Growing trade across Southeast Asia is a blessing and a headache for shippers and forwarders as they chase freight capacity
hich airline wants to fly to Southeast Asia? Although eager to gobble up traffic rights to China, European and U.S. airlines are not falling over each other mounting new services to the region. Even airlines from Southeast Asia prefer cargo markets elsewhere, if they're interested in freight at all.
MASkargo looked at the possibility of a regional freighter operation there. However, the carrier's plan to lease an A300-600 freighter for that purpose fell apart under the weight of high leasing and fuel costs. For now, general manager J.J. Ong has his sights on other destinations.
The Malaysian airline launched weekly 747 freighter service to Guangzhou in October and is now looking to use its fifth freedom rights out of Shanghai or Hangzhou for cargo service to Russia. In the meantime, Ong is looking to India. The next destination on his agenda is Delhi, which he wants to serve twice weekly initially with a 747 freighter.
Like other carriers in the region, Ong is focused on China and India rather than the closer markets in Southeast Asia. Ironically, this preference comes as the region is showing sustained growth, particularly from up and comers such as Vietnam and the Philippines, where export economies were struggling not long ago.
"The whole region is showing more activity and confidence," said Chris Coppersmith, president and chief executive of Target Logistic Services.
Despite the rising demand for lift out of Southeast Asia, many of the area's carriers show scant interest in cargo. Vietnam Airlines, Thai Airways and Garuda Indonesia don't operate freighters and have given no indication that they're looking at cargo aircraft soon. Instead, they've cultivated interline and code share agreements to move freight. Garuda, which is negotiating with up to five undisclosed airlines, does not even mention cargo in its products and services listing on the corporate Web site.
Nobody would accuse Singapore Airlines Cargo of neglecting the freight business, but capacity is even out of the region's premier gateway, Singapore.
SIA Cargo concentrates capacity deployment in China mainly, via its Great Wall Airlines joint venture. The carrier was grounded soon after take-off because of regulatory problems with United States authorities, but it is again operating. Forwarders said the Southeast Asia carrier succeeded in boosting its rates and yields by keeping a lid on uplift.
"Singapore Airlines believes in providing a quality service for a price," said Coppersmith, adding capacity for cargo requiring premium service has been adequate out of Singapore, but customers with general cargo face a tougher situation.
Some carriers want to add capacity but they face problems getting aircraft.
Besides looking for an attractively priced A300-600 freighter, MAS's restructuring plan, which called for phasing out of 747-400s from passenger service, would lead to the conversion of some of those planes into freighters, Ong said. The conversion plan, however, was scrapped, and the first -400s retired from of passenger service were sold to a third party.
"We are revisiting our fleet plans and exploring other options," Ong said.
Malaysian freighter operator Transmile wants to add two 727 freighters to its fleet. Chief Executive Gan Boon Aun said last year that the carrier needed many MD-11 freighters, but there are few of those jets available on world markets.
Transmile launched flights last year to the United States, but that brought little lift for shippers looking for a direct connection out of Malaysia. The flights are routed via Hong Kong, so most cargo loaded in Malaysia terminates in Hong Kong. Moreover, Transmile struck a strategic agreement with part owner DHL last summer, cementing its focus on overnight express traffic.
The discrepancy between economic growth and lack of new freighter operations in the region results in a precarious balance between capacity and demand during the best of times.
S.K. Leong, vice president of international business development of Target, said capacity is an issue across the region. A drop in rates comes typically between Christmas and Chinese New Year, but hasn't been as pronounced this year as forwarders anticipated, Coppersmith said.
Stimulating capacity growth is difficult, said Ole Ringheim, senior vice president for air freight in the Asia Pacific region for DHL Global Forwarding. "You get no cargo for a long time and then a lot in three days," he said.
Still, wielding the combined leverage of the former DHL Danzas and Exel organizations should help. "We now have the size where we can have some meaningful discussions with carriers to have better lift," he said.
