he price differential between air and ocean on major East-West lanes has significantly narrowed in recent weeks in the lead up to Chinese New Year.
CNY starts February 10 this year. This marks the traditional close-down of factories in China to give at least a week for workers to migrate to see families, although some factories are expected to close early and open later, with output impacted for up to three weeks.

     In the lead-up to the break, ocean freight all-in rates have been spiraling as lines have introduced a series of General Rate Increases and Peak Season Surcharges. According to the Shanghai Containerized Freight Index, ocean freight rates per TEU were hovering around $1,400 per TEU mark in mid-January on trades to Europe. Some carriers have also announced further PSSs and GRIs of $200-300 per TEU for the end of January on Asia-Europe trades.
     Rates to U.S. West Coast ports and U.S. East Coast ports were over $2,500 per FEU and $3,600 per FEU respectively in the latter part of January after recording healthy increases in the weeks since the turn of the year. However, on the Transpacific trades the rates trend is less clear, with spot rates fluctuating depending on the latest news regarding the ongoing ILA/USMX port labor dispute, which threatens to close ports if workers strike.
     By contrast, airfreight rates slipped in December as the trade returned to business-as-usual, following the volume boost received earlier in the year from the launch of new technology products by the likes of Samsung and Apple.
     Drewry’s East-West Air Freight Price Index, a weighted average of airfreight rates across 21 East-West trades, fell by 1.4 points from November to reach 110.8 in December at just over $3.50 on average per kg. The December decline came after four consecutive months of gains from the low of less than $2.25 on average per kg in July.
     “The waning effect of new hi-tech product launches on traffic demand was the primary contributor to declining rates from Asia into North America and Europe,” said Simon Heaney, research manager at Drewry, in the company’s new monthly Sea & Air Shipper Insight report.
     “Drewry expects pricing on routes out of Asia to decline further in January.”
     As ocean freight rates rise and air freight rates remain stagnant, Drewry expects an uptick in air freight demand levels in advance of Chinese New Year as the mode benefits at the expense of the ocean market.
     Drewry said that with ocean currently facing capacity issues such as the looming threat of strike action at U.S. ports and carriers cancelling voyages, some shippers, particularly those wanting to move higher value goods, might be tempted to shift some cargo to air.
     “Air cargo is not a viable Plan B for all shippers, but for those moving expensive goods it remains a justifiable alternative, particularly at a time when the reliability of the ocean supply chain is threatened,” said Heaney. Some container shipping lines have now announced major GRI/PSS of over $700 per TEU for the start of March, when they hope market demand will again start to pick up after the CNY slowdown. However, according to forwarders, ocean freight rates are expected to see a prolonged stagnant run post-Chinese New Year.
     The ocean freight sector also faces a number of structural issues. Peter Sand, Chief Shipping Analyst at Bimco, said the collapse of the financial markets in 2008 was still taking its toll on ship owners who, assuming continued high growth in world trade, had ordered new buildings at an unprecedented level.

     “The effects of this overly-optimistic market outlook continue to haunt ship owners, who are trying their best to manage the overhang of tonnage by slow-steaming, idling, and recycling,” he said.
     The container fleet expanded by 1.1 million TEU last year and will increase by a further 7 percent in 2013.      Moreover, the introduction of Ultra Large Container Ships (ULCS) on the Asia-Europe trade increased by 43 percent last year just as growth in Europe slumped. More ULCS will be delivered this year, putting further pressure on rates.
     “In an effort to establish reasonable returns on investment, liner companies resort to deactivating routes, laying-up, and demolishing tonnage extensively,” said Sand.
     “Going forward, the route to and perspective of recovery will greatly depend on the container trade’s ability to balance the supply side to demand.”
     With cracks in liner discipline already appearing in mid-January as some lines appeared to break ranks by reintroducing laid up vessels to seek out market share gains, and with latent market capacity running at some 20 percent, most analysts expect liner rates to decline in the second quarter, again widening the gap between ocean and air freight rates.
SkyKing

Editor’s Note: On December 13, 2012, IATA held its Annual Media Day event in Geneva, Switzerland, with scores of global press in attendance—including FlyingTypers.
     We noted in Part One of this series that the IATA event took place at the doorstep of Christmastide, just as festive, year-end events began and many on this planet were in a holiday frame of mind.
    So now as 2013 begins and we are all presumably looking ahead (and thinking what happened in 2012, along with the state of our money, safety, and the environment) here is the rest of the IATA 2012 encounter. We’ve included a deep-dish report and some additional commentary from Ted Braun, our reporter on the scene in Geneva last December.

