Middle East Air Cargo Growth Risks Protectionist Backlash
The latest IATA cargo figures again show the Middle East is the only region posting significant year-on-year traffic growth in a flat lining global market.
And if the trend continues into the second half of the year, when the global market is expected to return to growth, it could trigger a protectionist backlash, particularly in Europe.
The latest figures paint a dramatic contrast between the Middle East, particularly the Gulf, and other regions.
Middle East carriers’ freight traffic grew by 12.3 percent in February from a year ago and was up 0.8 percent on the previous month, according to IATA. Asia-Pacific carriers saw volume collapse 14.7 percent, largely due to factory closures during the Chinese New Year holiday. North American traffic dipped 3.1 percent, reflecting the fragility of the revival in U.S. consumer demand. Europe was down 5.4 percent from February 2012 amid persistent euro zone weakness. The once dynamic Latin America market saw international traffic dip 0.2 percent, and the much-hyped African market was up just 2 percent.
Even after adjusting for one-off factors, Middle East carriers are trouncing their rivals. They carried 15.3 percent more freight in January than a year ago while Asia-Pacific airlines were up just three percent after stripping out the impact of an export rush ahead of the Chinese New Year holidays.
This latest success of Middle East airlines, which is also reflected in the higher-profile passenger segment, is sure to inflame protectionist passions in competing aviation markets.
Just days before IATA published its February figures, the chief executive of Air France-KLM, a European leader in passenger traffic and until recently cargo too, urged European Union governments not to give Emirates and other Gulf airlines further access to their markets until they prove they are competing on a level playing field.
It would be “suicide” for European airlines to lift current restrictions on Gulf carriers flying into European airports without getting assurances about fair competition, Jean-Cyril Spinetta, told the Financial Times.
Gulf carriers likely get cheaper finance because they are state-owned and benefit from lower user fees at their hub airports, according to Spinetta. “If you compete with [Gulf airlines] in an open sky situation, it’s sort of suicide. It means European air will disappear.”
Spinetta isn’t saying something that hasn’t been aired by other European airline executives in recent years. Lufthansa Cargo raised the specter of Gulf airports replacing Frankfurt as a global hub during its campaign against a night flight ban at its home base, to no avail. A court made the ban permanent, and Dubai has already overtaken Frankfurt in the global cargo airport rankings.
The special pleading by European carriers will get louder in the coming weeks as the European Commission, the EU’s executive, negotiates with Qatar and the United Arab Emirates for a“fair competition” agreement.
The Gulf airlines have sought to “buy off” the hostility to their spectacular growth by forging partnerships with European carriers and joining global alliances rather than launching takeovers of more vulnerable airlines to move into their domestic markets.
It’s different in the cargo sector, which is much smaller than the passenger business and has less political clout. Some European carriers, led by Air France-KLM, are also shrinking their freighter operations and retreating to the more profitable belly-cargo business.
Lufthansa is still making good money from cargo, but it expects to be overtaken by Emirates soon as the Gulf carrier ramps up its freighter capacity to fill the hole left by retreating European and Asian airlines.
Qatar Airways also recently stressed it still intends to be a top five global cargo operator by 2018 despite divesting its 35 percent interest in Cargolux after a dispute over strategy for Europe’s biggest all-cargo carrier. The Gulf carrier, headed by former Cargolux boss Uli Ogiermann, is adding four freighters ¬ three A330s and a 777 ¬ to its current five all-cargo aircraft this year to keep pace with 20 percent annual growth. The small Gulf nation’s cargo ambitions will be underscored next week when it opens a new $16 billion airport with an annual capacity of 1.4 million tons.
Etihad Airways is boosting its cargo exposure, too, even as industry leaders like Hong Kong’s Cathay Pacific are downsizing their freighter fleets in line with flat global demand. The Abu Dhabi-based airline, which boosted freight traffic by 19 percent in 2012, is adding two 777 freighters and an A330 freighter to its fleet this year.
But the Middle Eastern challenge to the established order goes beyond tiny Gulf emirates desperately seeking ways to invest their surplus petrodollars. The region’s biggest player is Saudi Airlines Cargo, which recently acquired its first two 747-8Fs to expand its fleet to 15 freighters within a couple of months. The airline, which increased its freight traffic by 18 percent to 570,000 tons in 2012, is tapping new markets, particularly between Asia and Africa, at a time of sluggish growth on Asia-Europe routes that has forced its larger competitors to cull capacity.
The rise of the Middle East as a cargo powerhouse is shaking up the global air freight business and could yet trigger a backlash in the established markets. But as Asian and European airlines focus on passengers, the region is set to play an increasingly important role in international supply chains.