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Tue 3 Jan 2006 04:00 AM

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Freight Expectations

The Gulf is seeing a huge expansion in air cargo facilities. However, with smaller airports already being squeezed, will there be enough business to go round?

|~||~||~|Anyone who has tried to find a parking space at the Dubai Cargo Village can tell you that air cargo in the Middle East is growing at a phenomenal rate. The cargo terminal is hive of activity, full of lorries and vans on one side, and with freighters and passenger planes on the other.

Any free space left over is probably the site of construction work, as the new Mega Cargo Terminal begins to take shape. However, this scene is being repeated across the UAE and the rest of the Middle East. Abu Dhabi, Sharjah, Bahrain and Doha all have sizeable air cargo sectors and plans to build yet more facilities. Dubai trumps them all, though, with its huge plans for the Jebel Ali Airport City. However, with so much air cargo capacity being added in the local market, and with smaller airports already feeling the pinch, will there really be enough demand to satisfy all of this supply?

It is undeniably true that air cargo traffic has been growing at an enormous rate at many airports in the Middle East. Dubai, for instance, which has racked up double-digit growth for years, was expecting to handle 1.3 million tons in 2005, up nearly 15% on 2004. Other airports reported similarly growth patterns, if from smaller bases. Abu Dhabi was looking at growth of nearly 30%, driven by the arrival of Etihad Airway, in particular. Bahrain was reporting an increase above 20% in cargo traffic for at least the fifth year in a row, while Doha Airport was also seeing strong growth driven by Qatar Airways Cargo.

Ali Kombargi, director of Sharjah Airport’s freight centre, who was forecasting a 35% increase in traffic for 2005, speaks for many of his regional counterparts when he says this growth ‘give us pleasure and headaches at the same time.’
“I don’t know if we will be able to maintain this growth, as we will have had almost 90% more [cargo] than what we had in 2004… [and] we have not had a 90% increase in personnel to cope with the extra traffic,” he adds.

The rapid growth of the region’s air cargo sector is expected to continue. IATA, for instance, predicts an average annual growth rate (AAGR) of 5.1% for air freight flowing from Europe to the Middle East up to 2009. On the Asia/Pacific to Middle East sector, it is even more buoyant, forecasting an AAGR of 8.8% over the same timeframe, against a global AAGR of 6.1%.

This growth is being driven by a range of factors, including the open skies policies operated in the UAE and other countries, the reconstruction of Iraq and Afghanistan and the general growth of the region, particularly Dubai. “If you look at Dubai today, it is a hub for so many different industries, so many exhibitions, and there are so many people coming in and buying from Dubai,” notes Ali Al Jallaf, director, Dubai Cargo Village. “We are not manufacturing, but we see a lot of people coming in from Africa, the Middle East and India to buy goods.”

Airports across the region are ramping up their cargo capacity to try to grab a slice of this demand. Kuwait, for instance, only has limited air cargo facilities at the moment, but the government is planning to build a new cargo village. Bahrain also has plans to develop a cargo/logistics zone on the northern side of its airport, which will probably have dedicated freighter parking aprons and facilities.

In Doha, meanwhile, Qatar Airways is preparing for a huge boost in its cargo facilities. The present airport only has a small amount of cargo space, including a 32,500 m2 terminal for the flag carrier. In 2008, however, operations will move to the new airport, where Qatar will have its own semi-automated 700,000 m2 facility. “We have outgrown the [current] airport facilities,” says Bruce Gillette, QR’s general manager, cargo. “Qatar Airways has had explosive growth over the last three or four years.”

The UAE, however, is the site of the biggest cargo developments. Sharjah, for instance, only opened terminals 4 and 5 of its freight centre two years ago, but the airport is already building new warehouses. It also has plans for a sixth terminal and for six additional freighter parking spaces. Abu Dhabi also has huge expansion plans for both its passenger and cargo operations. The current airport is being expanded, and it will soon be replaced by a new midfield terminal complex, which will boost 80 contact gates and sizeable cargo facilities.

The biggest player in the local cargo market though is Dubai, which also has the biggest expansion plans. These begin at the current Cargo Village, where a new Mega Cargo Terminal is under-construction. This facility, which will be used by Emirates SkyCargo, will raise the airport’s total cargo capacity to 2 million tons per annum. However, the Cargo Village may soon be dwarfed by the new 25 km2 Jebel Ali Airport City, which is located 40 km away, next to Dubai’s main seaport and industrial free zone. The full plans for this facility, which will launch next year, is for an annual capacity of 12 millions tons per year. The six runway airport is scheduled to be built up in phases over the next 45 years, but the backers are already reporting strong interest. In Dubai Logistic City, for instance, which will be the heart of the airport’s cargo sector, a total of 1.4 million m2 of land had been leased to 35 companies by the end of November 2005.