irst to speak as “Media Day 2012” took off was IATA’s Guenther Matschnigg, SVP Safety, Operations & Infrastructure.
Matschnigg’s presentation was titled “Driving Safety Gains through Global Standards and Information Sharing.”
     In the good news category, the best global aviation safety performance was recorded last year. The industry rate is 0.19 hull losses for western-built jet aircraft; IATA members boasted a rate of 0 for 2012, the equivalent of one accident (per 5.3 million flights) in 14,000 years of flying.
     Africa still has the highest accident rate at 3.9 for the year, targeting runway excursions and loss of control as the primary accident types in Africa.


     African carriers that passed the IOSA (IATA Operational Safety Audit) actually had no accidents.
     The regional focus plays a major role in safety improvements and will be carried forward, including IPSOA (Implementation Program for Safe Operations in Africa) and flight data analysis under the FDX (flight data exchange, for IATA members).
     These plans make up what is known as the Abuja Declaration, which foresees all carriers in Africa going through IOSA by 2015, whether they are IATA Members or not.
     The IATA move has been endorsed by the African Union.
     An additional program is Enhanced IOSA, representing a continuous IOSA program to manage safety programs within the airline.
     One of its intended outcomes is the standardization of IOSA auditors and the overall audit process, eliminating any variances. In terms of measurable results, runway excursions were down from 28 in 2009 to 17, with zero fatalities.
     Additionally, IATA launched ISAGO (IATA Safety Audit for Ground Operations) in 2008, which deals with incidents/damage on the ground, the cost of which which can run up to $4 billion per annum.
     By the end of 2012 there were 173 ISAGO stations audited, with 111 providers at 133 locations.
     IATA has also launched GSIC (the Global Safety Information Center), an umbrella organization that incorporates IOSA, ISAGO, FDX, and 3 other databases, all of which collect data from carriers.
     Mr. Matschnigg said that the industry must move from a reactionary mode into a proactive, preventive one; therefore attitudes need to change, with data usage the best way to establish predictability.
     “For example information provided by FDX allows airlines to rectify approach procedures on specific runways,” Mr. Matschnigg said.


     We learned that IATA will significantly expand its data collection in 2013 by integrating all current safety programs into ODM (Operational Data Management) to further improve security, with new elements added for security, maintenance, flight operations, training, and fuel supply.
     “In order to keep the bar high, regulatory oversight, training, and cooperation are key,” Mr. Matschnigg noted.


     In response to questions regarding the cost structure of safety programs such as IOSA, Mr. Matschnigg elaborated that IATA employs 8 independent audit firms worldwide [Australia, France, Germany, UK, and four in the U.S.], which use standardized questions.
     The cost of the audit is borne by the carriers and is the same, regardless of region/country.
     Mr. Matschnigg commented that results for Africa in 2011 were driven by the fact that more non-western built aircraft are in operation there.
     IATA is working with ICAO to come up with a structure that will no longer distinguish between western and non-western built aircraft when collecting data.

     Having warmed up the crowd with the most fundamental and all-important criteria—safety—IATA Director General and CEO Tony Tyler and Chief economist Brian Pearce delivered the “State of the Industry and Global Economic Outlook.”
     The key topics addressed were safety, financial performance, the benefits of aviation, the environment, regulation, taxes, infrastructure, security, and simplifying the business. Subsequently, more detailed presentations followed.
     Addressing the industry financial performance, the DG remarked that the $4.1 billion anticipated profit in 2012 could now be revised to $6.7 billion for the year, along with an estimated up to $8.4 billion foreseen for 2013. "High fuel prices have become of fact of life" and "cargo growth has been stagnant," said Mr. Tyler.
     While making the point that the positive uptick was good news, Mr. Tyler said that the result reflected a 1 percent profit margin for the industry, which had to be kept in perspective against the need for a 7-8 percent margin to cover the costs of capital.
     “The industry is keeping its head above water. But only just. It’s a tough business working hard to make it through tough times,” said Mr. Tyler.


