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Center of gravity: are the big 3 gulf carries the new hub of global freight logistics?

For many months after the price of oil began its rapid descent last June, shippers and forwarders were clamoring for cargo carriers to drop the added fuel surcharges in their freight rates. With oil selling below US$50 a barrel, it became much harder to justify the surcharge as a hedge against price fluctuations.

On Dec. 31, 2014, one airline, Emirates SkyCargo, took action by announcing in a letter to customers that it was dropping its fuel and security surcharges and would go to an "all-in" rate as of February 1 for shipments in and out of Europe and for all global customers on March 1. About two weeks later, close rival Qatar Airways made its own all-in announcement that it, too, would abolish its fuel and security surcharges on its freight rates by spring.

Not long after Emirates and Qatar made their all-in announcements, a ripple of general approval swept through the freight forwarding industry. Organizations such as CLECAT, FIATA, the British and Canadian international freight forwarders' associations, the European Shippers' Council, TLF Overseas and others said, in effect, "it's about time," calling for other airlines to follow suit. Then in February, IAG Cargo announced that, "at the start of the summer season 2015," it would be the next major carrier to join the all-in bandwagon, and the first based outside the Middle East. SAS Scandinavian airlines also announced that they were rolling their surcharge into their single rate.

Emirates and Qatar are separated by a mere 400 miles along the southern arc of the Persian Gulf. The all-in decision is only the latest move by these rapidly growing Gulf carriers that could have major ramifications for the airfreight industry. These two cargo giants--along with a third carrier, Etihad, located on the same arc--have been dominating the global cargo market for years. In its report of the November 2014 peak season figures, IATA found that 64 percent of the increase in global freight capacity that month, year over year, was attributable to just Middle Eastern carriers, as well as 38 percent of the increase in total freight tonne kilometers.

Over the last ten years, Emirates, Qatar and Etihad--the "Big 3," as they are known--have ordered an almost unbelievable number of aircraft, including a record 450 widebody orders at the 2013 Dubai air show. Through their ever-expanding hubs in Doha,

Abu Dhabi and Dubai, the Big 3 have capitalized on open skies agreements and relentlessly driven more freight through their vast supply of cargo holds --usually at the expense of the less-financially-stable European carriers.

"At the pace at which they are growing, they're getting a new aircraft roughly every month," said David Phillips, CEO of Dubai-based forwarder Freight Systems Co. Ltd. "If I was getting a new plane every month, I'd make sure that I had cargo going into the belly. And they have been filling bellies from Europe."

Clearly, the fulcrum of global airfreight has slowly drifted eastward for years, away from Europe and toward the enormous Chinese market. Today, the center of gravity appears to be settling over the Gulf region and the Big 3. Has the triumvirate of Emirates, Qatar and Etihad reached a point where their decisions can change the course of world trade? After a decade of solid, double-digit annual growth, how long can the Big 3 maintain this influence? The fuel surcharge debate may indicate where the cargo center of gravity can be found in 2015 and beyond.

All in on all-in?

So far, the one-rate revolution hasn't quite been a cascade. Etihad had not yet weighed in on the fuel surcharge issue as Air Cargo World went to press. But most forwarders are still encouraged that an all-in trend is beginning.

"In our opinion, it's like we're going back to the future," said Thomas Mack, senior vice president and head of global airfreight for forwarding giant DB Schenker, which considers Emirates one of its top five capacity providers.

"It used to be we all had all-in rates. Now we're just going back to normal."

"There used to be airlines that would give you all-inclusive rates and spot pricing," Phillips said. "The airfreight rate element was non-existent. It was a structured formula to calculate fuel surcharges, and it was a very public piece of information that was always chosen by a formula."

To Phillips, the overriding reason to drop the surcharges is to allow airlines the freedom to negotiate. "You can't reduce the surcharge, but you don't want to let go of market share," he said. "You want the ability to react to the market.

I say airlines have suffered enough for a long time, and they need to be able to grow and benefit from these low prices, too."

"We had a lot of frustrations with the surcharges. Shippers demand stability in pricing, and all-in gives you that," Mack said. But, he added, despite their size, the Big 3 have been nimble enough to remain responsive in the long term, compared with the European carriers. "When you need extra capacity, they have enough flexibility in their network to make it available during times of high demand."

"Long-term, change with the prior approach is needed," said Vito Losurdo, vice president, global airfreight services, for UPS. "There needs to be logical linkage to the price of jet fuel that is more in synch with what's going on in the market. We are in another period of transition."

Losurdo, however, didn't think Emirates, Qatar or SAS would gain much more business from forwarders from the rate change because the whole airline industry competes from a market-share perspective.

Possible pitfalls

While a drop in surcharges seems to make great sense right now, with oil prices expected to remain low at least into the second quarter, a few forwarders have expressed some misgivings if more dominoes begin to fall and all-in sweeps the industry too quickly.

