errors. "We need IT suppliers to jump on and make this part of their system with little incremental cost," Gottlieb says.

At this point, the incentive to do this is still somewhat slim, as a number of trading nations have yet to embrace the international conventions that pave the way for a paperless customs regime. "E-freight is a very good thing, but there are certain countries where you cannot do it. It's all about customs," comments Brian Pedersen, vice-president of airfreight at Kuehne + Nagel.

In the current market situation, many operators are reluctant to spend on initiatives that have little short-term impact on their bottom line. "A return to profitability seems rather elusive these days," comments Gottlieb, and Cullen describes the market as "über-competitive.” Over-capacity, weak demand and market volatility have produced a fierce price competition – which is showing no sign of abating. Ad hoc pricing is rampant, which is undermining long-term agreements. "A lot of sectors are too volatile to lock in rates," Cullen remarks.

Jamie Porteous, executive vice-president of sales and service of Cargojet, notes that shipping patterns have shifted. Automotive traffic, which made up a significant portion of airfreight traffic some years ago, has gone down drastically, as have shipments of CDs and DVDs. Other types of products, like the iPhone and iPad, now make up a significant share of traffic.

Some segments have remained strong. "We are seeing growth in the luxury market, some well into double digits," Cullen reports. For Kuehne + Nagel, pharmaceutical and healthcare business has grown considerably, and so has perishable traffic.

On top of volatile market conditions and changing patterns in shipping, operators have to contend with shippers' desire to reduce their use of airfreight and attempts to shift as much traffic as possible to slower, cheaper modes of transport.

"There is business that over the years has slipped to ocean, but slow steaming is not for everybody," Turpin remarks.

According to Gottlieb, the trend towards cheaper alternatives looks set to carry on. "We will continue to see a movement to seafreight wherever possible," he predicts. "Airfreight continues to be a beleaguered industry – not that the other modes are in great shape."

The impact is particularly heavy on pure freighter operators, who have no passenger traffic to shoulder part of the operating costs. Even European freighter airline Cargolux, traditionally a very profitable carrier, is currently conducting a fundamental review of its business model to stem the flow of red ink on its balance sheet. "If I had a choice, I would support a freighter carrier to keep the alternative in the market," Pedersen says.

Cargojet's contract business with the large express operators has softened the impact from soft demand for general cargo on its balance sheet, but in the first quarter of the past year, its volumes were 20% below the level it had 12 months earlier. Management tweaked the schedule to permit more charter activity, and the market showed some improvement towards the end of the year. Another huge factor was the expansion of UPS into the Maritimes, which called upon Cargojet to mount two nightly flights to the region and gave it an overnight link between western Canada and the Maritimes for the first time.

At Air Canada, much of the focus in recent months has been on the development of plans for a low-cost carrier offshoot, which is due to take off in the coming summer with two Boeing 767 aircraft and two or three smaller Airbus A319s. The new carrier will be a separate entity with its own operating certificate, but its cargo capacity will be managed by air Canada Cargo. However, neither the narrowbody planes on the transborder routes nor the 767s, which will be deployed to sunshine destinations that have little freight traffic, are expected to carry much freight. "From a cargo perspective, there will be no significant impact," Turpin says.

Of greater importance will be two additional Boeing 777s that are going to join the carrier's fleet in the coming year. Routings have not yet been determined, but quite likely they will be fielded chiefly across the Pacific, Turpin says. With 25-35 tonnes of cargo capacity, these planes constitute the equivalent of a mid-sized freighter.

Air Canada stands to receive a substantial injection of capacity in 2014, when the long-delayed Boeing 787 is finally due to enter its fleet, where it will replace the smaller B767-300 aircraft.

The long wait is easier to bear at the moment, when there is ample capacity in most sectors in the market. Finding lift has not been an issue, not even on notoriously tight sectors like the Australia route, Pedersen says. Only lift to Latin America remains tight, although Air Canada just shifted from a 767 to a 777, he adds.

The picture is unlikely to change in the near future. Given the macroeconomic framework, a resurgence in demand looks unlikely, particularly for airfreight, which remains in shippers' crosshairs for further cost containment.

"As much as I am looking for a silver lining, 2013 is going to be a tough year," states Gottlieb, who expects operators' costs to go up, but not tonnage or revenues. "I don't see a recovery unless Apple launches a new product every few months, and even then you have to wonder if consumers would keep up the demand," he adds.

"Nobody sees light ahead. The market is flat now and it will be flat in 2013," Turpin says.

In this environment, few operators will be inclined to invest in expansion or towards longer-term objectives.

Air Canada Cargo does not have any significant expansion on its agenda for 2013. "We will be very focused on costs and finding more efficiencies. We will try to find new solutions, new opportunities," Turpin says.

Gottlieb cannot help pointing out a glaring contradiction in the airlines' position. "We get airlines say they got to wring out efficiencies. At the same time, we get their sales guys knocking on our doors and offering ridiculous rates. The airlines compound the problem they say they have," he says.

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