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David Evans

Once the seemingly unglamorous end of the airline industry, cargo has become a sexy topic.

Having recovered from the financial crisis, Asia has once again regained its position as a mecca for cheap raw materials, labour and products.

Combine this with strong demand from Western nations and it is no wonder the region's airlines and airports have plans for fleet and facility expansion to cope with the growth in freight.

China's long-awaited entry into the World Trade Organisation is also fuelling the large-scale investment by both private and government organisations into aircraft, logistics centres and infrastructure.

World air cargo is a US$40 billion business and a good chunk of that is being generated from the Asian freight market.

The forecast is that world air cargo traffic will grow by an average of 6.5 per cent over the next 20 years, compared with 8.2 per cent for intra-Asia traffic.

Trade between Asia and Europe is predicted to rise at 7.3 per cent while trade between Asia and North America will come in at a 7 per cent growth rate.

Seattle-based aircraft manufacturer Boeing has forecast that freight growth will outpace passenger growth in the region, and said that it would roll out the freighter version of its new long-range, greater capacity 747X stretch before a passenger version, if demand warrants.

Boeing has also said the fleet mix between freighter and passenger aircraft will change from today's 40 per cent and 57 per cent respectively, to 44 per cent and 55 per cent by 2019.

Europe-based Airbus Industrie has projected that world airlines will need about 15,400 new aircraft worth an estimated US$1.3 trillion over the next 20 years.

This will include some 14,700 passenger aircraft with more than 70 seats and more than 700 freighters for the period 2000-2019.

Airbus and rival Boeing are competing vigorously for orders from Asian carriers who are now shopping for new jets to meet rising travel and cargo demand.

Among local carriers expanding their fleets in anticipation of the expected growth is Dragonair which is to add 10 aircraft over the next six years in a move expected to cost about US$600 million.

In February, Dragonair also announced plans to enter the all-cargo freighter market and said an unspecified number of short and long-haul aircraft had been ordered.

The airline indicated that its all-cargo operations would focus on routes to Europe and the United States, extending the carrier's reach beyond Asia.

Hong Kong bed-fellow and SAR flagship carrier Cathay Pacific Airways announced plans in May to spend more than HK$8 billion on nine wide-bodied aircraft over the next 18 months, primarily for its regional network.

James Edgar, regional director, marketing commercial aircraft group at Boeing, said the strength of the North American and European economies importing Asian-made goods and raw materials was the main driver of freight growth.

Mr Edgar said regional airlines had risen to the challenge by investing in freighters and efficient cargo infrastructure.

'There will be an increasing reliance on freighter airplanes by all carriers since timing and reliability are important to cargo customers. Regional carriers must streamline the process and be sure that cargo is not just another by-product,' he said.

Despite a heavy reliance on the strength of the US and European markets in maintaining steady freight growth, Singapore-based John Casey, director of Asian-transport research at SG Securities, said intra-Asian trade should be sufficient to support the local market should foreign economies begin to slow.

'If the US should level out, then you won't get the 10 per cent growth we've been seeing,' Mr Casey said.

With a slowdown in overseas economies still a distant spectre, regional airlines are facing a more immediate threat from the on-going oil-price saga.

However, the effects of the impact are mixed.

Increasing oil prices may be hurting weaker airlines in the Asia-Pacific region but purchase hedging - fixing price against future fluctuations - has dampened the impact on some local carriers.

Despite fuel bills for Cathay and Taiwan's second-largest airline EVA Airways jumping 60 per cent in the first half of the year, both airlines reported soaring profits on the back of returning passenger numbers and improving cargo revenues.

According to Mr Casey, there is plenty of crude oil around but because of production decisions at refineries over the summer, it gives the impression of a shortage and so drives up the market.

Mr Casey said this pressure on airlines should ease in the early part of next year: 'Our view is that we are going to see some tame prices in 2001. Significantly lower than they are now.'

With the exception of Chinese carriers that are required to buy fuel from a state monopoly at fixed prices, carriers that do not hedge have fared the worst and as a result are being forced to raise prices.

This month, Korean Air Lines increased its cargo rates to the Americas by 10 per cent to 15 per cent. All Nippon Airways, Pakistan International Airlines, Asiana Airlines and Philippine Airlines have also raised selected cargo prices. Air New Zealand raised its air fares on domestic and Australian routes by an average of 7 per cent. Philippine Airlines said it would raise domestic fares by 4 per cent to 9 per cent.

Not to be outdone, the region's airports are also gearing up to cope with the extra demand, particularly in the light of China's imminent entry into the WTO.

High investment in new or planned airports in Hong Kong, Kuala Lumpur, Bangkok, Seoul and Singapore has been stepped up as all target the much-anticipated increase in hub traffic.

This is occurring against a back-drop of new or enhanced airports in Shanghai, Beijing, Guangzhou, Taipei, Macau and others planned for Japan.

According to international rating agency Standard & Poor's, solid demand is going to buoy the overall outlook on the Asian airport industry for some time.

'Individual operators, however, will become increasingly vulnerable to market dynamics as airlines seek out low-cost, high-quality service providers in an ever-more option-filled region,' it warned.

S&P said that not only were airports boosting capacity to meet projected growth, they were under pressure to assemble a package of airport charges and non-aeronautical services attractive enough to entice airlines to establish lucrative route hubs at their facilities.

Failing to do so could marginalise them, as the competitive field fills up with upstarts:  'Hence, while demand is projected to flourish for some years to come, not all airports will enjoy the same degree of success.'

Graphic: anal29gbz



Cargo carries weight