All in the Belly
Although the region is growing fast, freighters are
struggling to find enough feed in Eastern Europe
Ian Putzger
 f three new European destinations to be added to American Airlines' network this year, probably the most attractive from a cargo standpoint is Moscow. Not only is the carrier fielding 777 aircraft on the sector (whereas Barcelona and Milan, the other two additions, will be served with 767-300s), but cargo traffic to the Russian capital is booming, driven by a voracious appetite for consumer goods and luxury items.
Frankfurt-based research and consulting firm Aviainform has seen "explosive growth" in air freight volumes into Russia, an observation shared by airlines serving this market.
"Inbound traffic to Russia has been very strong," said Ram Menen, senior vice president of cargo at Emirates Airlines.
Russian airlines have been on the expansion path. AirBridgeCargo, the scheduled freighter airline owned by Antonov AN-124 operator Volga-Dnepr Airlines, recently took delivery of its second 747-400 extended range freighter.
Last year, the carrier signed an order for five 747-8 freighters, with options for an additional five. The firm orders are scheduled for delivery between 2010 and 2013. Aeroflot, Russia's largest airline signaled plans to take between five and 10 777 freighters, although no further details have been released so far.
Forwarders are also sensing opportunities. Last year Connecticut-based IJS Global established an alliance with Delivery World, which is headquartered in Moscow. Giorgio Laccona, chief executive of IJS, sees strong demand for a range of commodities from oilfield equipment to consumer items.
For much of the air freight shipping world, the moves add up to a changing view of Russia and the former Eastern European countries. After a brief period of interest and expansion in the early 1990s following the fall of the Soviet Union, most forwarders and airlines have stepped into the region only cautiously, preferring to focus on booming economies elsewhere while the political, legal and business storms played out.
The growing business in the air, however, suggests the business climate is clearing.
Not everybody has had smooth sailing in Russia, however.
Lufthansa Cargo found its overflight rights abruptly pulled by the Russian authorities last fall, with a temporary extension granted only after top-level political intervention. Both sides have maintained that the two issues are not linked, but it is widely seen as no coincidence the German carrier recently agreed to move its Central Asia hub from Kazakhstan to the Siberian city of Krasnoyarsk, provided the airport is upgraded.
Even without the heavy-handed tactics that have made investors think twice about putting money into Russia, carriers are not having an easy ride. Imports may be frothy, but the outbound leg is a lot harder to fill.
Veli Polat, director for Russia and the Commonwealth of Independent States for Lufthansa Cargo, estimates the balance is 70 percent/30 percent in favor of inbound volumes.
"The types of commodities that Russia exports are not for air freight," said Dirk Steiger, managing director of Aviainform. "On Aeroflot's freighters that come here, it's all stuff from Asia."
As a result of the discrepancy in flows, there is a yield-depressing capacity glut on the export side. This raises the question of what would happen if carriers were to push freighters into Moscow, where the cargo market so far is predominantly served with belly-hold capacity. According to Steiger, the existing lift is adequate to accommodate the demand for inbound traffic, so a surge in main deck capacity could seriously undermine the economics of serving the Russian market.
Menen said the weak export demand has rendered freighters an unviable option for Emirates in the Russian market so far.
For the rest of Eastern Europe, the case for freighters is even harder than in Russia, given the size of the market and logistics patterns. Currently the integrators account for most of the freighter lift into Eastern European capitals. According to Steiger, the only sizeable operation is a Cargolux 747 freighter moving twice a week through Budapest on its way to Asia. But this stop is mainly due to one large customer, he said.
Passenger flights to the region have been growing strongly, but belly-hold capacity consists largely of narrowbody aircraft that cannot take palletized cargo.
Bob Imbriani, vice president of international operations of forwarder Associated Global Systems, said direct lift from the United States to Eastern European markets is still limited but keeps growing. Despite the limited payload on most of these services, he finds these options attractive, partly because of the transit time, partly because many of these entrants have been willing to negotiate on base freight rates, especially while their passenger loads are relatively low.
