Opportunities outweigh risks for logistics industry

Tapping into the growing trade between emerging markets will provide expansion opportunities for regional logistics companies, despite continued political instability. Published in MEED, 2 March 2015

The Emirates flight that takes off from Dubai’s Al-Maktoum International airport at 9am on a Tuesday follows a rather strange route. The Boeing 777, flight number EK9707, first flies to Ouagadougou, the capital of Burkina Faso. After just an hour and a half on the tarmac, it takes off again for Dakar in Senegal. From there, it heads on to Frankfurt, Germany, before finally turning back home, arriving in Dubai some 43 hours after it left.

This path makes more sense when you realise it is a cargo-only flight. Links between such disparate cities are an increasingly important part of how the global economy functions, and Gulf airlines play a prominent role in providing the connections. Rather than holidaymakers or businessmen, Emirates airline says it expects to carry pharmaceuticals and electronics from India and China on its flight to Burkina Faso, and take fresh produce such as mangoes and beans on to Frankfurt and Dubai.

Nabil Sultan, a senior vice-president at Emirates Cargo, says the route to Burkina Faso, which was launched in January, takes the airline’s import capacity to Africa to 3,700 tonnes a week.

Increasing volumes

Overall, the volume of freight passing through Al-Maktoum International airport reached 758,371 tonnes in 2014, more than triple the 209,209 tonnes of 2013. Cargo volumes in the fourth quarter of 2014 alone were 238,520 tonnes. The airport currently has capacity for 1 million tonnes a year (t/y), but it is still a work in progress and the full plans include capacity to handle 12 million t/y of cargo.

All around the Gulf, investments are being made in cargo facilities and the expanding route networks of the major airlines that are fertile ground for logistics companies, particularly smaller companies that do not operate their own aircraft and instead piggy-back on the networks of commercial carriers.

“Our business model has enabled us to benefit from major investments being made in airports, ports, and airline expansion plans, whether it’s by Emirates airline, Etihad Airways or Qatar Airways,” says Iyad Kamal, chief operating officer of logistics firm Aramex, which is listed on the Dubai Financial Market. “This gives us the opportunity to reach more global distribution and handle increased capacity.”

Last year, Aramex posted revenue of AED3.6bn ($994m) and a net profit of AED318.4m, up 10 and 15 per cent respectively on 2013. Freight revenues accounted for about a third of the business in terms of sales, although it grew more slowly than the other lines of business such as national and domestic express deliveries. However, the company says it is hopeful the recent fall in oil prices could encourage more trade between Asia, Africa and Europe this year.

Others take a similar view. Kuwait’s Agility Logistics suggests the key to the sector’s growth in the near term is the ability of companies to tap into more resilient markets such as the Southeast Asian economies of Indonesia and Malaysia, as well as markets in the GCC and sub-Saharan Africa.

In its most recent Emerging Markets Logistics Index, an annual survey of industry executives, Agility Logistics says the top-ranked market remains China, but also high up the list are Saudi Arabia and the UAE, as well as Brazil, India and Mexico. Perhaps just as important are the links between some of these markets. The firm says logistics professionals are most upbeat about the potential for trade flows between Asia and other emerging markets around the world.

“A year ago, there was talk of an emerging markets meltdown,” said Essa al-Saleh, CEO of Agility Global Integrated Logistics, at the release of the survey in January. “Emerging markets as a group turned out to be far more resilient – even vibrant – than expected, despite continued sluggishness in the global economy. The factors driving growth are increases in population, the size of the middle class, spending power and urbanisation rates, along with steady progress in health, education, and poverty reduction.”

Global expansion

Such sentiments explain some of Agility Logistics’ own recent moves to expand its footprint around the world.

In January, its National Aviation Services subsidiary won a contract to provide ground-handling services at Felix Houphouet-Boigny International airport in Abidjan, the capital of the Ivory Coast. In the same month, the firm broke ground on a new 40-acre site in the Tema Port Free Trade Zone Enclave in Ghana’s capital, Accra. The park should be up and running before the end of the year, with 100,000 square metres of bonded and non-bonded warehouses. It is part of a planned network of logistics centres that Agility Logistics is developing around the African continent.

