Gulf leads the world in cargo growth

Gulf airlines and airports are leveraging their geographic location to take advantage of the increase in East-West air cargo traffic. Published in MEED, 7 August 2014

The centre of gravity of the air freight market, like so much of the global economy, is gradually moving Eastwards. According to French aircraft manufacturer Airbus, North America and Europe still account for most air cargo traffic, with 51 per cent of the global market in 2012, but by 2032, their share is expected to be about 45 per cent. In contrast, the Asia-Pacific region, including India and China, will grow from 36 per cent to 42 per cent over that period.

That shift represents an enticing opportunity for Gulf airlines if they can tap into the growing volumes of cargo being sent between Asia, Africa and Europe in the same way they have taken market share in the passenger segment. According to the Canada-headquartered International Air Transport Association (Iata), freight volumes between the Middle East and the Far East are growing faster than on any other major route, with a 17 per cent rise last year. Freight between the Middle East and both Europe and Africa is also outpacing the global average.

The trend fits in neatly with the macroeconomic policies of places such as Dubai, where transport and logistics have long been a focus of development. These days other major airlines and airports are well aware of the potential for further growth and are following Dubai’s lead, with large investments to increase capacity and efficiency.

“Dubai is a role model for other GCC cities, when it comes to developing the air freight industry,” says Safwan Tannir, chief freight officer at Aramex, a Dubai-listed logistics firm that operates across the region. “Easy and intelligent customs procedures, professional handling agents and new airport expansions and investments; these factors make the emirate an attractive place for both airlines and forwarding companies.”

At the heart of Dubai’s success is government-owned Emirates. According to Iata, the airline had almost 10.5 billion scheduled freight tonne kilometres (FTKs) last year, putting it ahead of all other international cargo carriers. Within the region, the other major competitor is Qatar Airways, which had close to 5 billion FTKs, making it the ninth-largest. In between those two are Asian carriers such as Hong Kong-based Cathay Pacific, Korean Air and Singapore Airlines, as well as cargo specialists such as the US’ FedEx and UPS.

The strength of their airlines and the growth in East-West cargo means the UAE and Qatar are now among the more important freight hubs in the world. According to Canada-based Airports Council International (ACI), Dubai International was the biggest cargo airport in the Middle East in 2013 and the fifth-busiest in the world, handling 2.4 million tonnes. That still puts it a long way behind global leader Hong Kong, which handled 4.2 million tonnes last year, although Dubai is growing faster, with volumes up 6.8 per cent in 2013, compared with a 2.3 per cent increase for Hong Kong.

Further down the ranking is Doha in 25th place with 883,000 tonnes and Abu Dhabi International in 29th place with 712,000 tonnes. Those two are also expanding their cargo business faster than most other major airports, with growth of 4.6 per cent for Doha and 24 per cent for Abu Dhabi last year.

The ability of the Gulf hubs to grow so fast is due to a combination of factors including their geographic location and lower operating costs compared with other airports, which means they should continue to expand in the coming years.

“All regional hubs have the same basic geographic advantages as Dubai,” says Malcolm Macbeth, vice-president, aviation, Middle East and Africa at logistics firm DHL Express. “So although Dubai is four times larger in terms of throughput than say Doha or Abu Dhabi, as long as they invest in facilities and process improvements, then there is no reason for the other regional hubs not to continue to prosper.”

The major hubs appear committed to making those investments. Dubai’s new airport, Al-Maktoum International, opened for cargo operations in June 2010 and has been gradually taking in more operators since then. Among the latest airlines to arrive has been Hong Kong’s Cathay Pacific, which, since February, has been running its freight-only flights to Al-Maktoum International. The airport now serves as its Middle East cargo hub.

A more significant development came on 1 May, when Emirates moved all of its cargo-only flights to the new airport. The carrier’s Skycargo division runs a fleet of 12 freighters, including 10 Boeing 777Fs and two Boeing 747-400 ERFs, each of which can carry more than 100 tonnes of cargo at a time. Three more planes are due to be delivered over the next two years. Since May, Emirates has also taken on a fleet of 47 trucks to transfer cargo between the two airports. About 10 trucks an hour rumble along Emirates Road at peak times, transferring goods between the freighters at Al-Maktoum International and the belly hold of Emirates passenger flights using Dubai International.