     IATA Chief Economist Brian Pearce picked up from there and noted that air freight used to be a good indicator, but "that's not the case this time and the divergence has more to do with the pattern of economic growth.
     “We will not see air freight recover to any extent until the economy rebounds.”
     Pearce pointed out that business confidence has declined but is consistent with the slower pace of growth, while travel markets are still expanding. RPK show wide variations with growth led by China, India dropping off, the U.S. flat [mature market], and Japan in [long term] decline.
     The Japanese domestic market has never fully recovered from the tsunami. RPK carried by U.S. carriers is no higher than it had been in 2008.
     In terms of net profits, 2 percent has traditionally been the 'stall speed' for airline financial performance. The largest airlines in all the regions have been generating 2006 equivalent revenues.
     Airlines managed to keep cash flowing despite very difficult economic times; the exception is air cargo—load factors are low "flying around half-empty" whereas utilization has been high for the passenger business.
     Fewer new airlines are being set up and consolidation continues; the U.S. is left with 4 majors.
     Oil prices continue to outpace world trade growth while the industry outlook shows further expansion for travel, with around 3.1 billion passengers in 2013. The U.S. is expected to drive a moderate growth in cargo volumes.
     Mr. Pearce also said that "we see modest improvement in profitability; the American airlines are performing relatively well, while the European airlines continue to struggle, yet the downward pressure is starting to ease; it is still a very risky environment, particularly in Europe."


     In a “Sun Will Come Out Tomorrow” moment, DG Tyler remarked that “2013 will be the 100th year for civil aviation, a milestone with 57 million jobs globally and a catalyst for global expansion with 2.2 trillion in economic activity.
     "Industry potential to grow is strong, with the majority of that growth in developing markets.
     “We need the right regulation, and tax and growth must be environmentally sustainable.
     “The targets include improving fuel efficiency by 1.5 percent annually to 2020, to cap net emissions from 2020 with carbon-neutral growth, and to cut emissions in half by 2050,” said Mr. Tyler.


     IATA pointed out that the European Union's Emissions Trading Scheme (EU-ETS) has polarized the world; with the clock now stopped, at ICAO negotiations have moved into high gear to develop a global approach.
     “There will be pressure on the airlines, which will be a challenge, and fleet age and composition will drive the outcome.
     “What is needed are more efficient routes and progress on the ‘long delayed’ Single European Sky.
     “There are just bureaucratic agreements that have produced very little in the way of real efficiencies.
     “The combination of several national airspace control entities to reduce the cost base has been touted, but none of that has been done.
     “The targets the commissioners fought for are welcome and are more ambitious, but the states need to take steps to achieve these targets.
     “The present state-of-affairs is less than disappointing, while the industry wastes billions of dollars and burns fuel unnecessarily due to lack of political will and effort to act decisively.
     “IATA has been defending changes to regulations, such as the slot system rules regarding ‘use-it-or-lose-it’ that were to be globally changed to 85-15 [ratio of flights operated versus slots allocated] from the accepted 80-20,” said Mr. Tyler.
     The word was just in from the European Parliament that the 80-20 system had been preserved.
     Similar work is underway in China, Columbia, India, Mexico, Poland, the UK, and the U.S.


     Passenger rights and legislation are a major issue worldwide and concern with national regulations present a challenge.
     Recently legislation was put in place in Israel (and next in the Philippines), which IATA thinks will result in confusion for passengers transiting on intercontinental flights. If additional countries develop their own tactic instead of a harmonized global approach it will have the same impact.
     Taxation is crippling the airlines, IATA said, vowing that it will continue to fight governments on the issue. Infrastructure is another area where growth can be facilitated or inhibited in terms of cost and availability.
IATA reported that their action resulted in some progress in India and Brazil, removing airport development fees.
     Addressing security, IATA noted a big bottleneck in the travel process. IATA has developed detailed definitions, comparing tests at AMS, LHR, and GVA airports focused on identity and document verification. Desired outcomes will be supported by the "Checkpoint of the Future" concept for which blueprints have been developed and approved with the aim of having the first version tested operationally in 2014.


