June 28, 2020
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The Devil And The Deep Sea

Times have never been so bad for the air cargo industry

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The Devil And The Deep Sea
Jaipur, December 1994: Air cargo agents and airlines' representatives meet for their 22nd convention. There are smiles all around as the champagne flows freely, and all they can talk about is their increased commissions. After all, business is good and has registered a 10-per cent plus growth rate since the beginning of the '90s. To add to the boom, projections point to a sustained double digit growth till the end of the century.

Bangalore, November 1995:  Time for another convention. Scowls and frowns have replaced the smiles and loss reduction, not profit maximisation, is the most discussed topic.

There has been a major slow-down in growth since March 1995. There's been practically no growth in tonnage," says Deepak Dadlani, president, Air Cargo Agents'Association of India (ACAAI). Though official figures for 1995-96 will only be avail-able at the end of the year, JoelBretonniere, general cargo manager for Air France, says cargo uplift from India has shrunk by 4.5 per cent this year.

So what happened to all those optimistic predictions? Three things: India's exports slumped, shipping encroached on air cargo's share, and charter airlines offering far lower rates took a fair share of the market which was getting smaller anyway.

It was the year-old export slump which put the air cargo trade on the backfoot initially. Four traditional air freight items—garments, leather, handicrafts and brassware—fell off their high pedestal of consistent double-digit growth and witnessed near zero growth. "The order book for the traditional air export commodities is half empty," moans Dadlani. Adding that, though exporters may have added value to their export items, it doesn't translate into increased tonnage.

One of the reasons why the order book is almost empty is that Indian exporters havebeen unable to offer competitive prices in the prevailing recession in western markets. With air cargo being five to ten times more expensive than sea freight and costing an average of 25 per cent of the total value of the export cargo—sea freight costs only 4 per cent—Indian exporters are using the sea route. Besides, shipping companies have pulled up their socks too, port handling has improved slightly and ships have managed to reduce their turnaround time. For instance, if everything goes well, a consignment can reach New York from Bombay in only 30-35 days. Earlier, it could take up to six weeks. "In addition, shipping rates are reasonably low these days because a number of new players have jumped in, leading to heavy competition," says B.P.S. Shrikent, managing director, Blacker and Co, a ship chartering firm and air cargo agents.

Shrikent adds that though shipping has been gnawing away at the edges of air cargo for the last few years, the impact this year has been far greater. "Even the export of perishable items, which was monopo-lised by air cargo earlier, is now shifting to sea. We ship perishables to the Gulf at Rs 28-30 a kg within a few hours. But exporters ignore the three-day transit time and have begun sending it by sea at Rs 5-6 a kg," says the cargo manager for a Middle-Eastern airline. And with repeat orders, which provide the bulk of exports by air, being reduced to a trickle, the air cargo trade has received another blow.

As a result, Indian air cargo is facing three first-time scenarios since the open sky policy for cargo aircraft was announced by the Government. First, freight rates have been slashed drastically. Prior to the slump, premier airlines charged around Rs 80 per kg for a shipment to Europe. Today, depending on the airline, exporters can send a shipment to Europe at anywhere between Rs 45 and Rs 68 a kg. Second, more often than not, airlines are forced to negotiate rates with the exporter directly, something unheard of in India till now. Prior to 1995, airlines would set a rate, and the exporter could either take it or leave it. Third, capacity for outgoing cargo is actually surplus. "Capacity utilisation for most airlines today stands between 60 and 70 per cent," says the Middle-Eastern airline's cargo manager.

But the excess supply can also be credited to the fresh capacities which came into India in 1995. In fact, 1995 saw capacitybeing increased by over 10 per cent, says Dadlani. Though the premier carriers did not add capacity during the year, with some actually reducing their ad-hoc freighters, new airlines operating chartered flights began operations. Points out Bretonniere: "Cargolux and Martin Air now operate in India. Besides, United Airlines flies a Boeing 767 passenger aircraft daily to Hong Kong and another to London. By offering low rates, they manage to stock a lot of cargo in the huge belly hold of the aircraft."

The leading airlines are thus busy devising strategies to max-imise capacity utilisation. "The only way to achieve this is by being flexible and responsive to market needs, and by going in for short haul freighters," says Meera Juneja, regional director, sales, KLM Cargo. For instance, KLM is busy devising routings like Amsterdam-Dubai-Bombay-Kuala Lumpur-Penang-Madras-Dubai-Amsterdam. Since volumes are either not available, or would disrupt the precarious market equilibrium, the idea is to pick up small amounts of cargo from numerous destinations to max-imise capacity utilisation and cut losses.

The problem of overcapacity leaves the airlines with only two options: reduce capacity, or outplay your competitors byoffering rock-bottom rates.

 "Despite the slump, everybody wants to hold on to their turf because the situation is expected to improve by the end of 1996," says Juneja. With the first option ruled out, airlines are busy competing with each other, offering cheap rates and devising innovative pricing strategies, until of course, they can do something similar to what KLM is trying. But that's a tough shot for most airlines. It involves precise synchronisation of sluggish but volatile Indian operations with world-wide operations.

If there is one favourable factor, it is the fact that thanks to import duty cuts in the last few years, imports have increased. "From a 1:3 ratio in favour of exports through air at the beginning of liberalisation, the ratio has come down to 1:2.5 at the least," says Dadlani. This skewed import-export ratio hurts the cargo operations of the airlines. For instance, when the open sky policy was announced by the Government because the national carrier Air-India could not cater to India's booming exports, foreign airlines didn't exactly jump at the opportunity. This was because, even though exports were booming, imports were depressed and sometimes airlines had to fly in near-empty freighters. They, therefore, had to recover the cost for both the incoming and outgoing flight from the latter. Exporters thus had to compensate the airline for bringing in empty freighters. Besides, since space was going abegging on flights into India, cargo rates for incoming flights were amazingly low. While the freight rate for imports from Europe stood at Rs 16 a kg, exports were despatched at Rs 80 a kg.

However, now with the differential reducing, airlines can afford to charge the importer more and the exporter less. But, says Juneja: "Despite the importer having to suffer a seven-to-eight-day throughput time, they are not willing to pay higher rates accustomed as they are to the rock bottom rates." Even then, the airlines have managed to double the rate for imports.

 Despite these measures, some airlines are still reporting losses. "We are spending much more than we earn. The costs are too high and the rates too low," says Bretonniere. That's because costs have gone up thanks to inflation and the depreciation of the rupee, while airlines have been unable to increase their rates.

So when will the air cargo trade emerge from this slump? "When India's exports boom," says Dadlani emphatically. Breton-niere adds that despite the dark clouds, optimism still reigns. And that's precisely why, unwilling to vacate their turf, airlines prefer to reduce rates than reduce capacity. Hoping, of course, that fortune will favour the brave. 

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