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Airport Overflowing
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Even a military coup last summer wasn't enough to halt Thailand's economic momentum.
While news reports focused on the bloodless military ouster of the country's civilian government, air cargo operators had more immediate worries about disruptions at Bangkok's new Suvarnabhumi airport, which finally opened last September.
A much-feared initial meltdown did not materialize, but recently operations were hampered by cracks in both runways as well as taxiways, which led to the shift of domestic flights to the city's old Don Muang airport.
Suvarnabhumi then won headlines about leaky toilets, baggage handling problems and allegations of corruption, as well as with the announced departure of the president of Airports of Thailand, officiallyfor health reasons.
Forwarders have not reported significant problems getting their cargo out of Bangkok, but disruptions could easily cause congestion - not only at the Thai gateway but throughout the region.
"It's a fragile infrastructure," said DHL Global Forwarding's Ole Ringheim.
"When something happens, you have delays at the airport, or manufacturing delays. It can go from no problem whatsoever to big problems. The more mature markets are more capable of dealing with the bumps."
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Smaller competitors are concerned that the growing clout of multinational behemoths such as DHL Global Forwarding and Schenker-BAX could result in less available space for them.
"They have the muscle to secure more capacity," Leong said.
Shippers and forwarders in Southeast Asia not only compete for freighter flights with China, they also compete for lift with Chinese exports of the major East Asian gateways though which most of their freight passes. This is due to the extreme stage lengths between the region and North America.
"It's difficult to compete in Hong Kong with the yields that the airlines can get there," said Ringheim.
There is something of an iron there since the growth in Southeast Asia is often linked to rising business with China. "Being able to connect China to Southeast Asia has been critical for us," said Coppersmith.
It's possible for forwarders to concentrate on trade between the U.S. and select markets in Southeast Asia, but increasingly shippers are looking for pan-regional capabilities, he said.
This tallies with results of the UPS Asia Business Monitor from 2006, which surveyed over 1,200 executives from small-to-mid-sized firms in Asia. Most businesses expected growth in intra-regional trade to outpace Asia's trade with the US and Europe.
Ringheim said the region's larger, well-established economies, such as Singapore and Thailand, will maintain their momentum. DHL Global Forwarding will focus more on boosting its presence in smaller, emerging markets in the area, Ringheim said, referring to Vietnam, Sri Lanka, Cambodia and Indonesia. Last year, the logistics giant opened a $3 million facility in Jakarta.
Capacity out of Jakarta is tight, but that is just one of the challenges. The airport can't handle the rise in volume, Leong said. The Indonesian government projects growth of around 6.4 percent for 2007.
While operators are seeing growth throughout the region, some markets stand out.
Target expects at least 20 percent growth in Vietnam in 2007, but this could easily spiral far higher if some shippers set up shop there. The country, which posted average growth of 7.4 percent over the past five years, was recently admitted to the World Trade Organization, which should boost its trade. Moreover, Vietnam attracted operations from companies that remain uncomfortable with continued reliance on China. Intel announced last year that it would invest $1 billion in Vietnam to build a 500,000-square-foot chip assembly and testing plant, slated to open in 2009.
Malaysia recently entered a new round of talks with Washington about a free trade agreement. Even without such a deal, the economy there is growing, having recovered from a migration of peripheral manufacturers to China a few years ago.
"Penang has regained some of the business that it lost earlier," said Coppersmith. TNT opened a 22,000-square-foot express center at the airport in December.
Such momentum isn't reflected in the cargo capacity, however. In July, authorities shelved a plan to acquire 3,954 acres in Senai for the purpose of setting up a cargo hub. Meanwhile, Malaysia Airports Holdings, which operates Kuala Lumpur International Airport, announced a new incentive package to lure international carriers to its doorstep. Despite a three-year waiver of landing fees, observers are skeptical that this will induce international carriers to launch flights to KLIA.
