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Mon 1 Jan 2007 02:00 PM

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Fly away

The air cargo industry is currently enjoying a growth period in the Middle East. Although the future looks bright, the industry must address a number of key challenges, which could prove turbulent.

Air cargo companies are currently experiencing a period of increased profitability and growth. The driving factor behind this industry boom, according to Chris Morgan, lead analyst for Datamonitor's logistics and express research unit, is a healthy economic climate, which has encouraged greater levels of global trade.

Whilst industry experts are predicting the growth in global trade will continue in the future, the Africa and Middle East region has the potential to capture a larger share of the market, driven by the ongoing investments in Dubai.

Nevertheless, Morgan feels there are still significant challenges that the industry must face - namely, the potential shifting of cargo to dedicated freighters, increased security measures and the threat of further increases in fuel prices. "These factors must be tackled, if turbulence is to be avoided," he says.

The first half of 2006 has seen a continual stream of positive news from companies with aircargo divisions. As shown in table 1, for example, Air France - KLM announced that aircargo revenue had increased 11.9% for the year ending March 31st, compared to the previous year. In total, the company reached EUR2.9 billion in aircargo revenue and transported 1.4 million tons of cargo.

These promising figures have also been echoed by statistics from the International Air Transport Association (IATA). They show that first quarter aircargo traffic has improved year-on-year, the growth being spread across all regions. Airline companies in Europe reported an aggregate year-on-year rise in Freight Tonne Kilometre (FTK) of 2.2%. Their North America equivalents recorded an increase of 7.2% and strong growth was also registered in Asia-Pacific (6.3%) However the largest improvement came in the Middle East area (16.6%), as can be seen in the table 2.

"There are also further signs that bode well for the future of the air cargo market and the players within it," says Morgan. "Although recent economic data has been less than impressive due to inflationary worries, global economic growth has recovered well since its collapse in 2001. This improvement has filtered through to global trade, and with consumers continuing to demand goods manufactured in the Far East, this trend is set to carry on for the foreseeable future."

Efforts to control costs also seem to have been successful, which will help the future financial performance of the cargo companies. "There is no doubt that airlines have been severely hit by the rapid and prolonged increase in oil prices," continues Morgan. "However, this has been tempered by improvements in fuel efficiency, as well as the effective utilisation of fuel price hedging."

Indeed, it seems non-fuel measures, such as improving labour and aircraft efficiency, have also helped. Statistics from IATA show unit costs excluding fuel have fallen 9% since 2001. Moreover, the introduction of the new Airbus A380 ‘superjumbo', albeit much later than scheduled, is set to help boost airfreight and logistics companies' margins, due to its larger capacity and greater fuel efficiency. Consequently it would seem that the industry is set for a period of strong growth.

Crucially though, the Africa/Middle East area has the potential to capture a larger share of this forecast growth. Key to this development will be the role that Dubai will play in diverting current trade routes. A logistics ‘super-hub' is being constructed in Dubai in a newly designated area consisting of the Dubai Logistics City (DLC), the Jebel Ali International Airport (JXB), and an expanded Jebel Ali Port. When completed in 2007, the airport will have the capacity to handle 120 million passengers and 12 million tonnes of cargo annually. Moreover, all facilities will be constructed for use in conjunction with the new Airbus A380 aircraft.

"The DLC will become the world's largest multi-modal logistics hub for air, sea and road services," says Morgan. "Spread out over 25 square kilometres, customers will have easy access to both JXB and the Port, allowing inter-modal transfers without further custom clearances and associated delays. The DLC will also be linked by a scheduled shuttle service to nearby Dubai International Airport."

Global companies are certainly showing an increased interest in both the project and the region as a whole. For example, DHL has continued to record impressive year-on-year growth at Jebel Ali since it began operating there, resulting in the opening of an express logistics centre in the area.

The attraction of the UAE to a company such as DHL is its geographic position, allowing access to Europe and Asia, while also being a gateway to the Middle East. "If the DLC venture proves to be a success, Dubai's ambitious plans should encourage further investment in expansion projects within the region. As a result, this could potentially make the UAE the main route for global trade with the Middle East, as well as becoming an important hub for trade with Africa, Eastern Europe and India," says Morgan.

