Frayed Edges

The relentless rise in capacity out of China and modal migration is hitting Korean Air's freight growth

By Ian Putzger

oo much television can be bad for you. If it goes by ocean vessel, it may contribute to a vacuum at the controls of an airliner.

Bereft of the large volumes of new generation TV sets, Korean Air Cargo flew into 2008 minus the architect of its rise to the top of the international carrier hierarchy. Ken Choi, who turned KAL Cargo into the world's largest international cargo carrier, left the airline at the end of 2007.

Presiding over an aggressive fleet and network expansion, Choi fulfilled the mandate from the KAL board to push the airline to the top of the international totem pole in terms of freight tonne kilometers as early as 2004, and kept it there ever since. His leadership won plaudits even from fierce rivals. However, more recently, traffic growth lagged behind the pace of expansion set by KAL and other Asian carriers and yields were hammered even more by soaring oil prices. KAL Cargo lost some $80 million in 2006 and lost an estimated $150 million last year.

The fuel-guzzling 747-200 freighter has been blamed for much of the pain. KAL's freighter fleet consists chiefly of 747-400s, but even the -400s drink too much fuel.

Make Do

Instead of expansion, the new mantra at the carrier is maximize capacity and yields. "The only way to survive in this saturated market is to focus on more effective routing plans. We are now restructuring our network to reduce capacity," Choi said before leaving the company.

A new freighter operation to Chengdu was scrapped due to poor loads on the inbound sector, and the Manila service was amalgamated with the freighter run to Singapore and Jakarta. More network tweaking is planned.

Excessive capacity build-up across Asian markets and fuel costs account for part of the woes for KAL Cargo; equally painful has been the weakness of Korean exports by air.

Steve Dearnley, chief executive for the Asia-Pacific of Schenker International, attributes this to two factors. "The problem we are suffering (and presumably also our competitors and airlines) is the ongoing migration of manufacturing to low-cost countries and some significant conversions from air to ocean freight," Dearnley said.

Korea ended 2007 with its first monthly trade deficit since 2003. Preliminary data showed an $865 million deficit for December, down from a $2.13 billion surplus in November. Statistics for the full year indicate that imports (up 15.3 percent) outpaced export growth (up 14.2 percent). Cars, ships and cell phones drove the latter. Mobile phones and large-panel TVs have largely migrated to ocean vessel over the past two years.

At this year's Consumer Electronics Show in Las Vegas in early January, Samsung announced aggressive plans to cement its lead in the global TV market by trying to sell 21 million LCD and plasma TV sets in 2008, a 56 percent boost over last year's sales.

Three years ago, this would have made airline cargo executives drool; today it is interesting news to shipping lines.

Free Trade

Korean industry is looking anxiously to the free trade agreement signed last year with Washington.

The pact is expected to boost the $78 billion trade volume between the two countries by another $29 billion. For airlines and logistics companies, however, the focus will be more on transit cargo moving through Seoul from other Asian points, chiefly manufacturing locations in northern China. At KAL, transit cargo accounts for well over 65 percent of its total volume.

"We have a fair volume of air freight transiting in Incheon. Additionally Korea is a viable transit point for sea-air services, ex-China, to the USA, which is a growing service," Dearnley said.

The Korean authorities have long-standing ambitions to establish the country as the logistics provider in a north Asian triangle where Japan provides technology and China the manufacturing. Billions of dollars have been invested in infrastructure developments at ports and Incheon airport, which plans to boost capacity from 2.7 million to 4.5 million tonnes.

Last year the government expanded land lease incentives in the free trade zone at Incheon, and the Incheon International Airport Corp. lowered its landing fees by 10 percent.

Cargo development continues at a brisk pace. Stressing the airport's hub role for trans-Pacific and intra-Asian traffic, Atlas Air entered into a joint venture agreement last summer to build a 129,000 square foot warehouse at Incheon; it's slated for completion early this year. KAL opened another cargo facility at the airport last September, bringing the carrier's overall annual capacity at its home base to 1.61 million tonnes.

Still, the drastic surge of direct air freight capacity out of China casts doubts over the attractiveness of Incheon for Chinese exports.

KAL plans to add more longhaul flights out of Seoul this year. Choi stressed the retrenchment would not entail shrinking the freighter fleet. Rather, capacity would be shifted to more lucrative sectors.

One plan for 2008 is to develop Latin American traffic through the Miami gateway. Sao Paulo and Santiago are possible destinations, said Choi.

… Briefly

Freight traffic for Asia-Pacific carriers rose 2.7 percent in November and the cargo load factor improved by 1.2 percentage points to 77.1 percent, the Association of Asia Pacific Airlines reported. Freight tonne kilometers the January-November period rose 3.1 percent to 51.5 million … Singapore Airport Terminal Services sold SATS Express Courier Center Two at the Changi Airport to DHL for $38 million. … DHL will invest $175 million in an express at Shanghai Pudong International Airport. … Thai Airways will establish a perishables distribution center at Munich Airport to support Thai agricultural exporters. … Cathay Pacific adopted Global Logistics Systems' Ezycustoms system for managing customs operations in compliance with Air Automated Manifest System requirements of the U.S. Customs and Border Protection Bureau. ... Pittsburgh International Airport signed a memorandum of understanding for a partnership with China's Xi'an Xianyang International Airport aimed at getting freighter service between the cities. … Nippon Cargo Airlines took delivery of the first freighter it ordered as an independent company, a 747-400 dubbed "NCA Apollo," and put the plane into service on non-stop routes between Tokyo and Los Angeles and San Francisio. … FedEx opened its 23rd station in Japan, a facility in the city of Nagoda aimed at meeting anticipated demand because of the growing manufacturing industry in the region. … Czech Airlines Cargo, a SkyTeam Cargo member, is the latest airline customer at Hong Kong International Airport. Hong Kong Air Cargo Terminals will provide cargo-handling services. … Schenker began construction of a 49,000-square-foot logistics hub near Ho Chi Minh City, Vietnam, which is slated for completion by April 2008. … Order Logistics, a subsidiary of Janel World Trade, partnered with Premier Resources International to provide logistics services for Digital Blue in Asia.