Aramex has also made some international moves over the past year, signing a joint venture with Leo Global Logistics in Thailand in November and buying the PostNet brand in South Africa for $16.5m in December. Kamal says the firm will continue to push ahead in such markets in the future, adding it is exploring potential opportunities in Vietnam and the Philippines.

“We are further investing in our Middle East market infrastructure, in addition to expanding our network in southern Africa and opening up in Nigeria and West Africa,” he says.

“Africa is a very exciting investment destination for us. It is the second-fastest growing region in the world, with a lot of trade taking place between Africa and the Middle East, in addition to growth in Africa-China and intra-African trade routes. For that reason, we are strengthening our footprint in key African markets through new acquisitions, franchises and integration with our global network.”

Obvious risks

While all this suggests a fairly rosy future for logistics companies, there are some obvious risks they will also have to face up to. Lower oil prices may well encourage more trade between some parts of the world, but the outlook for the global economy as a whole is not that bright.

The Washington-based IMF’s latest prediction is that global economic growth is expected to be between 3.5 and 3.7 per cent this year and the next, with relatively weak prospects for the likes of Russia, Japan, the eurozone countries, and some major oil exporters.

All this could take the shine off the prospects for logistics companies in the Gulf that rely on linking up suppliers and customers around the world. “The UAE does not operate in a vacuum and it must be assumed there will be some negative impact felt as a result of the ongoing situation in Europe and with other economic partners,” says one business executive in Dubai. The other issue facing the region is continued instability in Yemen, Syria, Libya and Iraq, to name just a few places. The risks for the logistics and transport sectors were highlighted in late January, when a FlyDubai jet was shot at while coming in to land at Baghdad International airport. Following the incident, other airlines quickly cancelled their own flights to the Iraqi capital.

“Regional instability is not an ideal scenario, but what we do is come up with different ways to work around it; we develop contingency plans to ensure we overcome any hurdles,” says Nour Suliman, CEO of DHL Express in the Middle East and North Africa.

Overall, he says the growth in the region means the opportunities outweigh the perils for logistics companies, with the most promising areas including the continued rise in e-commerce deliveries and the growth of small-to-medium-sized businesses.

“The Middle East is one of the fastest-growing regions, with some of the fastest-moving economies in the world,” says Suliman. “It is growing at a faster pace than the US or Europe in express shipments. The region offers plenty of lucrative opportunities for market growth, which makes it a highly attractive area of focus, with no sign of this changing in the foreseeable future.”

That perspective is shared by other industry executives and helps to explain the continued investments being made by DHL and others in the region, particularly in the UAE and Saudi Arabia. DHL opened a 10,000-sq-m facility at King Fahd International airport in Dammam last year and a $55m logistics centre in Cairo. This year, it plans to open a $20m, 12,383-sq-m site at King Khaled International airport in Riyadh and another centre in Jeddah. Aramex is also developing its facilities in Dubai and upgrading its existing sites in Saudi Arabia and Qatar.

“The Middle East remains a significant market, with the GCC being our largest contributor of revenues,” says Kamal. “With the growth in trade expected to take place in the coming years, especially in preparation for events such as the Expo 2020 [in Dubai], we are currently investing to develop an extra 50,000 sq m in our Dubai logistics centre, in addition to upgrades to our logistics infrastructure in Saudi Arabia and Qatar.”

Dealing with bureaucracy

Kamal says the prospects for Aramex and others like it would be enhanced if some of the bureaucracy they have to deal with were removed. That is a problem even for trade between GCC states.

“With growing cross-border trade between the GCC countries, especially between the UAE and Saudi Arabia, and Bahrain and Saudi Arabia, [there is] an opportunity for cost savings and efficiency enhancements, and a need for an improvement in customs regulations at the land borders, where most of the delays happen,” he says.

Even with those frustrations, the prospects for the industry look rather healthy. As Suliman says, in what could almost serve as a rallying cry for the industry as a whole: “No matter which industry you work in or what the nature of the business is, logistics is a necessity.”