Southbound again

Southbound again

Ron Young is an experienced air-cargo agent in the U.S.-Latin America trade. He values long-term relationships with airlines that provide stable capacity and competitive pricing, preferably in both directions. But these days, Young's company frequently asks its carrier partners to lower their previously negotiated rates.

"Given the fragility of rates, you have to be aware of the competition," said Young, vice president for Latin America and the Caribbean at Menlo International Forwarding. "Our customers expect us to leverage that purchasing power."

Menlo isn't the only forwarder scrambling for deals in Latin America. Every-one seems to be doing it. Jose Aguirre, executive vice president of MIF - the former Miami International Forwarders, which was acquired by Eagle Global Logistics last spring - is continually pressed by customers to secure lower rates from airlines. "You try to have long-term relationships, where you know space and pricing are guaranteed, but that does not mean that some customers don't push for lower prices," Aguirre said.

The bargain-basement mentality results from sluggish southbound volume and persistent overcapacity. During the first seven months of this year, air-cargo exports from New York to Brazil, the top U.S. trading partner in the region, fell 7.72 percent. Weak foreign investment in the region, combined with weak South American currencies, have reduced cargo volume.

The gap between demand and capacity has widened. Fred Jacobsen, executive vice president and chief operating officer of Colombian freighter airline Tampa Air, said that in recent months, only about half of planes' southbound cargo capacity has been filled. "Southbound rates are below cost. We have to position the airplanes at a loss," Jacobsen said.

Even cutbacks resulting from Avianca's filing for bankruptcy reorganization and the troubles of Varig, the Brazilian carrier, have had no discernible impact on the cargo market. "There's a lot of service to Brazil," Aguirre said. Cutbacks by passenger airlines, such as American Airlines' replacement of B777s with 767s on some routes, failed to slow the price war.

What keeps the airlines going is the strong demand for space on northbound routes. Forwarders and airlines report across-the-board traffic increases from the region. The Port Authority of New York and New Jersey reports double-digit volume increases from many Latin American countries for the first seven months of the year.

"Our load factors have been off the wall from Argentina, Brazil and Chile. I'd use any plane I could get northbound," said Rich Denhart, American Airlines managing director of cargo sales for Latin America and the southeastern U.S.

Forwarders still have ample space on northbound flights. Consequently, rates haven't gone up significantly. "I don't see an increase over the year before," Jacobsen said.

Though a few airlines are adding flights, most see little incentive to add capacity. Polar Air Cargo, which runs four 747 freighters a week from Miami to Chile and Brazil, plans no changes in this "challenging" market, said Thomas Becher, a company spokesman.

Some carriers, such as Tampa Air and Arrow Air, are seeking to add planes. In the second half of 2004, Tampa Air will begin to take delivery of B767s that will replace its DC-8 freighters. Three of the DC-8s will be phased out next year. The rest will be replaced in 2005.

Arrow, which wants to add a third L-1011 freighter to its fleet, expects to replace its DC-8 cargo planes, which account for most of Arrow's operations, within 12 to 18 months. "We're not going to completely abandon the DC-8, but it is an older aircraft," said Mike Visconti, vice president of planning and service.

The newer planes are expected to improve the airlines' performance. Freighter operators in Latin America and the Caribbean traditionally have maintained fairly loose schedules, and it was not uncommon for a plane to wait on the ground until enough freight materialized. But forwarders say this attitude is disappearing fast.

"The marketplace is becoming more mature," said Menlo's Young. "They want to see the same predictable service levels as in North America and Europe." Aguirre attributed this change largely to the schedule integrity of passenger carriers and express operators that compete with freighter airlines. "It makes us more efficient," he said.

American Airlines completed the roll-out of its premium "expedite.fs" service in Latin America and the Caribbean this summer. The region was the last part of the carrier's network where flight-specific express service was offered. Denhart said that the product has been well-received in South America.

On northbound routes, the expedited service is a tougher sell. "It's good to have this option available, but we're not a big user," said Aguirre of MIF. "We need standard rates at premium service. That's what our customers want."

Tampa Air's Jacobsen said there's a correlation between service levels and market share, and that service-quality is becoming more important in Latin America. "Value-added is an issue, although it's not going at the same rate as in North America and Europe," he said. Tampa Air spent $1.2 million on ground equipment and a new handling system this year and plans additional spending to further develop "cool chain" systems for temperature-controlled cargo, and to expand e-commerce capabilities. Jacobsen said he wants to refine the carrier's on-line tracking system that was launched in mid-2002.

Young said continued growth will be driven by distribution needs within the Mercosur trade bloc and by changes in distribution patterns beyond basic back-and-forth shipments between the region and U.S. gateways. He said Tampa Air wants to augment its southbound cargo from the U.S. with traffic from Asia and Europe. He also noted that some companies want to develop U.S. gateways other than Miami for cut flowers from South America. "Wholesalers are looking for new points of entry that are closer to the consumers," he said.

Menlo International Forwarding said most of its cargo from the region is still destined for the U.S., but that recently the company has seen an uptick in revenue opportunities involving the Pacific Rim and Europe.

Airlines are also becoming more creative to expand their reach in Latin America and participate in intra-regional flows. American Airlines has joined forces with freighter operators in some markets, chiefly where it does not fly widebody planes. "We carry 80 percent of our cargo from Guatemala on freighters. To participate in the big perishables business you need that capacity," Denhart said.

To take advantage of the asparagus market in Peru, American has negotiated with LanChile and Arrow Air for capacity. "They are competitors, but they can't reach some markets and we can't either, but together we can and open opportunities for shippers," Denhart said.