However, there are still three significant challenges for the air cargo industry to face. The first is a potential increase in price for product manufacturers, due to cargo switching from passenger planes to dedicated freighters. Currently, there is a mismatch between passenger and cargo routes. While the latter is seeing its fastest growth rates in all of the Asia-Pacific trading lanes due to the exports emanating from that region, passenger numbers on these routes are not rising as quickly. In addition, while the introduction of the A380 will increase the number of passengers flying by at least 30%, the rise in air cargo space will be far less proportional.

"The simple solution would be to shift cargo from the bellies of passenger airlines to space in dedicated freighters. However, this is normally a more expensive option for companies," says Morgan. "Furthermore, cargo holds and freighters are usually full when outbound from Asia, but relatively empty on the return leg due to the different locations of the manufacturers (Asia) and consumers (the rest of the world) of the cargo."

The second major challenge for the industry is that of security. After the terrorist attacks of 2001, measures for both passengers and cargo were increased. While this causes additional check-in time for passengers, the effect on cargo has been more severe. "US regulations now state that any pallets being moved must be tagged by category, making the process vastly more complicated. This can easily trigger fines or, more seriously, delays, which is a particular problem when there are limited flights for the cargo to go on," says Morgan.

The final problem is a potential rise in fuel prices, due to the maturing of existing hedging programmes. However, this should be counter-balanced by efficiency plans already in place, including the move to 100% e-ticketing and the increased use of RFID technology.

"Nevertheless, there are still severe challenges for the industry to face," concludes Morgan. "As such, while the recent air cargo statistics paint a healthy picture, there may well be some turbulence in the near future."

Datamonitor's strategic report "Air Cargo Benchmarking and Profiler," enables companies to ascertain opportunities in their market by highlighting and analysing current and future trends, as well as comparing over 20 of the major air cargo players in the global market.

For more details on the report, please email Krishna Rao (
krao@datamonitor.com

).

Vox Pop: Air Cargo

“The primary reason for the aircargo boom is high oil prices. Governments have decided to invest the money from the oil boom in infrastructure, such as roads, housing and high rises. All these projects have an element of airfreight involved. The future is bright, provided the Gulf countries and surrounding areas continue on the spending spree that we have recently witnessed. As long as some of the big contracting companies keep their project completion deadlines unfulfilled, there will always be a continued need for airfreight.”

Dirk van Doorn, commercial manager for DHL’s express freight and logistics.

“One of the reasons for the aircargo boom in the central location of the Middle East to the rest of the world. Two thirds of the world’s population lives within a seven-hour flying time of Dubai. Additionally, this region has always been a trading hub and oil income continues to rise, which has allowed countries in the Gulf to invest in infrastructure development projects. Changes in the region’s cargo industry will depend on unpredictable factors such as fuel prices and political stability. Saying that, Dubai’s position in the region allows us to make projections with strong confidence.”

Ram Menen, senior vice president cargo for Emirates Airline.

“Labour costs, the presence of trade and tariff agreements and the growing trend for governments in the region to invest and support privatisation, has spurred traffic growth. Overall, there is more focus on cargo in the region. A number of Middle Eastern carriers have set up cargo as an independent unit, with its own profitability targets and an increasing number of airlines are consolidating cargo in their hubs and re-distributing worldwide.”

Dr Majdi Sabri, IATA’s regional vice president for the Middle East and North Africa.

“In the Middle East, many of the major airports, such as Dubai, Abu Dhabi and Qatar, are investing significantly to upgrade their handling services, which our customers will subsequently benefit from, as service levels further improve. We are also investing in infrastructure to increase and improve our service offering and give us more handling capacity for our premium products. Our new $20 million premium handling facility, called Premia, at London Heathrow opens in September. It will enable further growth in our courier, mail and express sales, especially from the Middle East.”

Ian Barrigan, British Airway’s area manager for the Middle East, Southern Asia and Australia.

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