“We’re not the prophets of doom,” Menen tells Payload at an interview in Shanghai. “We are just acknowledging that there could be doom – and in a doom situation you shouldn’t get lost in the darkness, because if you do, you lose it. It’s survival of the fi ttest at thisstage,” he adds.How well a carrier will do in the downturns depends on how efficient it was during the market highs, he says. “It’s a rollercoaster, it’s cyclical and these challenges are very similar to what we have gone through several times before, it’s just that the intensity of the challenges that we face this time are more severe and simultaneous. Call it the perfect storm.”
It’s the perfect storm he says, because of the confl uence of four key economic factors: Th e US sub-prime crisis, recordhigh oil prices, global economic slowdown and a weak US dollar.
“You’ve got these four things coming at you at the same time, but the worst challenge of them all is clearly the fuel prices. I’m convinced now that the psychological barrier of US$150 per barrel of oil will be breached within the next three or four weeks,” Menen says.
Will the situation sustain, “no” says the Emirates cargo chief fi rmly, but how long is the real question, “and that is what we have to manage.”
“My own feeling is that within 12- 16 months the industry needs to start seeing some upward trends. I think we have lost about three years. Whatever we have forecast in early 2007, push it back about three years. It is a serious impactboth in terms of time and growth.
Industry correction coming
But the current industry malaise has an upside, according to Menen. “It will create some major structural changes and we need to have those changes happening as we come out of it.”
What will happen is a lot of the inefficient capacities are going to disappear, he says, but the problem with this scenario is that the new capacity will not come fast enough once the cycle picks up again.
“Let’s face it, the cargo industry has been flying old airplanes,” and going forward two key issues are likely to dominate the agenda – environmental issues and the importance of fuel efficiency in constraining costs. Inefficient planes will be parked as a result of this current downturn and the planes fl ying in the future will be much more environmentally friendly and fuel efficient.
As to just how far reaching this ‘correction’ will be, Menen says the capacity that will be taken out of the cargo sector “will be major,” easily in the double digits, he adds.
In order to deal with this downturn and the lingering impacts of it, the industry must work together towards building a healthy, sustainable air cargo industry. This could come about through environmental cooperation for instance, he says, because this issue is common to everybody and eff ects the whole supply chain.
Aside from a reduction of inefficient capacity, the current downturn could also, as Menen warned earlier, result in a rationalisation of cargo carriers themselves.
“While I look at the structural correction as a positive thing, it also affects everyone’s lives and it’s not only the aviation folks, its going to effect the average Joe’s life as well every time he goes to the supermarket, for instance. Transportation is key to everything, whether its air, land or sea transport.”
“The fact remains oil prices have to come down to a sane level,” he adds.
Championing liberalisation
So is this the moment of truth, the clarion call that the champions of liberalisation have long been pushing aviation authorities the world over to act on?
“Liberalisation has to happen,” Menen agrees, “one political and the second step modal liberalisation.”
The first step is to do away with the ageing bi-lateral air rights system which hamstrings efficient capacity deployment guided by free market economics and onerous national ownership restrictions.
Next is the intermodal aspect. Today a kilogram of cargo can travel by land and air, or land and sea, but cannot go on the same documentation sea and air. Creating a common set of rules so that distribution can take place seamlessly would greatly improve supply chain efficiency, according to Menen.
“If I’m a shipper I should have the ability to move cargo with the same documentation by land, sea and air and I shouldn’t need to do re-documentation, obtain new clearances, etc.”
Riding out the storm
But with all the talk of an industry correction and the potential carrier rationalisation, what of Emirates? At the recent press conference in Dubai for Emirates’ 2007-08 full-year fi nancial results ending 31 March, Emirates Group chairman and CEO Sheikh Ahmed bin Saeed Al-Maktoum left no doubt about Emirates’ place in the aviation universe.
“I’m sure it [the current downturn] will aff ect some people and we will see many airlines will be out of the market, but we don’t see that happening here,” he said simply.
“We at Emirates with our cash balance of AED14 billion (US$3.8 billion), up 8.5 per cent over the year before and with solid results, we will always be one of the airlines that is always there.”
Likewise, the group’s SkyCargo division turned in sterling results for the period with 1.3 million tonnes of cargo uplifted, an improvement of nearly 11 per cent over the previous year’s 1.2 million tonnes, providing a revenue increase of 20 per cent to AED 6.4 billion (US$1.8 billion), up from AED 5.4 billion ($1.5 billion) in 2006-07.
This cargo revenue contributed an impressive 19 per cent to the airline’s total transport revenue, one of the highest contributions of any airline in the world with a similar fleet composition.
If there is one universal truth in the air cargo industry, it’s the fact that the biggest challenge is having the right capacity, at the right place, at the right time. Easy to say, but quite diffi cult to achieve, unless you’re Emirates apparently.