"First of all, the method of how carriers administer the all-in rate will likely vary quite a bit by carrier," Losurdo said. "That will be a challenge for forwarders and shippers. It's going to take time for forwarders to implement the change. There will surely be discrepancies in how we change our traditional agreements with shippers."

Some carriers, he added, will also likely "be adamant that they will continue with the current methodology" and hold onto their surcharges as long as possible. "For carriers, if the price of oil goes back up, they may try to raise the all-in rates, but in the past they could not pass on increases fast enough. I think the same might happen here again."

One of the Big 3's emerging competitors, Turkish Airlines (see sidebar), was ambivalent about changing the surcharge model. "Last week, I had a meeting with airline executives about the all-in topic," said Halit Anlatan, vice president of sales and marketing for Turkish Cargo. "They said it would be 'not easy' if we did, especially if there's a fluctuation in prices. Most of the experts say in 2016 we're going to see oil rise back to US$80 to perhaps US$100 per barrel. But if the condition of the market generalizes, we are flexible for customizing if we need to."

DB Schenker's Mack, however, said this expected confusion could be a silver lining for carriers as large and as sophisticated as the Big 3. "As Emirates keeps adding capacity to their fleet, it will become eventually more and more difficult to maintain their flexibility," Mack said. "But I do not see that happening for the next three or four years. They have always been able to manage their growth, and we are confident that they will continue to maintain their customer focus in the future."

If you can join 'em, beat 'em

Beyond the surcharge issue, one of the more effective ways the Big 3 Gulf carriers have been able to beat the European and Asian carriers is to be strategic in the types of alliances and partnerships they develop and to take advantage of access to new markets.

Emirates, for instance, has chosen to go it alone and not join any of the major alliances. But in 2013, it partnered with Qantas Airlines and now flies 14 times a day from Australia to Dubai. From there, the Dubai carrier was able to secure more destinations in the South Pacific and Australian markets, while Qantas gained greater access in Europe, the Middle East and North Africa.

In 2012, Qatar Airways became the first of the major Gulf carriers to join an alliance--in this case oneworld and immediately benefitted from a wider east-west network. Qatar Airways Cargo and its oneworld partner IAG Cargo later signed a block-space agreement with IAG's British Airways on a five-times-weekly 777F Hong Kong-London service. This year, Qatar purchased a 10 percent stake in IAG, worth about US$1.7 billion. It is expected that Qatar will be able to gain a greater foothold in the coveted North and South American market through IAG's strength there. At the same time, IAG will also be able to go the other direction and penetrate deeper into South Asia and the Middle East.

Etihad, meanwhile, entered into an agreement with Colombia's Avianca Cargo to provide twice-a-week 747-8F service from Malpensa in Milan, Italy, and Bogota, Colombia. And by taking a 49 percent stake in Alitalia last year, Etihad is boosting the Italian carrier with new routes to North America and Asia while also funneling more Alitalia traffic through its Abu Dhabi hub.

For many North American and European carriers that have neither the funds nor the capacity to develop these partnerships, many of the old accusations about "Middle East subsidies" and the alleged unfair advantages they enjoy are resurfacing again. While the Big 3 carriers do enjoy huge natural advantages just by operating in the crossroads of the world and operate under oil-rich governments that build massive airports, they have always insisted that they operate as independent businesses--separate from their governments and each other--and purchase fuel the same way any other carrier does. As Emirates is keen to point out, virtually all big North American carriers have benefited by government bailouts via Chapter 11--often more than once.

In recent months, the rhetoric has become even more heated. In December, Lufthansa and Air France-KLM jointly wrote the European Commission asking it to investigate allegations that Middle Eastern carriers are unfairly distorting the market with government subsidies. Meanwhile, in the U.S., Delta, American and United recently launched a campaign to revise long-standing open skies agreements, calling on the federal government to limit access to Middle East carriers' access to U.S. destinations, cap the number of flights that can be operated and impose capacity restrictions, specifically on the Big 3 Gulf carriers.

Listen to the customer

After the sniping is done from across the Atlantic and Mediterranean, however, Freight Systems' Phillips says that few people would deny that the Gulf carriers have provided exceptional service. "[Emirates has] made a wonderfully successful airline," he said. "I'm a passenger of theirs almost every week. I can reach anywhere in the world without stopping. They have a very long-term vision, and put a lot of thought into connections to the subcontinent of India."

That's the key factor to remember, forwarders say. No matter how large the Big 3 gets, they can only remain influential in the cargo world if they continue to serve the customers who fill their belly space. And customer ser vice will likely be the ultimate decider of how the all-in rates will play out.

"I've been hearing for a long time that if Middle East carriers get too dominant, they may get cocky," Phillips said. "They have to remember that the forwarder is the customer. This is a business built on relationships, and they are playing on an open field. The customer knows what's going on."

