Airlines get Christmas bonus

Airlines get Christmas bonus       By the time you read this, a cargo backlog in Asia of quite significant proportions will likely have been cleared away.
      But over the past month, undercapacity has gripped the airfreight market like at no other time since the U.S.-inspired credit crunch took hold nearly two years ago.
      Yeah, it must be weird to see that word again, but undercapacity out of Asia did indeed occur, though the causes seem extremely temporary in nature.
      Reports emerged in mid-December that as many as 10,000 tons of cargo in Hong Kong, the busiest cargo airport in Asia, were awaiting space on planes. Other major Asian hubs suffered from similar congestion.
      Delays ranged from two days to as many as 14. Shippers with long-term capacity agreements found space just as hard to come by as those willing to pay a last-minute premium for priority service.
      The causes of the backlog are pretty simple to understand. For most of 2009, air carriers have been stripping capacity out of their networks because of poor demand, and even worse rates. Then, in the fourth quarter, developed economies started to show signs of recovery. Finally, demand for certain high-value, Asian-made goods spiked in the weeks before Christmas. Removal of capacity coinciding with a demand surge led to the severe backlogs.
      In mid-December, American Shipper spoke with Seattle-based aviation consultant Ned Laird about the situation.
      'There are backlogs at almost every major Asian airport,' Laird said. 'We see that getting worked off' by the end of December.
      A major reason behind the spike in demand out of Asia was the increasing competition between high-end phone manufacturers right before Christmas, he said.
   'There have been a number of charters because of these smart phones,' he said. 'Apple has done a number of charters for 3G AT&T iPhones. What these companies can't tolerate is a stockout when they have a competitive product.'
      One chartered freighter, for example, could conceivably carry 800,000 iPhones. That's is a lot of Christmas presents.
      The auto industry is another source of increased demand. Laird said the air freight industry is reliant on three primary types of goods ' cell phones, small notebook computers, and auto parts.
      'The most damaged part of the air freight sector (during the recession) is auto parts,' he said.
      The volume of auto parts moved by air dropped 80 percent from the third quarter of 2008 to the second quarter of 2009, in terms of quarter-by-quarter comparisons.
      'But over the last couple months, air freight demand from carmakers has risen again,' he said, adding that the Cash-for-Clunkers program further stimulated demand. 'It's very hard to get this information, but what we're hearing is that there is no physical way the carmakers (with plants in the United States) could ramp up production of Japanese cars using a traditional six-week marine supply chain.'
      A handful of Asia-based airlines indicated they were offering unusually high numbers of chartered flights to try to account for the demand spike. Cathay Pacific, for example, confirmed to American Shipper it was flying an average of 'six to seven extra sectors or charter flights every week to North America or Europe' during the backlog.
      'The capacity reduction is a factor and there has also been a rush for shippers to get consumer goods to the markets in advance of the seasonal shopping peaks,' Cathay Pacific said.
      The biggest carriers at Hong Kong, in terms of transpacific cargo, are Cathay, UPS and Polar Air Cargo. To Europe, the biggest carriers are Cathay, Cargolux and Lufthansa.
      Over the course of the year, those airlines have cut back on crew utilization, Laird said. Cathay, for example, has cut 25 percent of its capacity, but it has 'been able to offset reductions in capacity by flying crews more hours,' he said. 'They're not returning parked aircraft to active duty.'
      An official with Hellman Worldwide Logistics in China told the Hong Kong Shipping Gazette that carriers pulled 40 percent of capacity out of Asia this year, which made the sudden rise in demand in December all the more difficult to account for.
      Volume out of Asia in late November and early December surpassed 2007 levels briefly, shooting significantly past late 2008 levels.
      The surge has also placed pressure on companies that once used air freight but turned to ocean freight as consumer demand soured during late 2008 and much of 2009.
      'The whole thing is further confused by the recession,' Laird said. 'The whole supply chain has slowed down, so the strategy of quick delivery to avoid stockouts is not there. A lot of the traditional restocking of high-value goods has moved from air to ocean because of the ridiculously low rates. But as ocean rates have come back up, the beginning of a consumer turnaround and the reductions in capacity has created the perception of a major turnaround.'
      As nice as December has been for the airlines, don't look for sweeping structural changes to the capacity situation in the months ahead.
      Airlines that have parked aircraft 'are not to reactivate them for three weeks or a month of business,' Laird said.
      It takes 30 to 45 days to get a typical cargo plane up and running, and carriers are entering the slowest part of the year (January through March) in terms of demand.
      'Why would you rebuild this capacity before the slowest time of the year?' Laird said.
      In the meantime, airlines have taken advantage of the situation, charging as much as $550,000 for a charter flight when the typical rate from Asia to Europe or North America is about $375,000. And the freight rate for shipments per kilogram has more than doubled, from the usual $2.50 per kilogram to as much as $6 per kilogram during the demand spike.
      'Major airlines started raising rates in the August/September timelines because they were just losing so much money,' Laird said. 'And it worked, so when demand accelerated, it just took off.'
      The extra money earned during late fall won't lure airlines into thinking their problems have been solved, but it is a nice bonus to help those who are pushing deep into their lines of credit (never mind the carriers who have gone past), Laird said. ' Eric Johnson