Expanding capacity

Al-Maktoum International handled 209,000 tonnes of freight in 2013, but the figure will ramp up considerably in the coming years. Emirates’ new cargo terminal at the airport will, once complete, be able to handle up to 700,000 tonnes a year (t/y), with the potential to increase this to 1 million t/y in the future. The wider plan for the airport is to eventually have capacity for 12 million t/y of cargo.

In Qatar, it is all change too, with the belated opening of Hamad International Airport in May. The cargo terminal at the new airport will have capacity to handle 1.4 million t/y by 2015, a 75 per cent increase from the old airport. A second cargo terminal will in time grow capacity to 2.5 million t/y.

All this investment puts the Gulf hubs in a strong position to maintain industry-beating levels of growth, and it is likely to be matched by a steady expansion of the airlines’ freight-only fleets in the years to come. Airbus reckons the Middle East’s freighter fleet will more than double in size in the next 20 years, from 61 in 2013 to 160 dedicated cargo planes by 2032 – accounting for 6 per cent of the global fleet by 2032, compared with 4 per cent in 2013.

However, despite the optimism about future growth, airports and airlines alike will be aware of just how closely the fortunes of cargo traffic is tied to that of the global economy. Freight volumes at Dubai International dipped in 2012 as a result of, according to operator Dubai Airports, economic uncertainty in Europe and the US, which eroded consumer confidence and led to a drop in Asian exports. That was a useful and timely reality check for the regional aviation industry and highlights how dependent it is on factors outside its control.

If the region’s cargo sector is to continue growing at the pace it has been enjoying more recently, it will probably have to buck the wider global trends in air freight. Ten of the 30 leading cargo airports saw a drop in freight volumes in 2013 and other industry-wide data suggests a flat rather than growing market.

“We are expecting total cargo volumes this year to be about 52 million tonnes – basically unchanged since 2010,” said Tony Tyler, director-general of Iata, at a press conference in Doha on 28 May, ahead of the organisation’s annual meeting. “The cargo side of the business has been in the doldrums for some time. Part of this is the effect of global economic trends. But we are working hard to improve the industry’s competitiveness with process improvements.”

One reason why growth has been stagnant is that air freight has been losing ground to shipping. In 2013, air freight accounted for about 1.7 per cent of all containerised trade by weight, down from more than 3 per cent in 2000, according to Seabury, a US-based investment banking and consultancy firm. While air freight volumes grew by 2.6 per cent over those years, from 13.9 million tonnes in 2000 to 19.5 million tonnes in 2013, ocean cargo grew by 7.4 per cent.

Shrinking presence

There are several factors that explain why airlines lost market share. Part of it is the growth of trade in raw materials and other commodities that are always moved by sea. There has also been an increase in trade of other, low-value goods such as cheap clothing, which are more sensible to move by boat. However, about 5.4 million t/y of trade is in goods that would once have been sent by air, but are now moved by sea. This represents a major lost opportunity for the air cargo industry. If air freight had maintained its market share compared with the shipping industry, an extra 15.2 million tonnes of cargo would have been flown around the world last year, rather than placed on a ship, according to Seabury.

Despite these issues, some observers are convinced the Gulf will continue to enjoy robust growth in air cargo in the coming years. As the global economic picture improves, demand for air freight should pick up and the Gulf carriers look better placed than most to take advantage of that. They run very modern fleets from new airports and have low operating costs, which puts them in a stronger position than their rivals in most other parts of the world.

“There is still plenty more market share currently held by European and Asian carriers to be taken, so I see no reason for the current trend to change in the foreseeable future,” says Macbeth. “The Gulf carriers have industry-leading aircraft costs. Add to that lean operating costs without the levels of taxation and overheads that mature airlines in Europe and to some extent Asia have, and then you have a cost base the legacy carriers cannot match.”