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Peter Sedgley
With all the doom and gloom over the oil price, economic downturn and airline consolidation, you could be forgiven for thinking that the outlook is grim for air cargo operators.
The market is changing. When you look at specific markets, and market segments, you see changes in all freight, air and sea, because of the changes in demand in the huge European and American consumer markets. People are not buying a brand new computer every three months, like they were two years ago or three years ago, so there isn’t the requirement in terms of urgency in quite a few product lines that there was, say, three or four years ago.
This is driving these products to sea freight, because of the lesser demand, but also because interest rates are so cheap and so therefore it’s better for people to keep their inventory on the sea than it is to have it in warehouses, because it’s not moving.
Working smarter
Where we can fight back is that at Emirates we’ve got a very dynamic network, up to something like 101 destinations globally. Another area where we gain is in specialised markets, like sea/air traffic. Dubai used to be a big sea/air conversion hub, where one leg of the journey would be by sea and then the products fly the second leg to the final destination, getting a cost advantage on freight without taking a penalty on time. But now with the cost of fuel and fuel surcharges being applied, that differential in terms of pure air out of Hong Kong, say, versus sea then air out of Dubai goes down, because the fuel surcharge is such a high component of the price. The fuel surcharge is levied once, so shippers have to pay the same surcharge whether they’re shipping sea/air or air/air. So they don’t get the cost savings, the economies that they were previously getting.
Like everybody else, Emirates is keeping a close eye on fuel costs, and the longer haul intercontinental flights obviously take a far greater beating than the short-haul flights. Emirates is looking at the super long-haul flights, assessing all the time what the passenger demand is likely to be, and looking at individual markets and beefing up routes and frequencies where there is high demand vis-à-vis the super long-haul network flights. The situation is changing every single day of the week and fuel is now becoming nearer the 50-per-cent mark of operating costs, so airlines are having to look and rationalise those routes where there is high demand.
From a cargo point of view, obviously we’re still very active in the Chinese market, such as Hong Kong and Shanghai, and are putting a passenger service into Guangzhou. Although we have not increased our frequencies into China, we haven’t decreased them either.
We are not happy with the current situation, we are obviously watching our resources, watching our costs, and we’re also having to pass on as much of the fuel increase as we can possibly do within the context of the elasticity of demand. How elastic that demand is remains to be seen, but so far, on the cargo side, we are overall performing above our expectations.
But there is always a ‘but’
2008-09 revenue for cargo will be up 22 per cent on 2007-08, providing that the oil companies don’t do anything too outrageous, as we’re already paying considerably more for fuel than we’ve budgeted. We’re having to be very, very careful what we do and we’re having to react very, very quickly in order to be able to mitigate and minimise the impact of these vulnerable factors.
But let’s put this oil thing in its true context. Each day, there are something like 84.6 million barrels of oil produced. And every day, there are something like 1.3 billion barrels of oil traded. So speculators are accounting for probably USD 30 to 50 a barrel. Take speculators out of it and the price comes back down. Why are the speculators in the market? Because money’s cheap, they can’t make the returns on the stock exchange, they can’t make it in property, so they’re putting it in commodities such as oil and gold at the moment. While we’re at the mercy of this type of activity, who knows where it’s going. So you can see all sorts of games going on, which we have no control over, nobody has any control over, even the governments have lost control: nobody knows what the hell’s going on.
At the moment, which is very atypical of the way that way like to do business, we are managing the business on a day-to-day basis because we don’t know what’s round the corner.
The carbon issue
I feel it’s time that we as the aviation industry started being a little bit more proactive about the proposed carbon taxes, the way they’re going to further damage the industry. It seems as though we lurch from one methodology of the regulators raping the aviation industry to the next methodology of raping it.
The proposed carbon taxes are going to be levied on the weight of aircraft, which is archaic and is totally unfounded. But the airlines are a good target, so the legislators or the politicians, in their infinite wisdom, always target the A380. This is the most fuel-efficient aircraft that has ever been produced and is using absolutely the most up-to-date technology, but is a big heavy aircraft and will incur the highest level of carbon tax, the way it’s currently proposed.
So if you operate an old, inefficient aircraft that pumps out all sorts of noxious gases, because it’s lighter, you are being favoured. Airlines are not going to be taxed on the carbon emitted per person per hundred kilometres, but instead on the weight of the aircraft, which is utter nonsense. The regulators will be penalising the proactive and encouraging and promoting the decrepit.
Dwindling capacity, increasing share
Airlines have tended to use older aircraft that were always only marginally viable, which are now not operationally viable and are being parked up. Compared with airlines like ourselves, with an average fleet age of 65 months, we are in good shape. There are many airlines that are operating older aircraft. The commercial viability of the 747-200 freighter is now coming very, very much into question with the current fuel prices, and that’s why a lot of capacity is being parked up.
We are achieving our targets, we’re ahead of our targets in terms of the volumes that we are carrying. Obviously where we’re being hit is the cost to do that, to perform that transportation carriage. We’re not cancelling our aircraft orders, but we are rationalising their deployment. Therefore we are still planning to achieve our goals as before. So for next year, from a cargo perspective, we are planning 22 per cent growth in terms of revenue, which equates to something in the order of 18 per cent growth in tonnage. The tonnage will go up by about 12 per cent this year.
US growth is slowing down, European growth is slowing down, but the Chinese, Middle East and Indian growth is actually surpassing what the forecasts were, so if you take our geographic position and our route network, we are capable of taking advantage of this growth. On a worldwide basis and especially with the parking up of American domestic capacity, previous IATA projections of a high of 6.8 per cent growth have been revised down to about 5.3 per cent. So globally there is an impact but if you look regionally, and especially when you take into consideration that capacity is being parked up, there are going be opportunities for people. There may be a bit of a blip in terms of a bit of a downturn, but overall we are confident that over the next 10, 12 years, actual overall market growth will be on track for more than doubling.
All things being equal, we’ll be carrying over the 1.4 million tonnes for the financial year. Freight revenue increase will be about 22 per cent, with freight accounting for about 19.7 per cent of the total transportation revenue.
Peter Sedgley is the Emirates’ senior vice president, cargo commercial operations.
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