As the world subsequently learned, these were roads to nowhere. The global financial crisis exposed massive holes in the public finances of the so-called “PIIGS” economies. Portugal, Ireland, Italy, Greece and Spain have terminated their lavish public expenditure programs, and consumers have slashed their personal spending. Jobless numbers mount. Further large-scale bailouts may soon be required.
Politicians are talking about the crisis, but are not dealing with it, believes Nikolas Dombrowski, Geodis Wilson’s Hamburg-based airfreight director. EU auditors have worked to save the sinking economy by imposing unpopular reforms, but are losing patience with Greece for its failure to follow conditions laid down as part of its financial bailout last year. Dombrowski argues, however, that officials lack the tools to enforce sanctions on profligate member states.
“It’s difficult to encourage them to change their behavior. Sooner or later, Greece will default. The question is: Who is next? Could Portugal or Italy follow?” he asks. “We in Germany — and to a certain extent, the French — have got to fund the euro now, but we’re getting the most out of the common currency. More than 60 percent of Germany’s entire export volume goes to the EU, so we have to keep the door open to those markets.”
According to the financial analysis firm Markit, manufacturing activity in August across the members of the Eurozone shrank for the first time in two years. Translated into freight volumes, the International Transport Forum found a significant second-quarter slowdown.
Air trade volumes in the EU’s member states, which had grown in February to 15 percent above 2008, pre-recession levels, shrank back to just 9 percent above pre-crisis levels in June. The ITF also reports that trade by air between China and the EU is decreasing, with only India countering the downward trend.
Even historically successful Eurozone trading nations, such as Ireland, will have a hard time exporting their way out of trouble. Analysts believe the government will soon divest its remaining 25-percent stake in part-privatized Aer Lingus as part of a €5 billion sell-off of state assets.
The government has kept its stake predominantly to protect Aer Lingus from a hostile takeover by its Irish rival Ryanair, which owns almost 30 percent of the carrier. It is now thought that Ryanair would be unable to take majority ownership on monopoly grounds even if it wanted to, given that the EU blocked a proposed merger between Aegean and Olympic earlier this year.
After receiving an €85 billion bailout package from the International Monetary Fund and the EU in 2010, Ireland’s economy grew by 1.3 percent in the first quarter of 2011, prompting foreign minister Eamonn Gilmore to describe the stimulus as “the recovery story of the Eurozone.” Yet Irish manufacturing activity shrank for the third month in succession in August and economists predict that the country’s main UK, U.S. and European export markets could continue to slow into the second half of 2012.
After a “fantastic” first quarter, Ireland’s leading GSA, International Airline Marketing, saw a significant drop off in June and July. “But we’re still 6-percent ahead year on year, after growth of 4 to 5 percent in 2010,” says managing director Ian McCool.
Airfreight forwarders adjusted rapidly to the impact of IBM and Dell withdrawing from production in Ireland 18 months ago, McCool says. There have been substantial new export flows, with shipments of pharmaceuticals and medical devices running particularly strongly to the U.S.
Belly-hold capacity direct out of Ireland on passenger services is sufficient to meet forwarders’ needs, according to David Sadlier, business development and solutions director for Kuehne + Nagel in Ireland. Freighter services have diminished in response to the shrinkage in computer hardware manufacturing, but shipments only have to be trucked to hubs in London or Paris to pick up an all-cargo flight if they are hazardous or bulky.
K+N has targeted pharmaceutical multinationals in the last five years and continues to pick up high-tech export traffic despite the high-profile plant closures, Sadlier says. However, the retail sector that fuels imports is weak. Instead of sourcing directly from Asia, many retailers have reverted to a more traditional business model and are buying from third-party suppliers who feed the market by road and sea from Europe.
“Take away the debt, and we could export our way out of this,” Sadlier says. “Ireland has the same management, ingenuity and drive that it had before. If the debt crisis is resolved, we can flip over faster than Europe’s other troubled economies.”
One solution being proposed to stem the crisis is to create deflation in the Eurozone by establishing two parallel currencies. If this doesn’t happen, Sadlier foresees the euro breaking up and Europe reverting to national currencies; this would be “a total disaster,” according to Lefteris Kaltsas, president and managing director of Greek Air Cargo, one of the largest Greek-owned airfreight forwarders.
