Neel Shah, vice president of Delta Airlines’ cargo division, has reason to be pleased with 2011’s first quarter results. Despite unexpected softness in Chinese exports and the devastating earthquake and tsunami in Japan, Delta Cargo’s revenue surged 42 percent in the period, far outracing rivals American and United airlines, which posted cargo revenue increases of 10 and 9.3 percent, respectively.
Whether shipping goods by air, sea or land, shippers are painfully aware of the soaring fuel surcharges that have boosted carrier revenues across the transportation spectrum. Although that’s certainly true for air cargo carriers, Delta’s revenue growth resulted just as much from higher yields and increased traffic, with improved yield driven equally by higher surcharges and better margins, Shah said.
Nowhere was the improvement more pronounced than in Delta’s international network, particularly the trans-Pacific, he said.
That in itself is somewhat remarkable, given the slowdown in airborne exports from China in February. Factories stayed closed longer than usual after the Lunar New Year festival, and some Chinese airlines, facing weak volumes, canceled freighter flights. As a result, forwarders looking for lift to China experienced some bottlenecks.
“We ran backlogs from early February until about the middle of March, but that has cleared, and space is no longer an issue,” said Gary Schultheis, senior vice president, air freight for the Americas at DHL Global Forwarding.
Given the traditional imbalance in trans-Pacific trade flows, the bottlenecks for westbound traffic was somewhat unusual, a reflection of China’s growing appetite for imported goods. That flow is still lopsided in favor of U.S.-bound cargo, but airfreight headed to China has picked up considerably.
“Loads to China have improved. They are also more predictable and sustainable,” Shah said.
Rates to China, which languished below the $1-per-kilo level for years, have increased to about $1.50. This is still less than half the rates in the opposite direction, which is why airlines readily canceled freighters that would have left China only 70 percent full in February, one cargo agent said.
In March and April, loads and yields from China and Hong Kong rebounded, although some softness persists, notably out of Shanghai, according to James Woodrow, general manager of cargo sales and marketing at Cathay Pacific. Chinese exports, he said, are expected to pick up in July, driven by the need to replenish inventories.
Other Asian markets, including Singapore and Korea, have been strong, but not to the point where finding lift would be an issue. Some developing markets such as Vietnam or Cambodia that started out from a low base of international routes can be challenging, said Bob Imbriani, vice president of corporate development at Winnsboro, Texas-based forwarder Team Worldwide.
Capacity and volumes in the Japanese market dipped sharply in the immediate aftermath of the March 11 disaster. But all-cargo operations returned to normal quickly, and carriers largely have maintained their schedules.
“We have continued our steady schedule,” said Shawn McWhorter, president for the Americas of Nippon Cargo Airlines.
Traffic volumes to and from Japan rebounded quickly and have remained relatively steady at pre-disaster levels, he added. Exports of some commodities, such as automotive parts, have slowed because of ongoing supply chain disruptions, but production from central and southern Japan faced little interruption.
Japanese imports of materials for production have declined, but carriers have filled the void with shipments related to disaster relief and reconstruction, McWhorter said.
Another big gainer: butts, the smoking kind. “We have flown quite a lot of cigarettes from the U.S. to Japan. Cigarette factories in Japan are down,” said Shinya Nagayasu, manager of cargo planning for the Americas at Japan Airlines.
The carrier is “pretty full in both directions” and has no plan to change its schedule, but a number of passenger operators, including American and Delta, have trimmed their Japanese flights. “Passenger demand has decreased. Cargo demand seems relatively stable,” Nagayasu said.
But the diminished bellyhold capacity hasn’t affected the balance between supply and demand, although that may change when Japanese factory activity returns to pre-disaster levels.
Shah is bracing for a surge in Japanese air freight. “We are waiting for Japan to show the strength that many customers predicted,” he said. “Parts factories have been slow to come on line, but that’s only a matter of time. Within the next 60 days, it will go up.”
Moreover, when Japanese manufacturers such as Toyota or Honda resume full-scale production in North America, they are widely expected to shift a sizable portion of their parts shipments that normally would go by ocean vessel to air freight to sustain production levels.
There have been signals shippers are looking to arrange cargo charters to move automotive parts quickly from Japan to overseas production facilities. JAL, for one, has received inquiries about using a B777 passenger aircraft to ferry cargo across the Pacific, echoing a similar move last month between Seoul and Tokyo.
The interest in freighter charters isn’t confined to Japanese exporters. Some large forwarders have made moves to secure charters out of China and Hong Kong and, to a lesser extent, from markets such as Singapore, Imbriani said. “The charter business seems to be picking up,” he said.
In addition, new scheduled freighter capacity is entering the trans-Pacific market. Cathay Pacific and Korean Air, last year’s two largest international cargo carriers, are in line to receive the new, 140-ton Boeing 747-8 freighter, and plan to step up their U.S. flights.
Asiana Airlines, which started Boeing 747-400 freighter flights from its base in Seoul to Atlanta last year, will add a fourth weekly frequency in the summer and will go to daily flights in September, according to Kee Chul, senior vice president of cargo sales. The Korean carrier is scheduled to take delivery of another B747-400 freighter next year and is considering the acquisition of more aircraft.
The carrier, as part of its move to daily service, also will break into the Miami market for the first time. Asiana is the latest Asian airline to try to tap into burgeoning trade between their home region and South America. At the start of 2009, Miami had nine weekly freighter flights to Asia. That number swelled to 19 by late last year. And, for the first time, China made the list of Miami’s top 10 international trade partners in terms of air freight.
The 2011 peak season is another engine of freighter proliferation for which some forwarders have started to line up charters, McWhorter said. “Most of our clients are cautiously optimistic,” Imbriani agreed.
Growth of trans-Pacific airfreight capacity is overshadowed by the soaring fuel price, however, which has brought back the specter of a modal shift. “Many shippers are looking at ocean as a possible alternative again,” Imbriani said.
“Another thing that has started to be discussed again is sea-air programs. People are looking at some combination of air and sea, trying to find a middle ground in transit times,” he added.
Nagayasu believes a modal shift already has settled in. “We have not seen it from the U.S. mainland to Japan, but from Hawaii. It is much closer to Japan, of course, so the transit time is not very long,” he said.
Opinions differ regarding how much traffic currently moving by air could be shifted to ocean vessels. For Woodrow, it’s a secondary worry. “There is certainly a concern that higher total rates will affect global demand in general and, at the margin, drive some conversion of air to sea-air or time-definite sea freight. I do, however, believe that this conversion is really at the margin,” he said. “More worrying is just what high fuel prices do to reduce global demand.”
Contact Ian Putzger at email@example.com.