While China and South America are both rapidly developing regions, recent economic indications suggest that they may not be as strong as they once were. “Near-term prospects remain fairly dim for South America, with output contractions projected in three of the largest economies for 2015 – Argentina, Brazil, and Venezuela – while only Chile and Peru would see a pick-up in growth,” according to an International Monetary Fund report, Regional Economic Outlook for the Western Hemisphere. Meanwhile, China manufacturing and services sectors only grew modestly in April, after exports declined 15% year-on-year in March and industrial output only grew 5.6%.
Some airlines have already felt the effects.
“The market from mainland China to South America was pretty soft last year, dropping 8% compared to 2013,” says Christophe Boucher, cargo area manager for Asia at Air France-KLM-Martinair Cargo. “The decrease was especially strong from Beijing. The Hong Kong market did better with a slight increase of 4%.”
On the other hand, two American carriers performed somewhat better between the two markets.
“In 2014, American Airlines Cargo performance was both solid and consistent, driven by the expansion of our Asia and Latin America daily services out of Dallas/Fort Worth, our largest hub,” says Carmen Taylor, managing director of cargo sales for Florida, Caribbean and Latin America at American Airlines. “In addition to the continued daily flights to Buenos Aires, São Paulo, Santiago, Bogota and Lima – Latin America’s largest markets – in May 2014, we introduced two new daily services to Asia – Hong Kong and Shanghai.”
With the increased services to and from Asia, American now has a strong position in the region, offering four daily flights to/from Narita, three daily flights to/from Shanghai and one daily flight to/from Incheon. On May 7, American added a new service between Dallas/Fort Worth and Beijing, which is also served from American’s Chicago hub.
“We continue to see consistent traffic to and from all our Asian destinations, as well as from Latin America, where we offer approximately 1,400 weekly flights through all of our US hubs,” says Taylor. “The unique, strong choice of flights we offer to major markets makes the flow of traffic between Asia and Latin America possible.”
United Airlines experienced “healthy growth” in cargo volume between China and South America last year, according to Jim Bellinder, vice president for cargo sales in the Americas at United. “This followed our worldwide trend where cargo tonne miles grew 12.4% over 2013,” says Bellinder. “Business on these routes has been boosted by the introduction of Santiago to our network. We now operate daily widebody service between Santiago and Houston – United’s principal Latin American gateway.”
Interestingly, the economic situation of a region does not necessarily have too much of an impact on the aircraft leasing business. Greg Marcoux, an analyst at US-based lessor Vx Capital Partners, says that the quality of an airline management matters more than the opinion of the IMF.
“We’ve had terrible experiences with airlines in the US, even during booming economic times, and conversely we’ve had wonderful experiences with well-run airlines based in countries with stagnant or poor economic times,” he says. “Good management and strong business models usually survive any economic situation save for the global meltdowns.”
One issue surrounding the cargo market in China is the shift of manufacturing away from the coast, as well as a shift away from China into other Southeast Asian nations such as Cambodia, Myanmar and Vietnam.
United took the step of introducing a Boeing 787 flight between San Francisco and Chengdu in June 2014. Apart from being the first service by a US airline in Chengdu, this was the first service by any US airline to a mainland Chinese city beyond Beijing and Shanghai.
“We continue to be impressed by the volume of business on the 787 service between Chengdu and San Francisco. Since Chengdu is one of China’s fastest-developing cities economically, we expected solid China origin business on this route – and we have not been disappointed,” says Bellinder. “What was a pleasant surprise is that volumes from SFO into Chengdu have also been strong. We see this business expanding further this summer as our service between Chengdu and San Francisco increases to a daily frequency from June 4 to September 1.”
There won’t be many major changes at Air France-KLM-Martinair for the time being, according to Boucher. Aside from Beijing, Shanghai and Guangzhou, Air France also serves Wuhan, while KLM serves Chengdu, Hangzhou and Xiamen.
“The main trade lanes of Air France-KLM ex China are to Europe, representing around 90% of our business. For South America, it’s less than 5%, even if our extensive passenger and full freighter network to South America serving 14 stations allows us to maintain a market share above 12% from China,” says Boucher. “However the China market will not be the one driving network changes, as Europe is the leading region for the South America lanes for us.”
Vx, which deals in converted narrowbody freighter aircraft, is not too concerned with the shift since it does not present any real problems for the leasing market in China. “The movement of manufacturing centres inland and possibly out of China will not affect the narrowbody market greatly since most of the traffic is supporting e-commerce rather than the transport of manufactured goods to Europe and North America,” says Marcoux.
Another issue is the increasing use of bellyhold capacity. While neither American nor United operate any dedicated freighter aircraft, Air-France-KLM-Martinair is also scaling back its freighter operations, with plans to reduce the fleet to just six aircraft.
“There is presently a considerable belly overcapacity worldwide, which naturally makes the use of full freighters less necessary compared to before,” says Boucher. “However, full freighters will still remain useful or necessary, but differently so. More on niche markets, or on some very specific legs, where they are needed because bellyhold would be insufficient. But mind you, this is true on some very specific routes, legs, markets and for some specific types of products only.”
In terms of the Chinese market, Boucher says that overcapacity operating from China is one of the major challenges. “Air France-KLM has addressed the issue by adjusting its full freighter footprint to the needs of the market, with only three freighters operating from Hong Kong,” he says. “The rest of the capacity is offered on our passenger and combi flights out of seven stations in China. This capacity is enough to properly serve the Chinese market and to connect to our extensive truck and flight network from Amsterdam and Paris.”
For United, new destinations and developing economies present challenges related to airport support services and transportation infrastructure, says Bellinger. “United continues to work with governments and industry associations to provide cooperation and assistance with these issues,” he says. “In South America, as in any region where perishables are a significant sector of the business, additional challenges arise with seasonality, capacity constraints, and planning difficulties due to weather and other factors impacting the availability of crops. United Cargo manages these challenges by keeping as close as possible to our customers at the local level to minimize the uncertainty these issues create.”
For instance, the recent eruptions of the Calbuco volcano in Chile created flight interruptions in the surrounding area, but three airlines did not experience any long-term or widespread disruption.
As for American, Taylor says that the airline runs into different challenges and difficulties every day, but that there are no more challenges in China and South America than in any other region in the network.
“We feel very privileged to have strong business relationships in both China and South America. As a company, we made a decision to provide a cargo service to our customers, which means we are dedicated to addressing any and all challenges or difficulties that arise.”
She also says that the cargo industry is constantly changing, and that she isn’t too worried about evolving as needed. “As we implement changes, we keep our customers and their needs top of mind, always asking how each change might affect them and their businesses,” she says. “Challenges and difficulties teach us to work as a team and allow us to remain alert, adaptable and ready to make changes when necessary.”
By Jeffrey Lee
Staff Writer | Hong Kong
