South Korea: A free-trade lifeline

March saw the elimination of bureaucratic obstacles to cargo flows between the U.S. and South Korea. The two nations formally implemented the FTA that the two sides signed last year, bringing a long and laborious negotiating process to a close after five years of talks. The deal eliminates tariffs on 95 percent of each country’s goods over five years and is expected to boost U.S. exports by about $9.7 billion, according to the International Trade Commission.

On the eastbound sector, the agreement should also produce an increase in traffic, especially in consumer electronics and technology. The automotive segment, which also stands to benefit, will not show immediate growth, as the duties will be phased out over the five-year term, noted Steve Jun, general manager of airfreight for DHL Global Forwarding in Korea. Imports into Korea are expected to show significant growth in the wake of the trade pact, notes Lim Hoon, cargo manager in Incheon International Airport’s business development group.

Cargo flows between the two countries will benefit from a shot in the arm. Under the prevailing economic conditions, trade has slowed, as has Korea’s trade with the European Union, the introduction of a free-trade agreement last summer notwithstanding. Incheon International Airport, which ranks as the fifth largest air cargo gateway on the globe, suffered a 5.4-percent drop in throughput last year to 2,599,222 metric tonnes. Imports dropped 10.2 percent, exports sank 6.1 percent, and transit volume was down 2.1 percent.

The first quarter of this year brought no discernible improvement for Incheon. “We have experienced a soft first three months. A number of our key customers had softer volumes than expected,” says Steve Whittingham, Agility’s CEO for North Asia.

Under the circumstances, airfreight rates out of South Korea should be headed down, particularly with new main-deck capacity entering the picture. Korean Air took delivery of a B777 freighter and a B747-8F in February. It has deployed the former mostly on European routes, while the 747-8 has been used on flights to the U.S. West Coast and to Tokyo and Osaka. Rival Asiana is due to receive a B747-400F in May and another in June. Shippers looking for bargains are in for a bit of a disappointment, though. “Airfreight rates have been moving up because of space-control measures,” Jun notes.

David Choung, senior executive director in charge of sales and freight management at DB Schenker in Korea, warns that this development has not yet run its full course. As demand for semiconductors and electronic products is not expected to rise, overall air and ocean cargo capacity could fall by 30 percent. This drop would attain a more rational balance for the carriers, he says, adding that reduced capacity will lead to a rise in rates.

In an effort to stem yield erosion, the Korean carriers have tightened lift on sectors marked by overcapacity, such as routes to London and Paris. KAL has cut back its lift by about 15 percent, Andrew Walker, managing director of Kuehne + Nagel Korea, observes. The carrier was due to take a 747-400BCF out of service in April, but in the main, the capacity reductions have been achieved by shifting planes to other destinations with little or no overcapacity. Asiana has also pursued this strategy.

Drawn by the presence of Samsung and several other large Asian manufacturers, the smaller of the two international carriers based in Korea launched twice-weekly freighter flights to Hanoi in March. The airline was due to mount all-cargo service to Manila in April. Next, Asiana is looking to Chengdu, says Kee Chul, senior vice president of cargo sales for the airline.

Korean launched a Chengdu freighter operation last September and is now planning to develop all-cargo service to other up-and-coming cities in China’s interior, according to Rlee Song-jong, managing vice president of the carrier’s cargo marketing department.

“Korean Air plans to accelerate the development to cities in the Midwest of China, where the production bases for global IT firms are relocating,” he says.

Agility’s Whittingham has found volumes on intra-Asian sectors more in line with demand projections than the long-haul trunk routes to Europe and North America. Overall, however, intra-Asian traffic has not been markedly stronger than the long-haul markets out of Incheon, forwarders and carriers agree.

Asiana and KAL have cultivated transit traffic through Incheon, making up a substantial portion of the airport’s intra-Asian volumes. “Incheon, as a regional gateway, has a lot of importance for the Asian market. The fact that it has two substantial carriers based there gives value to Incheon as a transit point,” Whittingham says.

Aside from volumes flown from the region to Incheon to feed into the long-haul departures from there, the airport has also attracted a fair amount of cargo brought in from northern China by a combination of truck and ferry. This sea-air traffic has shrunk considerably in recent years, though, and is likely going to fall further. Choung reckons that it could drop by as much as 22 percent this year.

Agility explored the sea-air option last year and came to the conclusion that it was not an avenue to pursue. “Three, four years ago, capacity from northern China was tight, and prices were high. Sea-air made sense then. Today, volumes across the region are soft, and pricing from northern China has decreased,” remarks Whittingham. By late March, rates out of northern China to Europe were almost on a par with pricing from Incheon to Europe, he adds.

“Until the China market advances and exports pick up, sea-air volume in Korea will remain slow,” DHL’s Jun agrees.

At this point, sea-air through Incheon only makes sense to destinations like Russia, which have scant direct lift out of northern China, Whittingham concludes. One emerging market he is much more upbeat about is Latin America, notably Brazil. Large Korean manufacturers like Hyundai, Samsung and LG are either moving in or expanding their presence there, he says.

“Korea-Latin America is part of our trade lane development strategy for 2012. The challenge is lift and getting airfreight there,” Whittingham adds.

KAL sees potential in the sector. Last November, the carrier mounted three weekly flights with B747-400 freighters from its home base to Lima via Sao Paulo. Management has since signaled its intention to build up cargo operations in South America centered around a hub in Brazil. Shipments headed for South America will be vying for lift with Asian exports to the U.S. when the eastbound transpacific market eventually firms up. Predictions indicate an improvement in the second half of the year, and Korea’s FTAs are widely expected to contribute to this.

Walker figures that the automotive and textile industries will benefit considerably from the new regime. “The free-trade agreement with the E.U. has contributed to an increase in automotive imports from Europe,” he adds. A significant number of products were not affected by the free -trade regime with the E.U., as they had not faced any tariffs in the first place, Choung points out.

“Although Korea’s exports to the E.U. have been reduced by 8.5 percent during the last five months after the FTA came into effect, exports of products that have tariff benefits from the FTA increased by 14.8 percent. In fact, among the exports, products whose tariffs were removed or reduced — such as petrol products, automobile parts and lighting equipment — saw a huge increase in export,” Choung says.

The Korean government has predicted a rebound in cargo traffic, pointing to mega-events like the Olympic Games as catalysts for growth. For their part, forwarders and carriers seem to be preoccupied at the moment with honing their value-added capabilities rather than preparing for a surge in volumes.

Kuehne + Nagel recently expanded its product portfolio with the launch of KN PharmaChain, which includes wireless temperature control, a 24-hour alert system and best practice standards for facilities. DHL Global Forwarding is building up value-added services at Incheon’s free-trade zone. The company has obtained certification for security and for handling and storage of life science and healthcare traffic at Incheon. It is also in the process of getting authorized economic operator designation for Customs clearance.

DB Schenker is expanding segments like healthcare and fashion. This is now supported by a new 200,000-square-meter distribution facility in the Seoul area that opened in April. Likewise, Agility is focusing on the development of particular segments. “We want to place a greater focus on retail and consumer goods here,” Whittingham says.

KAL embarked on an overhaul of portions of its product portfolio last year, revamping services aimed at perishables, shock-sensitive freight and outsize cargo. This year, the carrier’s offerings for animal transport and hazardous goods are being revamped. According to Rlee, the former should be completed before July, while the later will be tackled in the second half of this year.

By then, airfreight volumes will be ready to once again increase, Korean operators hope.

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