Uwe Kaeding, regional manager for the U.S. Midwest of forwarder Emo Trans, said that his company has not been doing much with direct belly-hold capacity to Eastern Europe. "That capacity works for small volumes from known shippers; otherwise, you go through the European hubs, like Frankfurt, Vienna or Paris," he said.
Given the fast economic growth rate in Eastern Europe, the idea of investing in cargo there could gain prominence on investors' radars, "but what are the benefits?" Steiger said.
Given the strength and depth of trucking links from the major European gateways to the markets in Eastern Europe, little would be gained from going direct by air, he said.
Moreover, dispatch decisions are still made in shippers' head offices in Western Europe. "A company like Nokia may move production to Eastern Europe because of financial incentives, but it will continue to fly with the likes of Lufthansa, KLM Royal Dutch Airlines or Air France. So the cargo will be trucked to those carriers' hubs," he added.
Apparently the airport authority in Budapest does not subscribe to this point of view. As part of a $411.7 million airport upgrade program, the airport is planning a new cargo village. Construction of phase one of the project is expected to start in the spring of 2009. This will have an annual capacity of 160,000 tonnes, comfortably in excess of the 65,150 tonnes that passed through the airport in 2006.
Overall, capacity at the region's airports seems adequate.
"We haven't had any significant problems," Imbriani said. "As long as you plan ahead, it shouldn't be too much of a problem. However, if you have larger charters, it might be better to fly to Frankfurt or Vienna and truck from there."
Operators use most of the major continental European gateways, from Amsterdam and Paris to Frankfurt and Vienna, but the latter two attract a bigger share thanks to their closer proximity to Eastern Europe. Given its location, up-and-coming Leipzig Airport, the designated hub for the joint venture cargo airline between Lufthansa Cargo and DHL, is also expected to serve as a gateway to the region. Singapore Airlines started freighter flights there March 30, but operators believe it will take some time before the airport becomes a regular fixture in these traffic flows.
"Leipzig has to establish itself, it has to find its place in the distribution plans of forwarders," said Klaus Holler, vice president for the Americas of Lufthansa Cargo.
In terms of main deck capacity, Frankfurt is head and shoulders above Vienna, which lost EVA Air's twice weekly MD-11 freighter service to Taipei last fall, but still retains up to 20 weekly freighter links to Korea courtesy of Korean Air and Asiana Airlines, as well as a weekly Emirates 747-200 freighter flight to Dubai. Companies, such as Samsung and LG Electronics Worldwide, which are expanding their production in Slovakia and Hungary, are driving the strong Korean presence.
For U.S. shippers Delta's launch of five weekly 767-300 extended range flights last year brought a welcome direct link from Atlanta to the Austrian capital. The carrier can take about 10 tons of cargo on the route.
Steiger does not see Vienna's limited freighter profile as a significant disadvantage, as shipments to Eastern Europe typically are not very large. The airport has excellent belly and truck links to the region, he said.
The key player in both areas has been Austrian Airlines, which has more than 40 passenger flights to points in Eastern Europe and 18 rail feeder service links. With the most recent European Union expansion, which brought Romania and Bulgaria into the fold, Vienna's role looks likely to grow further, as these countries are a long haul from its more western rivals, like Frankfurt or Amsterdam.
This is going to take a while to build up momentum, however.
"We're not doing much with these countries," Kaeding said. "This is only just beginning."
He finds the existing road feeder links from the main hubs to the region very efficient and fast but warned they can be a good deal more expensive than what other truckers offer.
"It helps to have good contacts if you move cargo beyond the airport and not having to rely on the airline. There can be significant differences in trucking costs," Kaeding said.
Imbriani adds one more point why an experienced and reliable local partner on the other side is crucial. "Road feeder service to Eastern Europe is usually pretty good, but customs clearance and finding a viable agent may be more difficult. Finding the right partner in these countries can make a huge difference," he said.
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