Emirates’ introduction of a daily passenger B777 from Dubai to Lisbon singlehandedly more than doubled airfreight capacity from Portugal, one of the Eurozone’s weakest economies, to the Near East and Asia. Nothing could better illustrate the problems afflicting the European airfreight market and its native carriers. Demand is weak, and competition intensifying.
The growth in capacity from Middle Eastern carriers shows no signs of slowing, Chris Nielen, regional commercial manager Europe for IAG Cargo, says.
“What may prove particularly challenging is that these carriers are not just serving major hubs, but also smaller regional airports, giving them a service reach that will appeal to freight forwarders,” Nielen admits.
This will force established carriers to focus more than ever on service quality, he believes.
“Formidable competitors in the Middle East are offering huge networks and operate to high standards,” Oliver Evans, chief cargo officer at Swiss International Air Lines, says. “Maybe one or two will overreach themselves, but others will succeed. You have different ways now of flying from North America to Asia or Europe to Asia. It’s a huge challenge for European operators.”
Carsten Wirths, vice president Europe and Africa at Lufthansa Cargo, says the fast-expanding passenger networks of new-generation carriers, whose planes are cargo-friendly but whose focus “is not necessarily on earning from cargo” has meant that other carriers’ capacity reductions have proved insufficient in a declining European market.
The Eurozone crisis continues to hang heavy over those both within and outside the single currency.
“Declining inbound cargo volumes have reflected the loss in consumer confidence caused by an uncertain economic situation,” Nielen says. “The Netherlands is in the grip of a triple-dip recession. We’ve seen a particular decline in electronic goods shipments into Schiphol from the Far East as consumers hold back on those big purchases. When it comes to nice-to-have or luxury goods, people are not buying as they did a few years ago and there are scant signs of this changing in the near-term.”
Air exports from Europe are patchy and depend on the mood in the destination market.
“We have seen continued demand from China for German car parts as German cars remain popular in China, and consumers are still willing to spend,” Nielen says.
While the pharmaceutical, car parts and machinery exporters of Switzerland, Germany and Italy are likely to keep leading the way, even countries that are flat-lining at home are seeing some export success. IAG Cargo reports “steady and secure” business out of Greece and Cyprus, despite its challenging economic circumstances.
“There will always be a demand for perishables from these two countries, particularly fish, so we are less exposed to a decline in other industries. But the best we can hope for from Europe overall is modest growth,” Nielen says.
Redeployment of freighters from the Asian market to trans-Atlantic routes has helped balance capacity, he suggests. “With less capacity on these Asian routes, we hope to see more stable yields and maybe even an increase.”
Exports from Europe to the U.S. are sluggish, but certain niche trans-Atlantic markets are thriving.
“We’ve recognized increasing demand for pharmaceutical shipments to Latin America and have worked on increasing the number of Constant-Climate-enabled stations in this region,” Nielen says.
Lufthansa Cargo saw a 7.2 percent decline in cargo volume in the first quarter of 2013. Asia-Pacific business suffered the most, with an 11.2 percent decrease. LC has consciously excluded itself from competing for some business through tight capacity management. Capacity was scaled back by 7.4 percent with the aim of keeping the business profitable.
The company has predicted a significant pick-up in demand later this year, but Wirths sees the same regional variations as his competitors.
“In terms of imports from the U.S. into Europe, we have a better situation in the first months of this year than we experienced in 2011 or 2012,” he says. “The picture is different out of Asia, which is still in decline.”
The mood in Western Europe is “not really getting any better,” with the debt crisis dampening companies’ appetite for investment, he says. Turkey, Russia and parts of Eastern Europe are performing more strongly, though Wirths pinpoints problems in Bulgaria and Slovenia.
On the export front, pharmaceuticals are “developing nicely,” both to the U.S. and to emerging markets such as China. Like IAG Cargo, Lufthansa is playing to its strengths in the temperature-controlled market.
The benefit of a large freighter fleet is that main-deck services can be more responsive to fluctuations in demand than passenger networks. LC recently opened up Guadalajara with a twice-weekly freighter from Frankfurt as well as increasing its Cairo service, which is strong in both directions, from two to three per week.
Eelco van Asch, vice president Europe for Air France-KLM Cargo and Martinair Cargo, points out that Europe is not alone in its woes – though a decrease in import demand may have afflicted supplier markets. CASS figures showed a significant decline in airfreight exports globally in January and February, and while shipments ex-Europe were down 10 percent year-over-year, he points to double-digit decreases out of Mexico (-35 percent), Japan (-28 percent) and Brazil (-15 percent).
“Freight forwarders always say at this time of year that the second half will be better, but there is an element of wishful thinking about that,” van Asch believes.
He is encouraged by his group’s movement of perishables, pharmaceuticals and automotive spares, but says the technology sector has slowed thanks to fewer new product launches. Among bright spots in Europe, Spain is shipping increased volumes of pharmaceuticals and fashion goods, while Germany saw a 20 percent increase in exports to Shanghai in March.
Carriers use various performance indicators to try to determine future airfreight trends, but some traditional indicators are now proving less reliable.
“We have started to look at the purchasing managers’ index, where there is still a good correlation. This has been improving since February,” van Asch says. “Japan is back above 50 [the neutral point], and Europe has seen a slight improvement to 48 compared with 44 last summer. Airfreight volumes typically lag this index by two to three months.”
Wirths says LC follows consumer confidence, business confidence and business investment indices as a guide to overall air cargo volumes, and also watches GDP and manufacturing activity to help assess development of the export market.
Swiss also tracks business confidence.
“GDP used to have a close correlation with airfreight volumes, but less so now because political and economic problems have made trends more complex to read,” Evans says.
Swiss has been achieving “steady rather than spectacular” volume growth since the fourth quarter of 2012, but the increase in demand has not yet reflected in higher yields. He claims this is likely because the influx of capacity is exceeding demand growth.
Though outside the EU, Switzerland is geographically close to major Eurozone economies.
“Our extended home market stretches to eastern France, southern Germany and northern Italy,” Evans says.
Italian exporters represent an opportunity for third-party carriers because Italy lacks a strong national carrier with global reach, and lot of commodities are trucked to Zurich to access the growing Swiss network. Last year, the operator added Newark and Beijing to its list of destinations in 2010, joined by Singapore in May.
Despite political turmoil – and a GDP that is set to fall further this year – Italy is still benefiting from strong exports of fashion and industrial goods. Lufthansa is increasing its market share and Wirths sees further opportunities to develop the Italian market.
Pharmaceuticals and luxury goods dominate air exports from Switzerland, though Evans says the latter sector has been more volatile of late. “Exports of Swiss watches have grown strongly, but that has reversed recently. Shipments to China are 25 percent down this year, but consumer spending is increasing fast in other markets such as India, Russia and Latin America. A lot of giants are awakening – and North America is becoming one of our most interesting export markets.”
The competitive challenge is primarily at the volume end of the business, Evans says.
“We’re a small player with a specific focus on certain market segments,” he says, “so we will continue to hold our own and compete on the basis of quality and market knowledge.”