When asked what Emirates is planning, Menen becomes somewhat coy. “We are looking at rationalising the routes, cutting capacity looking at parking some of the risks,” he says obliquely. “We’re trying to assess how long this is going to last, because we don’t want to have excess capacity while we’re going through a situation like this, so we’re looking at issues like capacity induction and the way we induct new aircraft.”
And what of the new aircraft? With 182 aircraft worth nearly US$58 billion on order, one cannot help but wonder if there are some sleepless nights over in Dubai. “You always get this sort of thing, there’s never a sure point, the industry is cyclical.” But the difference now Menen says, is that the new economic realities are diff erent from the old realities.
“We’ve been in this situation before, but now its a new learning curve,” he says, adding that Emirates benefi ts from being both an agile company and one run by the same management team that has weathered previous downturns. “So when we go into this thing we switch off the autopilot, take control of the plane and fly by the seats of our pants,” he says with a laugh.
Large freighter order
Amongst Emirates’ world-beating aircraft order, SkyCargo also picks up some juicy morsels, although they don’ttend to share the same limelight as the passenger division’s A380 hoopla.
“The A380s? No, we’re not really excited about them!” says Menen with a wry grin. With two decks of potentially over 500 passengers, there isn’t much room in the cargo hold for anything other than suitcases, despite the fact it has an overall cargo capacity nearing that of a B747. “To me baggage is nonrevenue cargo!” he adds.
If the trend recently started by American carriers of charging for baggage continues and spreads internationally, this could reduce the amount of baggage that people carry and will ultimately benefit the carriers by enabling them to carry more revenue-earning cargo. As to whether this will catch-on globally, Menen says it, “depends on how long airlines have to stay in this survival mode.”
But what really quickens the pulse of Menen and his SkyCargo comrades, is Boeing’s latest freighter, the B777F. “The efficiencies and reliability that it is going to bring are huge. Two engines lifting 103 tonnes – it’s almost got a 747-200 capacity on two engines with great fuel economy. It’s got to be exciting!” he enthuses.
The first B777F will be delivered this coming December with seven more to follow. Next in line is the industry’s redesigned cargo workhorse, the 747, which has re-emerged very nearly an entirely new aircraft as the B747-8F. Emirate’s first such aircraft is scheduled for delivery in November 2009, with nine more being delivered through 2014.
While currently 65 per cent of SkyCargo’s volumes come from the passenger bellies, this is likely to change in favour of the dedicated freighters, both as a result of the A380s and the 18 freighter order.
Emirates’ fleet, with an average age of 67 months, currently includes 10 freighters – four Boeing 747-400Fs, three Boeing 747-400ERFs and three A310-300Fs which will eventually be phased out, plus bellyhold capacity on 106 Emirates’ passenger aircraft.
China and India expansion
At a point where carriers are rationalising capacity right, left and centre, Emirates SkyCargo appears to be flying in the opposite direction.
Emirates has recently advanced its Indian operations with 18 additional flights per week, from 1 July.
It will add frequencies to India’s capital city, New Delhi, and IT hubs, Bangalore and Hyderabad, increasing its services to India to 132 fl ights per week, “the highest frequency for an international carrier in the Indian skies,” the carrier said.
Cargo Marketing Manager, Prakash K. Nair said that while cargo lifting from Hyderabad grew by 302 per cent during April-July this year compared to the previous corresponding period, the growth from Chennai was also impressive at 53 per cent, followed by Delhi (34 per cent) and Mumbai (27 per cent).
“India accounted for close to 10 per cent of the revenue which SkyCargo generated globally in the previous year,” and this year will likely be better,according to Nair.
From India, the majority of the cargo is to areas in West Asia followed by Europe. Nearly 60 per cent of the cargo is bound for West Asia – mainly perishables like fruit and vegetables – while about 40 per cent is bound for Europe.
And in Southern China, SkyCargo launched, on 1 July, a full six direct Guangzhou-Dubai services a week. SkyCargo already offers over 3,000 tonnes of bellyhold and freighter cargo capacity a week through its double daily services to Beijing and Shanghai and 14 weekly fl ights to Hong Kong. It also operates eight dedicated freighter services to Shanghai and 15 to Hong Kong.
The new Guangzhou service will provide Chinese shippers with an additional 80-plus tonnes of weekly belly-hold cargo capacity in each direction, according to Menen.
These will clearly not be the last of Emirates expansion into the dynamic Asian markets, for as Menen points out “50 per cent of world’s population is to the east of us and 2/3 of that are the worlds’ fastest growing economies.
“This huge amount of developing markets around us has a very positive impact for us. Yes markets shift, that’s why we bring in freighters as they tend to go from production to consumptionmarkets.
“It’s very easy for us to move the freighters compared with the passenger planes. The belly capacity gives us constant regular capacity while the freighters are more supplemental,” hesaid.