European and North American carriers may gripe, but they won't be driven out of business unless they ignore their customers, he added. "Emirates has come in with competitive pricing and dependable service. They're certainly getting a piece of our pie."

Price structures should not be decided entirely by the carriers, said Turkish's Anlatan. "It's up to the local markets. Some customers are talking about all-in, but not everyone. There will always be customized rates for different customers. We wouldn't want it to be one general policy around the world."

"My gut feeling? I think all-in is going to spread everywhere," Phillips predicted. "Some airlines will take a longer time to adopt the new system. Some may say, we're going to stick to the three-tiered structure because that's what we know."

"For a certain period of time, there will be an advantage to those that do go back to all-in," said DB Schenker's Mack. "But only up until most of the industry adopts it." Most carriers, he predicted, will likely drop their fuel surcharges within the next six months.

"Cargo is like water--it always goes the easiest way," he added. "All-in makes it easier to do business, and when you do that you get more business."

From Riches ... to More Riches

The rise of the Big 3 in the Gulf is best appreciated by understanding just how little time the carriers have been in existence.

* Emirates--This is the granddaddy of the Big 3, at the ripe old age of nearly 30 years. When it was launched in October 1985, Emirates flew out of Dubai, United Arab Emirates, with just two aircraft--a leased 737 and an A300 (seen at right). Today, Emirates is the world's largest international airline by capacity, with more than 220 widebody aircraft and nearly 300 more on order. Emirates SkyCargo operates dedicated cargo flights to 20 destinations.

* Qatar Airways--The flag carrier of Qatar began as a regional carrier in 1994, but was re-launched with four aircraft in 1997 by the country's Emir Sheikh Hamad bin Khalifa Al Thani, who set it on its path of rapid growth. Today, the Doha-based airline has more than 150 aircraft in operation, plus nearly 250 more on order.

* Etihad--Etihad was launched via royal decree by Sheikh Khalifa bin Zayed Al Nahyan in 2004 as UAE's flag carrier. From its Abu Dhabi base, Etihad Airways now flies to 111 passenger and cargo destinations, with a fleet of 110 Airbus and Boeing aircraft, and more than 200 aircraft on firm order. Etihad is also planning a new, 2.5 million-tonne-capacity cargo terminal at Abu Dhabi International Airport by 2025.

A New Rival

A midst all this forward-looking growth, there is at least one airfreight carrier that has been creeping closer in the rear-view mirror of the Big 3 in recent years. In many ways, it's trying to beat the Doha-Dubai-Abu Dhabi Triangle at its own game: Location, market share, capacity and customer service.

"I talked with one of the Gulf carriers recently," said David Phillips of Dubai's Freight Systems Co. Ltd. "I asked them, 'Who's your biggest carrier competitor?' He said, 'Turkish Airlines. They are our real competition.'"

Like the Big 3, Turkish has geography on its side. With one foot in Europe and the other in the Middle East, Turkish's hub in Istanbul is also a major crossroads of the world, only it's much closer to the major European capitals. For instance, its Turkish Cargo division recently increased its freighter frequencies to Bulgaria and Hungary and is also setting up a truck feeder operation to Budapest.

"Our general strategy is to catch passenger flows passing through our country," said Halit Anlatan, vice president of sales and marketing for Turkish Cargo. "About 60 percent of that flow is east-west."

Turkish has already set some lofty airfreight goals for itself. "Our main focus for 2016 is to carry, by the end of that year, at least 1 million tonnes of airfreight," Anlatan said. "Cur rently, we're at about 700,000 tonnes and, by the end of this year, we hope to be at 825,000 tonnes."

Turkish Cargo has a network of more than 260 destinations. By 2020, Anlatan said the carrier wants to reach 1.5 million tonnes of cargo handled and increase its freighter fleet from 9 to 15.

In the headlong fight for cargo market share, Turkish is ready to scrap for it. Last month, the carrier cleared a major hurdle by opening a new cargo terminal at its Istanbul hub. With an annual capacity of 1.2 million tonnes, the facility has 250 percent more operational space, measuring 45,000 square meters; Dubai World Central, Anlatan added, only has 35,000.

"Turkish has been very aggressive," Phillips said. "They do a large amount of trade between the U.S. and India. Their operation in Istanbul is much better now. They're going to be a really big player."

In Turkey, government spending on airlines and aviation is about 3 percent of the nation's US$800 billion total GDP. "But then look at Dubai, where aviation spending is about 28 percent of GDP. I don't want to say that we can't eventually reach that, but that's tough to beat,"

Anlatan said. "By the end of 2018/ early 2019 we will be the world's biggest airport."
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Comment:Center of gravity: are the big 3 gulf carries the new hub of global freight logistics?
Author:Woods, Randy
Publication:Air Cargo World, International ed.
Article Type:Cover story
Geographic Code:70MID
Date:Mar 1, 2015
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