AIR CARGO QUARTERLY - Fuel costs causing havoc for planned China service

By: | at 08:00 PM | Channel(s): Air Cargo News  

By Karen E. Thuermer, AJOTAmidst so much doom and gloom in the financial markets, lowering fuel prices seem to be giving a reprieve to airlines and their customers, although earlier steep prices caused some carriers to retract some business.
Among the good news, on October 15 American Airlines (AA) reported a small Third Quarter profit and announced plans to order 42 787 Dreamliner aircraft that would replace some of its 152 less efficient wide-body aircraft.
Still, air carriers face turbulent times as many ground aircraft, refocus networks, merge companies, and worse – face bankruptcy. One of the big challenges facing long-haul carriers is what to do about networks that service China.
A year ago carriers were climbing over themselves to gain access to China and the voluminous amounts of cargo manufacturers there were exporting. Today the picture there is, at best, constrained.
“That’s because the market is over served and opportunities are now limited,” says Ned Laid, managing director of Seattle-based Air Cargo Management Group. “The current marketplace is dysfunction, dislocated and depressed because of fuel surcharges combined with the growing recession in Europe and existing recession in the United States.”
Despite the fact China’s economy continues to expand roughly seven percent, the Bureau of Economic Analysis reports that the gross domestic product (GDP) in the United States grew only 2.8% in the second quarter 2008. Next year, Britain’s GDP is expected to only hover in the one percent range.
“The industry crisis is deepening and no region is immune,” comments Giovanni Bisignani, IATA’s Director General/CEO.
This translates to less spending by Americans and Europeans, China’s biggest overseas customers.
Volumes of air shipments, which should be up now because of the holiday season, are down. In late September, the International Airline Transport Association (IATA) announced that international freight traffic shrank 2.7% in August, led by a 6.8% decline in the Asia-Pacific region. That’s bad news since the Asia-Pacific makes up 45% of the global air cargo market. This followed a 1.9% decline in July.
“As the year goes on, indicators are not favorable for high value goods shipped by heavy weight freight,” Laid says.
Brian Pearce, IATA chief economist, reports that even if Asia is depressed by temporary factors, “economic conditions continue to deteriorate and point to weaker air travel ahead.” But unlike passenger markets, weakness in air freight is broad based, suggesting, he says, a significant decline in world trade.
“Of great concern is the further fall in load factors, in spite of attempts to slow capacity growth, reducing unit revenues and adding to pressure on profitability,” Pearce adds.
Citing high fuel costs as the main culprit, a host of US air carriers are postponing their highly covenanted flights to China despite the fact that access to routes between the United States and China has been highly competitive.
Air service between the two countries had been restricted by bilateral agreements until both nations signed an agreement in July to double the number of daily flights between China and the United States during the next five years. But weakening passenger and cargo traffic is making flights of more than 12 hours or so particularly vulnerable to fuel prices.
United Airlines and US Airways, which won federal approval to begin routes to China this spring, have asked the US Department of Transportation (DOT) to delay the launch of their new services. United has asked to defer the start date for flights from San Francisco to Guangzhou from March 2008 to June 2009. US Airways asked to delay its new service between Philadelphia and Beijing to March 2010.
“We’re optimistic that economic conditions will be on the upswing in 2010, giving us a better chance of success with our first route to China,” wrote Scott Kirby, US Airways President, in a letter to US

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American Journal of Transportation