Airlines face lower yields

PUBLISHED : Wednesday, 24 July, 1996, 12:00am
UPDATED : Wednesday, 24 July, 1996, 12:00am

Air cargo yields will be further eroded in the second half of this year as new entrants to the increasingly competitive business create over-capacity in the market, a senior Korean Air official says.

Vice-president for cargo sales and marketing, Lee Jong-joo, said a number of airlines that set up separate cargo subsidiaries following the boom in the industry in 1994 and 1995 had already had a damaging effect in the first half.

Korean Air's yields to the United States - the airline's biggest freight market - had plunged more than 20 per cent over the past year, Mr Lee said, and other established cargo carriers had experienced about the same fall.

Still, he said, many airlines were continuing to add freighter aircraft, justifying the acquisitions with recent forecasts from big aircraft manufacturers that the air cargo market would grow by double-digit percentage rates over the next 20 years.

'Those years, 1994 and 1995, were very exceptional years for air cargo worldwide, and in the Asian market in particular there's been a big jump,' Mr Lee said.

'The airlines recognised, or realised, the cargo product could become a very important business to support their other business.

'But some of the Asian airlines, particularly their management, whether they like it or not, they're like freshmen to the business.

'They puzzle the market. I believe they want this a great deal in a very short time and it's like a fashion. Everybody wants to do it.

'The yield will be decreased continuously . . . the main reason is the over-capacity in the market. We have seen a huge increase in a very short period this year and last year.

'We see too much of a yield decline experienced by everybody, but still many airlines want to add capacity and set up cargo subsidiaries.' Mr Lee accused some Asia-Pacific airlines of setting up cargo subsidiaries for political reasons rather than commercial reasons, as the sector was seen by some Governments as important to national pride.

Malaysia Airlines was one which recently got into the freighter business. Thai Airways also leased a freighter and has announced plans to spin off its cargo operations in the near future.

Mr Lee also said certain US-based freight carriers launched in the past two years that had been successful would have difficult times ahead.

'Atlas, PolairAir, Evergreen, Gemini, Southern Air Transport - they all made a good success last year but I'm interested to see how it is later this year and next year,' he said.

Mr Lee added that the over-capacity problems and other global economic factors would likely kill off new entrants while established players like Korean Air, Cathay Pacific Airways and Singapore Airlines would survive the difficult times.

'Fuel prices are going up and there is the currency problem,' Mr Lee said.

'These are major factors in all parts of the world except the US. We'll have to wait several months to see whether all this freighter aircraft [leased by some airlines] will be returned or extended.

'I'm sure that this year, in the second half of this year, we will hear some crying from some of these airlines.'