Jebel Ali Airport will be nowhere near its full size for many years, but the potential surge in capacity is already being felt at other airports. At Dubai Cargo Village, for instance, plans for two more mega cargo terminals have been put on the back burner. “We will first see the reaction of Jebel Ali, which will be part of the total air cargo development in Dubai,” says Al Jallaf.

Plans for the operations and management of Dubai’s two airports are still to be finalised, but Al Jallaf is keen to stress that they will work together. This may well see the two facilities coming under the same management structure, and it will certainly include strong transport links between the two sites, either a bonded trucking service or a railway. “I do not know why people assume the Cargo Village and Jebel Ali are in competition,” says Al Jallaf.

“They are not in competition. It does not matter if the cargo comes here or goes to Jebel Ali… Jebel Ali is complimentary to the Cargo Village,” he adds.

For other local airports though, Jebel Ali, along with Dubai’s wider surge in cargo capacity, clearly is competition. How they will react is unclear, partly because of the lack of details about the timeline for the Jebel Ali project and about how the two Dubai airports will co-operate. “We don’t know,” says Kombargi. “Up to now, nobody knows what Jebel Ali Airport is really going to be like.”

“If Jebel Ali is going to be just for freighters, how is the cargo going to go from Jebel Ali to Dubai? Shippers are going to have to see this and to see how [reliable] the service is,” he adds. “Meanwhile, we have to work as normal. We know there is a big investment there at Jebel Ali Airport, but our services will remain the same and we hope our clients stick to us.”

However, the new Jebel Ali airport may also create opportunities for other local airports by drawing in more cargo for the entire region. “I really hope that once the Jebel Ali airport is functioning, they will realise that they can use Sharjah as an extension of Dubai Airport,” says Kombargi. “There are many ways that we could work together.”

Sharjah already does work with Dubai airport in a number of ways, including receiving goods for Dnata, so it has benefited from both its own growth and from that of its neighbour’s. However, other airports within the UAE have not been as fortunate. Both Fujairah and Ras Al khaimah airports, for instance, have seen their cargo traffic fall by at least 20% over the last 12 months. A range of factors has attributed to these dramatic dips, predominately the fact that both airports are small facilities with no home carrier. However, their declines certainly suggests that the ‘build it and they will come’ approach that seems to guide other airport projects in the region may not hold water.

Some of the issues that have hurt Fujairah, for instance, may also affect larger airports. In particularly, V. Suresh, Fujairah International Airport’s cargo supervisor, points to tough competition from other airports that are able to offer cheaper rates, and a drop in demand to key destinations, particularly Russia. “In December, we used to be hectic with Moscow flights, mainly consumer electronics, but these are all going direct now,” he says.

The rising price of aviation fuel is also forcing customers to look at alternative means of transportation. In particular, road haulage has become a much more viable option for intra-Middle East traffic since the formation of the GCC Customs Union two years ago. Previously, goods had to be flown just to avoid lengthy customs checks at land borders. However, the introduction of the customs union is leading to an increase in road traffic within the Gulf and to the Levant, mirroring that seen in Europe after the launch of the single market there. “We used to have loads to Oman, Kuwait and Doha, for instance, but these all now go by truck,” says Suresh. “This used to be good business for us.”

The use of road transport within the region is only likely to grow more, especially now that the big integrators are starting to invest heavily in developing regional road networks. TNT, for instance, is aiming to double the revenue generated by its Middle East road network within the next three year. Aramex is similarly investing in building a trucking hub in Jebel Ali and a region-wide trucking network. “A lot of freight in the Middle East is moving from airfreight to land freight,” says Iyad Kamal, vice president, logistics & ground services, Aramex.

The rise of intra-regional road haulage will obviously not be the death knell for the local air cargo industry, which is heavily reliant on long-haul transhipments, but it could well slow growth. It will also level the playing field in a way, as airports with smaller home markets will be more easily able to truck goods to neighbouring cities and countries.

This is particularly true in the Gulf, a small region with dense populations centres. However, the trucking companies will also go where the business is, which is drawing them to large airports that can offer volumes. Dubai, for instance, now has regular trucking services across the GCC and up to Egypt and the Levant, which are further spreading its catchment area. “The trucking system is helping us get more airlines coming in,” says Al Jallaf.

