‘Domestic cargo traffic was the saving grace’

A decline in global trade in the wake of the economic slowdown has had a direct impact on India’s export-import movement. Things have been only made worse with ailing airline operators putting the air cargo business in a spot. However, the last three months have seen some glimmer of hope as import volumes improved marginally.

Experts in the industry also feel India has all the fundamental drivers in place for growing the air cargo business. At a DNA Conversations, Detlev Janik, CEO, AFL Dachser Pvt Ltd, Devdip Purkayastha, vice-president — strategy & business development, south Asia, DHL Express, and K Govindarajan, vice-president—cargo, Mumbai International Airport Pvt Ltd, discuss  the future of the logistics industry in India.

IATA says air freight is stabilising. Do we see that stability coming now?
Devdip: We are now definitely seeing a sideways movement vis-a-vis a continued decline in the past. Though International Air Transport Association (IATA) has increased its loss estimates for this year, I would like to separate India from the global trend. India has many things going well for its economy. It is growing at 5-6%. The GDP composition is also not export driven like China’s — it is only 20-30% for us. The demographic and consumption patterns, more relevant for express and domestic air cargo geography, is also favourable. Being a large country, it has many manufacturing centres, consumption centres and ports. This augurs well for goods movement within the country. We have got one of the most stable coalition governments at the Centre in a long time, which will probably see things move in a positive direction. So the fundamental drivers of the economy are intact.

Detlev: I think optimism returned the day election results were announced. Clearly, the demography is in India’s favour and the economy is driven by domestic demand, rather than export-related production. Hence, trade and manufacturing will grow. However, we should not omit the aspect that carriers will lose a phenomenal amount of money this year. How the carriers react to this situation and whether they’ll support or hinder the industry’s growth are the things that need to be monitored now. We have seen a recovery in import volumes, but at the same time, carriers have cut capacity.

The long-term assessment of fundamentals is there, but we must also not underestimate the medium- and short-term impact of policies of the airlines.

Govindrajan: I agree. We have been driven by a strong domestic market and it is evident that although imports have fallen, they have been far better than exports. We saw the decline mainly from November-December but then it was a slow decline, not like other Asian and European countries. March is usually a good month for us. We did not see a negative growth that month, which is an encouraging sign. Both exports and imports, specifically for MIAL, have grown 4-5 %.

From which geographies do you see an uptick for exports?
Govindrajan: To see a bigger growth, the US exports have to pick up. Traditionally, exports come from the garments sector and there’s also a lot of conversion from sea to air. Now sea transportation is also not taking place due to port congestion. Garment exports have gone down and will only pick up with the demand from the US.

Is commoditisation of air cargo in terms of pricing happening in India?
Devdip: There are two parts to it. One point is the supply and demand curve. So if we add a lot of capacity, which is happening across Asia-Pacific and the Middle-East, this then takes the capacity too far ahead of the curve and the yields suffer.

Where are we now?
Devdip: Now we are getting comfortable in both counts — volumes are down (as IATA said in its last release that cargo volumes are down 72% and yields are down 11%.) And as Detlev was saying, carriers are also adjusting capacity as they have phenomenal losses, which they cannot carry. And since this is a network business, lot of the plans don’t just originate in India, some may be part of the network and when there is a pull-up, let’s say due to the downturn in North Asia, may be the transit flights will be impacted and so will India.

Detlev: In terms of decline in exports and imports, imports have held up better but there needs to be a differentiation in segments and sectors. The Frankfurt airport statistics tell us that the decline in the Frankfurt-Mumbai sector is in excess of 50% (Jan-on-Jan). Imports from that sector have been sometimes substituted by imports from China, but very low from Europe.

Govindrajan: Intra-Asia business has been much better than the imports from Europe or US because good amount of business is still coming from China. But year-on-year, as an airport, we have seen a decline of about 15% as compared with Hong Kong or Singapore, which had 20-14% decline. Most of the Far Eastern markets are predominantly export-oriented.

So, is intra-India cargo movement offsetting the declines?
Govindrajan: Not just intra-India, the country still imports a lot of things.

