Airlines ground some cargo planes to ride out capacity and rate turbulence.
By Jon Ross
At the beginning of December, officials at Singapore Airlines Cargo said goodbye to one of their 13 Boeing 747-400 freighters, taking it out of the sky with the hope to keep it grounded for at least a year, possibly two years.
The freighter market had dealt SIA a tough hand, and due to weak demand for freighter services and high fuel prices, officials took the step to park the plane after first scaling back long-haul freighter services, creating an initial cut to capacity.
And SIA is not alone. Earlier in April, Cathay Pacific parked one of its older freighters in the face of declining demand.
These two moves can be viewed in the light of future freighter deliveries — these older planes were going to be retired anyway once new, souped-up freighters started rolling off production lines. Observers can also see that demand for freighters has fallen drastically, and retiring planes simply makes economic sense.
While Asia-Pacific rates are trending up, rates in Europe are on the decline. Among the integrators, air freight rates have increased slightly, with costs increasing anywhere from 3 percent to 5 percent after a reduction in fuel surcharges. But these Asian carriers’ moves might go beyond the tightening of air cargo capacity and speak to a longer-term transition away from freighter aircraft.
With Singapore Cargo’s capacity retired a bit early, Bob Imbriani of Texas-based forwarder Team Worldwide said this will lead to an increase in rates out of Asia-Pacific. Since late fall, he had seen general rate increases of 15 percent to 18 percent coming out of Asia, and expects this ballooning of rates to continue in 2013. These increases are a direct result of constrained capacity.
“In some cases, they’re not putting the larger vessels back in service, or keeping in the larger vessels and pulling out some of the other smaller vessels in a trade lane,” he said. “Everyone looks at China, and China’s still a big concern and a big area of volume, but we’ve seen it really happen a little bit more in some of the other areas.”
Imbriani mentioned Vietnam and Singapore as two areas that are currently experiencing tight capacity and elevated rates.
Another wrinkle in the capacity issue, which is adding to increased rates, is the security standards implemented by the United States. “We’re seeing more shippers that have to go to cargo aircraft because the shippers are newer — they haven’t been set up as a known shipper — so the need for cargo aircraft is actually increasing as opposed to diminishing right now,” Imbriani said.
The early retirement of planes by Asian carriers doesn’t spell disaster, but it is of some concern and could become a problem if it evolves into a trend, said Alan Hedge of Air Cargo Management Group. His group has taken note that capacity is not shrinking as quickly as demand, so freighter retirements may need to be accelerated for economic reasons. But if demand picks up, this capacity issue, and the rate increases, could be solved organically.
“Eventually, lift will catch up with capacity or demand will recover to some extent, and that will bring the freighters back out of the desert again as conditions approve,” Hedge said. “There is always the roller coaster effect, where people can’t predict perfectly, and right now we’re still in the lagging phase where capacity is still not coming out as fast as demand.”
Airlines operating older freighters are in a unique position in the current market, he said, because there will be an unusual number of new freighters coming online in the next few years. Deliveries of these large-capacity freighters will change the game completely.
“We have all these freighters coming and the used market doesn’t seem to be trickling down as fast as it has done in the past — in other words, in good times,” he said. “We’re seeing freighters starting to accumulate in the desert, and we have a lot of capacity coming in.”
This capacity is forcing airlines to begrudgingly charge low base rates for shipments. Passenger deliveries also complicate the picture, leaving the long-term stability of rates up in the air.
“With all the belly capacity coming in, will rates hold? All the economics and all the capacity, there’s downward pressure — we just don’t know how the rates are going to respond,” Hedge said.
The Asia-Pacific route seems to be the only place where rates are going up. Almost everywhere else, those in the air cargo industry are seeing rampant capacity availability – on freighters and belly space – which is leading to a decrease in rates. Rates on freighters can only go so low, however, due to baseline costs of operating the planes. Fluctuation in fuel and other surcharges still makes rates hard to predict.
Joost Van Doesburg, air freight policy manager at the European Shippers Council, confirmed that prices are dropping and capacity is rising in Europe. Shippers across Europe are getting ready to see air cargo rates drop next year, but they don’t know by how much, he said. The reason? There is simply too much freighter and belly-hold capacity. In addition, he sees some shippers exploring other modes.
“More and more shippers choose to shift their cargo to the ocean,” he said. “The cargo industry should not speedup this process.”
Though he deals with freighters in a charter capacity, and is thus a bit more insulated from capacity issues, Justin Lancaster of Air Charter Service also sees a tough freighter market for airlines in 2013. The imbalance between supply and demand, he said, must come to a head soon. When demand was higher a few years ago, a slow uptick in freighter capacity was fine, but now that demand has plummeted, painful choices must be made.