A more significant threat to existing airports could be stability in Iraq and Afghanistan. At present, reconstruction efforts and the US military presence in these countries is sucking in huge amounts of air cargo, which is transiting via the Gulf. However, in the longer term, this traffic is sure to slow and/or go directly to Basra, Baghdad and Kabul. “The Iraqi market and the Afghanistan market are ad hoc,” says Riyadh Al Maskati, cargo manager, Bahrain Airport Services (BAS). “This [freight] can come and go, and it is not a solid base for a business.”

Sharjah has also benefited from the flood of traffic into Iraq and Afghanistan. It has, for instance, handled the new Iraqi currency, the ballot boxes for the Iraqi elections, and a host of other UN and US shipments. However, Kombargi is aware that this traffic may one day come to an end, so the airport is actively looking to grow traffic to and from other markets. “Maybe the Americans will be staying [in Iraq] for 10 years, or maybe there are staying for 10 days, we just do not know,” he says.

“We are therefore now concentrating on the traditional destinations that we used to have,” he explains. “For instance, we used to be very strong towards Asia, but these destinations are not now as strong as they used to be. However, we feel this is regular traffic and we should concentrate on it more.”

Alongside these external challenges though, the sheer growth in capacity will also create its own challenges. Even assuming that the region’s overall air cargo traffic grows at a generous 10% AAGR, it is clear that the airport capacity is growing much more quickly. As such, there may well be some airport cargo managers looking at empty terminals in the years ahead. “I think the traffic will be there, but whether it will keep everybody happy is very difficult to judge,” says Al Maskati.

“Not everybody is going to survive,” adds Gillette. “Some of these airports will be under-utilised, as we do not have the market here within the Middle East to support the growth you are going to see.”

Which airports will be forced to scale back on their ambitions remains to be seen, but it is clear which factors will drive future growth. The biggest will undoubtedly be a strong home carrier that is able to generate cargo, while also providing the onward connections needed to turn an airport into a hub. Emirates SkyCargo, for instance, accounts for more than 50% of the traffic flowing through Dubai Cargo Village, while Etihad and Qatar Airways also generate significant chunks of business in Abu Dhabi and Doha, respectively.

Bahrain, meanwhile, is home to both Gulf Air, which is increasingly focusing on cargo, and to DHL’s regional hub, which gives it a solid foundation. Airports without home carriers to drive traffic into them can clearly suffer. Fujairah, for instance, did have an all-cargo carrier called Connect Air, but this has long since been grounded. A resumption of services may be the only way to kickstart the airport’s cargo business. “A UAE freighter service is my dream,” says Suresh.

Sharjah also does not have its own scheduled cargo carrier. However, it is home to a large number of charter operators predominately flying Russian aircraft, as well as being a mini-hub for Martinair. It also attracts a large number of scheduled freighter operations, including Lufthansa, which has handling rights at the airport, Cargolux and Khalita Air. However, none of these airlines is tied to the airport indefinitely, and none can provide a range of direct connections from Sharjah to rival those on offer at Dubai or Abu Dhabi, for instance. As such, the emirate is thinking about launching freighter services through Air Arabia, its low cost airline, which currently does not carry cargo. “This is going to be the next step,” says Kombargi. “Air Arabia has always been thinking about operating freighters and they are looking for the right aircraft.”

“However, Etihad is not leaving any destinations undiscovered. Their freighters fly everywhere,” he adds. “Basically, we wanted to do what Etihad has already done, and I think they are ahead of us. They also have more potential and more funds,” he admits.

In terms of attracting non-home carriers, prices and services will be the key to success. Charges will be particularly problematic for airports, as handling in the Middle East is already fairly cheap by international standards. As such, any potential price war would only hurt the airports. “Competition is not just cutting rates,” notes Kombargi. “If you cut your rates, the other [airport] will cut their rates, and the airlines will take advantage of that.”

Services will therefore be vital for competing airports, ranging from efficient handling and quick customs clearance to good IT systems in the warehouse. Larger airports may have an advantage here, as they are able to invest in such services. Dubai Airport, for instance, has built an express handling centre, the much-delayed Flower Centre, which should open soon, as well as helping the Emirates Group’s IT arm, Mercator, develop a new back end cargo handling system, Chameleon. “We are not just taking the money and putting it in our pocket, we are using it for re-investment,” comments Al Jallaf.

However, size is not everything when it comes to service levels. Indeed, with less traffic to worry about, smaller airports are often able to clear and load goods more quickly than larger facilities. Yet, by definition, these airports will also be able to offer less connections and less business, which may counter the advantages offered by quicker handling. As such, Al Jallaf is confident, that although finding a parking space may remain a problem at the Cargo Village, finding cargo will not be.

“It is not just one business, it is also the surrounding businesses that Dubai has and that some other airports do not have,” he says. “And, if you do not have the complete infrastructure, you will not make it.”||**||

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