Airlines building synergies to tap the lucrative AEC market

The ongoing cooperation between Japanese carrier All Nippon Airways (ANA) and the German airline Lufthansa will ostensibly extend beyond the shores of their two countries. The recently-formed joint venture between the two carriers could generate synergies enabling them to tap the lucrative 600 million consumer-strong integrated market of the 10-member Association of Southeast Asian Nations (ASEAN), which is projected to consolidate itself into the ASEAN Economic Cooperation (AEC) by the end of the current year.

Malaysia, with its well-developed infrastructure and good connectivity with the rest of the ASEAN group, could possibly serve as a “gateway,” ANA representatives recently told Asia Cargo News in conversations held in Tokyo.

Indeed, after recently announcing that it was launching a daily passenger service from Tokyo to Kuala Lumpur effective September 1, 2015, ANA revealed that it was also mulling launching a freighter service to Malaysia.

However, the carrier has not yet taken a firm decision on the choice of the destination, which will be between Malaysia and Vietnam.

“In view of the projected formation of the ASEAN Economic Community (AEC), the region’s attractiveness has further increased. This will also intensify our all-cargo trade by air not only between the member states of the ASEAN community but also, particularly, with the Asia-Pacific Region,” Toshiaki Toyama, ANA Cargo’s executive vice president (global marketing), told Asia Cargo News at the carrier’s Tokyo headquarters.

The Japanese cargo carrier is also trying to expand its Asia-North America traffic by creating a joint venture with US-based United Airlines (UAL), which is expected to increase traffic between Asia and North America.

“We are planning a Joint venture with the United Airlines. The official approval from the US authorities should be coming in the near future,” Toyama said.

The “Arc of Markets”

The North American cargo market is strengthening as the US economy gains steam and as unemployment in the US continues to decline, thus generating greater consumer demand. With its joint venture with Lufthansa Cargo and the projected joint venture with United Airlines, the ANA-Lufthansa-United Airlines collaboration, as some experts were saying, will create an “arc of markets” stretching from Asia via Europe to North America.

But ANA’s marketing strategy focuses on what the carrier’s executives described as an “Asia-related market” which is forecast to grow by 5% annually. The express service market in the intra-Asia market is another area which is inherent with strong business potential for the Japanese carrier’s B2C eCommerce Business. According to a recent Boeing study, the Asia-North America service is forecast to grow annually by 5.4%, while Europe-Asia traffic will grow 5.3% and the intra-Asian traffic by 6.5%.

ANA’s foothold in the European market through its joint venture with Lufthansa-Cargo (LHC), is expected to strengthen its position in Europe and also in North America; LHC has a strong position in both these regions. LHC executives told Asia Cargo News that the ANA-LHC collaboration would generate “huge synergies” that can benefit both sides. LHC also stands to benefit from ANA’s introduction of a freighter service to either Malaysia or Vietnam. Lufthansa already operates five passenger flights a week directly from Frankfurt to Kuala Lumpur, transporting the cargo in the aircraft belly. Lufthansa will soon increase its five flights a week to a daily flight to the Malaysian capital, Lufthansa sources confirmed.

The projected creation of the AEC by the end of 2015 is being closely watched by foreign carriers who see good business opportunities inherent in the new community which will dismantle barriers and simplify trade between the 10 member countries of the community.

As the ASEAN region moves up the next level of integration with the AEC’s creation, Lufthansa Cargo envisages that Malaysia’s attractiveness, both as a market and cargo distribution center, will be further enhanced.

“I believe that Malaysia’s attractiveness, both as a market and distribution centre, will be greatly enhanced,” Peter Gerber, Lufthansa Cargo’s chairman and CEO, said in a recent interview in Tokyo. The synergies flowing from the joint venture between the two carriers will enable both partners to jointly tap the markets of Asia, North America, Europe and also Africa and the Middle East.

LHC is already well-represented in the ASEAN region through its associate cargo carrier Aerologic, which operates a freighter service to Singapore.  However, the ANA-LHC joint venture will give a strong impetus to ANA’s cargo traffic from Southeast Asia to Europe, LHC also has a daily bellyhold cargo service on Lufthansa’s passenger planes flying between Kuala Lumpur and Frankfurt.

ANA and LHC rule out competition between them because of what Gerber described as a “win-win situation” for both of them.

“I do not think there will be competition. In fact, we will have synergies that will complement one another,” Gerber averred.

Besides North America, which is currently LHC’s most attractive market where, despite a decline in tonnage volume, the carrier has successfully increased its market share, LHC sees a vibrant Asia-Pacific market.

“We are the number one cargo carrier in the North Atlantic traffic where we have a 30% market share. The major points of our traffic are in Chicago in the Midwest and the west coast of the United States in the Pacific direction,” Gerber explained.

The depreciation of the euro against the US dollar has also helped a surge in European exports, even though some experts are concerned that this development could affect imports into Europe.

Discussing marketing strategy, Gerber said that LHC was planning a number of moves, including forming joint ventures with other airlines, though he declined to name the potential partners. “We are planning another joint venture, but I cannot disclose any details at this point about our partner or the basis of our collaboration,” Gerber responded when asked to name the joint venture partner.

But LHC’s top executive also spoke about the fierce competition in the global air-cargo markets. Although it accounted for only a tiny fraction of the global trade, air cargo accounted in value terms for some 35% of the global trade. “This is because shipments by air are used for time-sensitive cargo, high-value products, etc,” Gerber explained.

Michael Stoermer, LHC’s Tokyo-based director responsible for Japan and Korea markets and reporting to the carrier’s Singapore regional headquarters, said that LHC was considering introducing a freighter service to Malaysia though Vietnam was also in the running as a potential cargo destination. This idea is still in a nascent stage, and a final decision will be taken later.

“Our associate airline Aerologic already operates a freighter service to Singapore, but the AEC creation will, invariably, attract greater interest in the future,” Stoermer said.

In Stoermer’s personal assessment, Indonesia, Thailand and Vietnam will grow exponentially, which will also benefit other ASEAN member states because of the high-level of economic integration taking place among them.

“Japanese companies are shifting their manufacturing operations to some ASEAN countries, and their shipments from such manufacturing sites will enhance cargo traffic from and to such sites,” Stoermer added.

LHC’s partner ANC also hopes to increase its air cargo traffic from Japan, Taiwan and South Korea to the ASEAN region because of the migration of manufacturing operations of companies to the ASEAN countries.

But Stoermer, an expert on Japan and Korea, also spoke of Japan’s market characteristics, including the continuing demand for branded and luxury items. This could also offer opportunities for Malaysian suppliers of upper-end products.

“The average Japanese is very quality-conscious and prefers to buy quality, high-end products rather than fake copies that you see elsewhere in Asia. Indeed, Japan is having a boom in high-end products, and we expect the imports of such products will continue,” he said.

South Korea, like Japan, also buys a lot of high-end products. South Korea’s economy is even more dynamic than that of Japan, and buys a lot of Japanese machinery products. “Foreign suppliers may identify business opportunities in Japan and South Korea and tap the opportunities unfolding here,” Stoermer said.

By Manik Mehta

International Correspondent | Tokyo