What about commoditisation of air cargo for intra-India?
Devdip: There are not many cargo airlines in India. There’s just Blue Dart. Few others had taken off, but have stopped. Deccan Cargo has started now. The demand for services, especially air cargo, is growing with the increase in demand for products such as plasma TV, mobile phone and chips, etc. Secondly, there is more reach with all carriers moving to Tier-II and Tier-III cities.  On the supply side, it is very fragmented. With goods and services tax coming in, it will be more concentrated. There we will see consolidation. And on the demand side, the reach is increasing and so there will be need for more differentiated services. Therefore, my guess is it may not commoditise.

What is the most important factor for the growth of air cargo — demand, supply or airport development?
Devdip: The driver will be demand and the enabler infrastructure. If there is a volume growth, people will invest. The government needs to play a role in the airports, not only new ones but also in the existing ones, by increasing capacity and then processes. electronic data interchange (EDI) needs to come in, so that all stakeholders are in one loop.

Detlev: To some extent, commoditisation of air cargo has already set in. In a scenario where capacity exceeds the demand, you can see a pressure in pricing. It’s an interesting scene in India. On one hand you have scarcity of airports, movement of goods takes endless time and there’s a high degree of bureaucracy, at the same time to operate an aircraft in India, it depends largely on what the customers are prepared to pay.

Do you mean the tariff has to go up?
Detlev: Many carriers may not have been successful in judging the right pricing to operate profitably and what the customer is ready to pay. So tariff that the customer pays has to increase to make it interesting and viable for the operator to fly because every mile you fly, you make a loss. If it was possible to make cash profits, you would see more aircraft flying.

Devdip: The total supply chain cost in emerging markets like India would be as high as 13-14% as against 8-9% in matured markets. And if we look matured markets, air cargo has a larger share. The progression moves from sea to road to air, and it will also eventually happen for India. But at what pace, will be decided by the enablers. Companies are already working on restructuring their supply chain bases with the GST coming in.

What it is then Capt Gopinath is betting on?
Devdip: It will be exactly a fundamental driver. Maybe the timing is wrong now. So in the next one-two years, there may be general challenges of slowdown, over capacity and declining volumes.

Is the market overcrowded now? Is there a need for more players?
Govindrajan: In India, the growth is still there. Volumes have grown this year compared with last year. Airlines had increased capacity, expecting the market to grow. So a correction had to happen and is now taking place. Airlines have withdrawn capacity, freighters have been taken off. So creation of more capacity in this market will lead to unnecessary freight war, which is already going on and may not be good for the industry.

What are the challenges pertaining to airports? The turnaround time is still very high…
Govindrajan: Interestingly, in the last four to five months, great efficiencies have been built into systems. So the dwell time for cargo has come down by almost a day vis-a-vis last year. The export cargo that comes into my warehouses now gets to the aircraft in just 12-14 hours against 24 hours a year back. There also has been a percentage drop in cargo volumes and efficiency has increased in cargo clearance, which has also helped the dwell time. Import has come down by 10-12% and export is down 15%. However, there is a 50% improvement in the turnaround time.

As an airport we are moving into new regime to be able to offer all activities for export-import and warehousing, under one roof, to the airlines. This is to enable the airlines focus on their core activity as we takeover the cargo handling—from receiving the cargo, processing, pallatisation to feeding it into the aircraft. This is also a new revenue model from the airport operator’s point of view. It’s a good deal for the customer also who had to deal with different agencies for different processes. We are now handling 15-20% of the airline’s customers directly.

How well does this help the agencies?
Detlev: Right now MIAL is handling the air-side of operations. So as freight forwarder, we give cargo to the airport operator. But we really wish that we were able to deliver or take unit loads to the airlines rather than delivering everything in bulk. But then it would require us to have facilities on the airport to consolidate and build those unit loads. I understand there is strictly no space for us to do that.

Govindrajan: I agree. Pallatisation and segregation will happen in the next phase. The revolution of sea cargo came about with containerisation. Today 75% of the sea cargo has been coming from factory-built containers and 60% of containers go to factories and manufacturing sites. Air cargo will also logically move into it. But besides space, capability is also a criterion.