South Korea: A free-trade lifeline
March saw the elimination of bureaucratic obstacles to cargo flows between the U.S. and South Korea. The two nations formally implemented the FTA that the two sides signed last year, bringing a long and laborious negotiating process to a close after five years of talks. The deal eliminates tariffs on 95 percent of each country’s goods over five years and is expected to boost U.S. exports by about $9.7 billion, according to the International Trade Commission.
On the eastbound sector, the agreement should also produce an increase in traffic, especially in consumer electronics and technology. The automotive segment, which also stands to benefit, will not show immediate growth, as the duties will be phased out over the five-year term, noted Steve Jun, general manager of airfreight for DHL Global Forwarding in Korea. Imports into Korea are expected to show significant growth in the wake of the trade pact, notes Lim Hoon, cargo manager in Incheon International Airport’s business development group.
Cargo flows between the two countries will benefit from a shot in the arm. Under the prevailing economic conditions, trade has slowed, as has Korea’s trade with the European Union, the introduction of a free-trade agreement last summer notwithstanding. Incheon International Airport, which ranks as the fifth largest air cargo gateway on the globe, suffered a 5.4-percent drop in throughput last year to 2,599,222 metric tonnes. Imports dropped 10.2 percent, exports sank 6.1 percent, and transit volume was down 2.1 percent.
The first quarter of this year brought no discernible improvement for Incheon. “We have experienced a soft first three months. A number of our key customers had softer volumes than expected,” says Steve Whittingham, Agility’s CEO for North Asia.
Under the circumstances, airfreight rates out of South Korea should be headed down, particularly with new main-deck capacity entering the picture. Korean Air took delivery of a B777 freighter and a B747-8F in February. It has deployed the former mostly on European routes, while the 747-8 has been used on flights to the U.S. West Coast and to Tokyo and Osaka. Rival Asiana is due to receive a B747-400F in May and another in June. Shippers looking for bargains are in for a bit of a disappointment, though. “Airfreight rates have been moving up because of space-control measures,” Jun notes.
David Choung, senior executive director in charge of sales and freight management at DB Schenker in Korea, warns that this development has not yet run its full course. As demand for semiconductors and electronic products is not expected to rise, overall air and ocean cargo capacity could fall by 30 percent. This drop would attain a more rational balance for the carriers, he says, adding that reduced capacity will lead to a rise in rates.
In an effort to stem yield erosion, the Korean carriers have tightened lift on sectors marked by overcapacity, such as routes to London and Paris. KAL has cut back its lift by about 15 percent, Andrew Walker, managing director of Kuehne + Nagel Korea, observes. The carrier was due to take a 747-400BCF out of service in April, but in the main, the capacity reductions have been achieved by shifting planes to other destinations with little or no overcapacity. Asiana has also pursued this strategy.
Drawn by the presence of Samsung and several other large Asian manufacturers, the smaller of the two international carriers based in Korea launched twice-weekly freighter flights to Hanoi in March. The airline was due to mount all-cargo service to Manila in April. Next, Asiana is looking to Chengdu, says Kee Chul, senior vice president of cargo sales for the airline.
Korean launched a Chengdu freighter operation last September and is now planning to develop all-cargo service to other up-and-coming cities in China’s interior, according to Rlee Song-jong, managing vice president of the carrier’s cargo marketing department.
“Korean Air plans to accelerate the development to cities in the Midwest of China, where the production bases for global IT firms are relocating,” he says.
Agility’s Whittingham has found volumes on intra-Asian sectors more in line with demand projections than the long-haul trunk routes to Europe and North America. Overall, however, intra-Asian traffic has not been markedly stronger than the long-haul markets out of Incheon, forwarders and carriers agree.