28 February 2020
Cargolux CEO Richard Forson doubts there will be a shortage of main deck space when ex-China demand returns, but does expect an upward trend in prices and objects to suggestions airlines have been ‘cashing in’ by charging higher rates for one-way charters
Air cargo carriers are pinning their hopes on a strong rebound in Chinese exports after the coronavirus is contained, providing scope to recoup the losses of the first quarter of the year, according to a senior industry executive, although he objects to suggestions airlines have been ‘cashing in’ by charging higher rates for one-way charters.
“Even before Covid-19 came along, 2020 was already going to be a very challenging year with the prospect of low growth – even negative growth – putting yields under pressure,” Cargolux’s chairman and CEO Richard Forson told Lloyd’s Loading List in an interview.
“The coronavirus is bringing serious disruption to global supply chains, along with a good deal of uncertainty – in that, as things stand, today we have no clear idea of when it will be brought under control.
“It’s spread to other major economies such Japan, South Korea; and now in Europe, with Italy, is a very disturbing development. Are we heading for a pandemic, triggering a slowdown in the global economy? All this is still open to debate.”
China is a major sector for the Luxembourg-based cargo airline’s fleet 30 B747 freighters.
It normally operates 13 weekly flights to Zhengzhou, seven weekly flights to Shanghai, two to Beijing and Xiamen, as well as six transpacific flights out of mainland China to the US.
In line with its normal February schedule, Cargolux would be offering 27 weekly flights into Hong Kong, including its transpacific services.
“Coming out of the China New Year, these schedules continued to be significantly reduced, but we’re slowing building up frequencies again and flights have included charters to mainland China – the bulk of them are carrying medical supplies.”
Forson noted that a key imponderable is how quickly Chinese production can get back up to speed.
“We’re not at the stage where we can say the worst of it (the outbreak) is over and things are now getting back to normal. Feedback from sources in China suggests a slow build in production rather than a rush.
“It’s a very worrying situation as I do think there’s been a significant drawdown in inventories these past few months and one can surmise that there are quite a few businesses around the world running low right now and in need of replenishment, while those operating to just-in-time production cycle are beginning to fear shutdowns. Arguably, pharmaceuticals and automotive are the industrial verticals the hardest hit by the coronavirus.”
Asked about reports of spectacular hikes in rates for inbound freight (into China), in some cases of up to 300-400%, Forson replied: “There appears to be a lot of demand for flights into China for whatever reason – backlogged cargo, etc. But ex-China it’s been a very different picture, at least until now.
“From an airline perspective, there needs to be demand for capacity both ways – coming into China and back out again; otherwise it’s an extremely expensive exercise.
“A lot of forwarders have been shouting that airlines have taken advantage of the situation and bumped up rates disproportionately. But if an airline is going to fly one way with cargo and the other way empty, they need to recover the costs. It’s not a matter of ‘cashing in’, but rather operating on a financially sustainable basis.”
Forson underlined that a number of “potential positives” await air cargo carriers once Covid-19 is contained.
“I’ve no doubt production will increase in China in the weeks ahead and that a ‘rebound’ in economic activity and exports will emerge. It all depends when the rebound comes – obviously the sooner the better – and the scale of it. Certainly, the only bright spot at the moment is the prospect of a rebound.”
He said one could speculate that once production levels have normalised in China, a lot of goods which are usually shipped as ocean freight will have to be flown by air because of short lead-time requirements – given the urgency to replenish inventories and re-stock on spare parts for manufacturing processes. This would swell the surge in demand triggered by ‘regular’ air freight flows coming back on stream.
However, Forson is cautious about adding his voice to those who have warned of a full-blown capacity crunch this spring.
“A good deal of main deck capacity has been idle in the first two months the year, so there could be quite a few bees around the honey pot, so to speak,” he notes.
“There has got to be serious doubts about how quickly passenger services on Chinese routes resume. People aren’t going to be falling over themselves to get back on a plane to China. So, the absence of belly cargo from the market could cause some capacity tension, perhaps benefitting freighter operators. We’re certainly confident about accommodating the market’s requirements whenever demand picks up again after the epidemic.”
He added: “How rates react will clearly depend on the amount of capacity in the market. I would doubt that there will be a shortage of main deck space, but I think it’s safe to say that there’s a strong likelihood of an upward trend in prices resulting from a China rebound.”
Commenting on the financial impact of the coronavirus on Cargolux, Forson said this was mitigated by the flexible use of aircraft capacity built into its business model.
“Obviously, we incur fixed costs like any other business – for example, salaries – and there is a loss of income when something like Covid-19 comes along as a result of fewer revenue-earning flights; but the ‘economics’ of the airline allow us to have a certain number of freighters on the ground.
“In any case, even during the exceptional years of 2017 and 2018, we were preparing ourselves for a downturn in the industry and such preparations have given us greater sustainability in confronting very challenging times such as we have at the moment. We are very confident in our resilience.”
As to the coronavirus prompting reflection at Cargolux on possible over-exposure to China, Forson replied: “For mainline carriers like ourselves, China is the place to be – good times or bad. It’s the powerhouse of world exports. You can’t not be there.”
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