Shippers in Greece airfreight small quantities of garments and shoes to the U.S. and other markets, and Kaltsas says local factories producing food and electronic goods have turned to manufacturing for export, as local demand has slumped. Some companies have relocated altogether to take advantage of lower taxes and cheaper labor in neighboring countries. Most of their production no longer flies directly from Greece, where the options have become more limited. Aside from the integrators, the only scheduled freighter flying into Athens, for example, is a weekly Lufthansa Airbus A300.
Air exports from northern Greece are trucked to Budapest or Vienna, which have attracted Macedonian and Bulgarian traffic away from Athens, thanks to the countries’ competitive pricing and greater range of destinations, Kaltsas says. While all the region’s hubs have lost volume, those carriers still serving Athens face higher handling costs.
To unify the market, GAC has a daily road feeder service linking Athens with Thessaloniki in the north of the country. Kaltsas is looking to develop an international service on the back of this in early 2012, consolidating shipments from Macedonia, Bulgaria and, eventually, Romania.
Alexios Sioris, cargo development manager at Athens International Airport, says cargo tonnage has underperformed even his conservative expectations, falling 11 percent in the first sixth months of the year. “It is questionable whether we will reach 90,000 tonnes this year. Only three years ago, traffic peaked at 122,000 tonnes. With origin-and-destination traffic, and especially imports, shrinking significantly, the only thing we can do from an airport perspective is to encourage transit traffic and make joint efforts to generate new flows.”
The International Monetary Fund has warned that the €110 billion rescue package agreed for Greece in May 2010 will not be enough unless the government clamps down on tax evasion. And Athens, like Dublin, may be forced into a fire sale of state assets.
Geodis Wilson’s airfreight volumes in southern Europe were down 3 percent in the first six months of this year, says Nikolas Dombrowski. Results for this region, comprising Spain, Italy and France, contrasted with central Europe and the Nordic region, which performed well for Geodis. Central Europe (Germany, the Netherlands, Belgium and the UK) was up 24 percent, confirming the two-speed Europe.
Italy has seen a 9-percent increase in air exports so far this year, led by fashion, leatherware and luxury goods, but with a solid underpinning of auto and motorcycle parts. However, a slowdown in industrial projects in markets such as Turkey and the Middle East has hit Geodis hard; its share of what remains a highly fragmented market has fallen back from 1.6 percent to 1.4 percent.
Lack of local capacity meant that 80 percent of Italian export airfreight was once trucked to airports such as Frankfurt, Paris and Brussels. The figure is currently less than 45 percent, with carriers such as Korean Air, Singapore Airlines and Emirates now operating freighters directly to Milan. This, and the fact that airfreight rates are lower than in Germany, has helped prevent modal shift. It’s feasible for exporters in eastern Europe to truck to Italy instead of using local airports such as Prague, Dombrowski says.
Geodis has also lost airfreight market share in Spain, suffering a 19-percent volume decrease in the first half, while the overall market grew by 9 percent. “We lost some business controlled from Latin America and Asia,” Dombrowski says. “Now, we’re coming up again, and I’m positive we can end the year level with last year.”
Spanish importers with a poor payment record will happily change suppliers in a bid to extend their credit line. Forwarders buying their capacity from airlines on fixed contracts were badly wounded by falling spot rates that would have meant taking a loss of anything from HK$6 to HK$9 per kilo, and this forced Geodis to reject textile import traffic.
In happier times, carriers were similarly lured by the prospect of massive fashion imports into Spain and tried operating freighters direct into Zaragoza, Dombrowski says. Some have been forced to withdraw from this superficially attractive market.
Problems look set to continue for the Eurozone if strong economic recovery doesn’t happen soon. There is no appetite, or funding mechanism, for bailing out larger economies should they fail.
A full fiscal union of EU states is unacceptable to voters in those countries with stronger balance sheets, but the behavior of the money markets suggests this is inevitable for the euro to survive. If even one Eurozone member defaults or is forced out, then surely the great euro project will go the same way as all history’s previous attempts at currency union.