“Either airlines will have to start to reduce that capacity, or yields will get squeezed lower and lower,” he said. “This can’t be good for airlines and is not sustainable for a long period of time.”
On most major routes, Lancaster sees an excess of freighter capacity. If in the coming months, this capacity is cut down to the bone, and there happens to be a surge in demand issuing from a product launch or other development, Lancaster could benefit from the imbalance. He’d be there to provide chartered flights on Asia-Europe and transpacific routes where capacity had vanished. If a situation like that doesn’t occur, he said, changes in freighter capacity don’t really have any consequence on his business.
The bottom line, however, is that freighters cost a lot to operate, said Brandon Fried, executive director of the Airforwarders Association. He has watched bigger passenger planes replace smaller freighters, with a number of airlines choosing to get out of the freighter game altogether. This is a growing trend that so far hasn’t squeezed rates that much, but as freighters get harder to find, shippers of oversize goods and hazardous materials may find themselves involved with a charter broker or integrator.
“We’re seeing this downsizing of computers of electronics in general, and that’s making belly space more attractive,” Fried said. “You’ve got the advent of the 777s and soon to come, the A350. These planes have very cavernous bellies. That’s not negating the need for freighters, but it’s certainly forcing a lot of airlines to question their need to fly them.”
Any adjustment in rates this movement away from freighters brings — or on the other side, the availability of too many freighters for the market — will obviously be lane specific. A few lanes, Fried pointed out, don’t have airline freighter service and have adjusted to using integrator services when needed.
“A lot of these airlines are putting a tremendous amount of stock in the size of these new planes coming online,” he said. “That seems to be fulfilling their needs.”
SIA’s move to park freighters, either as an early retirement or a temporary cost-saving method, might reverberate throughout the industry.
According to Shawn McWhorter, president of Nippon Cargo Airlines in the Americas, older parked freighters, such as the B747-200F and B747-400 passenger conversion, are unlikely to return to service, but airlines will also look at the rest of their fleets because freighters are becoming more expensive to operate.
“I think you will see some carriers parking more freighters until the point where pricing can increase to where it covers the real operating cost,” he said. “No longer will airlines allow freighters to operate at a loss and allow the passenger operation to cover the losses.”
McWhorter said he can’t imagine what the rates will look like down the road, but does see some stability in the market and is optimistic that 2013 will be a rebound year for cargo. Reduced freighter capacity, along with financial stability in Europe and the United States, will make this a reality.
Air France-KLM-Martinair Cargo is currently taking stock of its freighter fleet and shifting its focus toward belly cargo. The carrier is taking two freighters out of operation at Paris-CDG Airport and Amsterdam Schiphol Airport, reducing the fleet down from 16.
Jean-Claude Raynaud of the airline said it’s simply more economical to focus on passenger planes and that the company will use its dwindling number of freighters only when, and if, it’s viable to do so. Using a freighter would make sense if a lot of demand flooded the market or a certain type of commodity in the oil and gas industry necessitated the use of a freighter, he said.
Raynaud has experienced the shift at the carrier first hand, seeing the fleet balance of freighter and passenger planes moved from a 50-50 split to more of a 35-65 ratio in favor of passenger planes. Reasons for this include sluggish Chinese and Asia trade and the market’s rampant overcapacity problem brought on by declining demand. Integrators and operators of specialty aircraft, such as the Antonov 124, will be the major players in the freighter industry moving forward.
“Our main focus and motto now is to stick as much and as often as possible to capacity discipline,” he said. “Visibility is too hazardous on the market to predict anything really sure or reliable presently… Air cargo is always very affected by the international weak state of commerce and trade, and altogether average-low predictions make us necessarily careful.”
While Raynaud wouldn’t comment directly on rates, he did acknowledge that this overcapacity hasn’t favored rates and yields. “So needless to say, rates are not at the level we would like them to be,” he said.
The freighter capacity issue is markedly constrained in some corners of the world and overly abundant in other regions, making rate predictions very difficult. One thing is for sure, however, air cargo industry officials, while remaining optimistic about freighters, see the winds of air cargo capacity shifting toward passenger planes.
- Air cargo rates in Europe are declining due to weak demand and an oversupply of capacity, while costs of shipping into and out of Asia have increased. Shipping rates in Asia could see a 15 percent increase this year.
- Airlines may continue retiring freighter capacity early, leading to tight availability in some lanes.
- Airlines are moving away from operating freighters in favor of large passenger planes with cavernous belly-hold space, leaving shippers of hazardous materials and oversized goods with fewer and more expensive air transport options.