Overcapacity clouds air cargo boomlet

BANGALORE: Is the air cargo market going the passenger aviation way? Many industry observers believe so, what with capacity addition surging at a much faster pace than demand. This is likely to pressure yields, and as that happens, players will be goaded to push up volumes to salvage operating margins. And this vicious cycle could continue till consolidation takes place.

This being the reality, civil aviation minister Praful Patel’s recent announcement that overseas investors may soon be allowed to own as much as 74% in Indian cargo airlines compared with 49% now has failed to excite the industry as much as it should have.

Take the case of US-based UTi Worldwide Inc’s Indian subsidiary, UTi India, which is operating as a forwarding agent here and growing at much above the industry growth rate. It is not jumping at Patel’s announcement to start a cargo airline immediately.

“There is plenty of capacity in India. We will use that before we think of bringing in our own freighters,” says UTi India managing director Rajiv Bhatnagar. UTi operates around 200 chartered freighters in Hong Kong and China.

According to Bhatnagar, air-freight capacity is currently 30% more than consumption mainly due to the boom in the passenger aviation industry.
“As domestic airlines add new aircraft to their fleet and foreign carriers increase frequencies to India, we are getting that much more cargo capacity in the belly of the aircraft. The government has estimated that the current 200-plus aircraft fleet strength of passenger airlines will grow to 600-800 in the next five years. All this adds enough capacity. Today, dedicated freighter operators like Lufthansa Cargo and others carry only 20% of the total cargo; the remaining 80% is shipped by passenger airlines,” says Bhatnagar.

AFL Pvt Ltd’s head of market development and brand communication Manoj Chandra worries that the demand-supply imbalance will put pressure on yields, forcing players to resort to the volumes game.

“Capacity expansion will definitely impact yields. This will compel many to scale up operations to sustain current levels of yield. All this will stimulate demand. Customers have already started moving to multi-modal shipment (surface and air), due to increased air-cargo services,” says Chandra.

However, despite the current oversupply, Bhatnagar acknowledges that there is huge growth potential in the air cargo segment, with the retail explosion waiting to happen.
The ambitious retail plans drawn up by Bharti Enterprises (with US retail giant Wal-Mart), Reliance Industries Ltd and other companies to will, over time, boost demand for domestic air cargo shipments.

Industry experts believe that as the Indian market matures, cargo transportation will shift from surface to air. According to data posted on the Airports Authority of India (AAI) website, international cargo handle by the four metro airports (Mumbai, New Delhi, Chennai and Kolkata) grew by 10.79% last year (2005-2006) to 7,62,387 tonnes from 6,88,160 tonnes in 2004-2005. Over the last five year, it has surged 56%.

India currently has only one domestic cargo airline, Blue Dart Express Ltd, which is controlled by Deutsche Post AG’s DHL Worldwide Express. Budget airlines, Deccan Aviation Ltd and Go Air, also have plans to set up cargo carriers. State-owned Air India and Indian are also converting passenger planes into freighters to add cargo capacity.

Express service provider First Flight, which recently inducted two eight-tonne ATPF aircraft, is planning acquire Boeing aircraft for deployment on trunk routes. “Today, our air cargo capacity is used for 30-40% of our captive courier service while 60-70% is still being transported by passenger airlines. Once the Boeing aircraft join our fleet, our entire courier service will be operated on our own aircraft,” says First Flight managing director RK Saboo.

And as opportunity knocks on the door, Saboo has initiated talks with strategic investors for the infusion of capital to expand his business. “We are at a very advanced stage of dialogue with a strategic investor and will dilute a small part of our equity,” says Saboo.