Air Cargo in Decline as Chinese Air Takes a Hit

Dec. 4, 2008
The big three of Chinese Airlines have begun to ground aircraft and cut flights as their domestic market continues to slump

The big three of Chinese Airlines have begun to ground aircraft and cut flights as their domestic market continues to slump. Adding to woes are lower fuel prices as the airlines had signed hedge contracts.

The big three are Air China that has seen double-digit drop in year over year traffic, China Southern that saw a net loss of $118 million in its third quarter and China Eastern, whose president, Li Fenghua noted as the airline grounded some aircraft, that, “Nowadays almost all the big carriers are cutting flights, especially international flights,” according to Air Transport World.

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When jet fuel prices were up to more than $144 a barrel, entering fuel-hedging contracts seemed a smart move. However, with the fall in fuel pricing, the airlines have seen sharp losses due to their hedge bets. For example, according to reports, Air China stands to lose $454 million and China Eastern, $690 million.

China Southern has announced that it will get $440 million in capital from the government in Beijing. The other airlines are said to be seeking governmental assistance, as well.

The decline in air freight and passenger travel is global, according the International Air Transport Association (IATA). “The gloom continues and the situation of the industry remains critical,” claims Giovanni Bisignani, IATA’s Director General and CEO. “While the drop in oil prices is welcome relief, recession is now the biggest threat to airline profitability. The slight slowing in the decline of passenger traffic is likely only temporary. The deepening slump in cargo markets is a clear indication that the worst is yet to come.”

In October, air freight declined by 7.9%. Carriers in the Asia-Pacific region represent 44.7% of the international cargo market that experienced an 11.0% drop in exports. North American cargo dipped by 7.6% and European freight declined 5.4%. Latin American air freight was down by 11.4%. While passenger demand declined, African carriers experienced a 3.0% gain in cargo. Middle East freight grew by 1.0%.

Looking ahead, The International Air Cargo Association (TIACA) is calling for countries to separate cargo from passenger rights in a step to liberalizing what it calls the “significant benefits that can be derived from a more open and competitive air cargo market.” The organization supports the contention that carriers should have the ability to move air cargo in any international market between two points anywhere in the world. If cabotage would be a stumbling block to negotiations at this point, TIACA would be open to excluding it from discussions.

“The benefits of liberalized agreements would be open to all carriers, irrespective of national ownership,” says Larry Coyne, member of TIACA’s Industry Affairs committee and CEO of Coyne Airways. “We would like to see a mutually acceptable supervisory body be responsible for the transparent and equitable operation of all resulting agreements.”

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