     Another program, Simplifying the Business (StB), initially focused on improving service and cutting costs.
     It has been developed further and a white paper produced entitled "NDC - new distribution capability," which describes what travel will look like in 2020 and outlines what to do to enable innovation and invite competition.
     It encompasses developing standards for more modern systems to facilitate new entrants into the market and create new opportunity for within the travel distribution arena, including the GDSs.
     In responding to questions, the DG made the following points:
          •  There is a shortage of finance in Europe for aviation.
          •  While it holds promise, it is difficult to achieve synergies and consolidation.
          •  European airline CEOs are the gloomiest bunch, exhibiting deeply-felt frustration with regulations that grind them down.
          •   Infrastructure privatization needs robust regulation and consultations with the users in light of excesses seen in Brazil and Portugal.
          •  The intensely competitive nature of the airline industry has been a drain on profit margins and the industry has never made money.
          •  Q1 2013 “The Bankruptcy Season” could see further culling of weaker carriers.


     Paul Steele, Director of Montreal-based (Air Transport Action Group) Aviation Environment Group, presented “Meeting Aviation’s Environmental Commitments” and elaborated on the points raised by Tony Tyler.
     Paul said, “aviation is the only industry to have set specific targets—50 percent reduction in net emissions by 2050 (CNG - carbon neutral growth).
     “Aviation uses 10 percent of the total liquid transportation fuel globally; therefore delivering biofuels to aviation is a smaller challenge than delivering biofuels to other transport sectors in general.”
Aviation “has a highly concentrated distribution system with 190 airports covering 80 percent of passenger traffic.”
     Contrast that with 161,768 gas stations in the U.S. Over 1,500 passenger flights with biofuel have taken place, with the main challenges remaining “the valley of death” being full-scale commercialization, production, and delivery to aircraft, and the price.
     In order to move from laboratory scale production to full-scale production around the world, the government must support industry efforts.


     Biomass in Europe, for instance, is directed at producing bio-diesel instead of focusing on the stated strategy of electrifying the road transport sector. In response to a FlyingTypers question regarding the foreseen global limits on the availability of water supply needed for food production, which may impact water use to produce aviation biofuel, Paul stated that the industry is looking at a variety of approaches. This includes using many types of biomass, including cooking oil, wastes, and not necessarily the components or types of fuel used for automotive fuel supply.
     The EU ETS freeze does not exclude flights within Europe and there is an automatic snap-back clause if no progress is achieved at ICAO through negotiations. Comprehensive agreement is needed to head off national and regional initiatives that will be disruptive and counterproductive for the industry.


     There was no mention of aviation coming out of the UN Climate Change Conference in Doha, which ignored the progress made at ICAO for a new CO2 standard for new aircraft types to certify fuel efficiency. The ICAO Council was mandated to pursue the feasibility of a single global scheme and develop a framework for states to implement harmonized national measures.
     The single scheme proposals being evaluated consist of a mandatory offsetting scheme, a fund to be reinvested back into the industry to develop biofuel and/or assist countries to develop a scheme, and a global emissions trading scheme modeled after the EU ETS.
     The ICAO approach suggests a global framework rather than a patchwork, yet it remains extremely difficult to accommodate the needs of various players from developed and developing countries in a unified regime.


     Eric Leopold, (left) the IATA Director Passenger delved into the future travel distribution concepts and talked about NDC, The Next Big Thing in Airline Retailing. IATA developed a mock-up “Build Your Trip” website for a passenger using NDC (new distribution capability), a customer-centric concept and approach. A pilot is planned for the end of 2013 with investment from a wide variety of stakeholders including GDS, IT companies, and airlines.
     The aim is to bring a “retail” experience when shopping for travel products, more Amazon-like than GDS. Eric concluded by saying that “historically, standards and innovation mean lower fares.”


     With a cargo hat on, yours truly found the most stimulating presentation to be “Understanding our Passengers and Improving the Travel Experience,” a collaborative effort by Mike Muller, IATA Head, Interline & Intermodal Policy; Paul Behan, Head, Passenger Experience; and Yanik Hoyles, Head Business Development.
     It drew the clearest and most stark contrast between where the passenger business is headed vis-à-vis the cargo business, which is still stuck in trying to get the present to work more efficiently.
     These people work on transformational programs and explained their approach, starting with the 2012 World Passenger Symposium where NDC was discussed for more than one day.
     Simplifying the Business (StB) is a think tank—5 airlines (AF, BA, DL, EK, NZ) HP, Expedia, Oracle, Amadeus, ITA, and LEK, all worked for two years to develop the vision crystalized in five goals that “will enable us to get close to the vision described in the paper.” A new StB brochure has been made available by IATA.
     Paul Behan (right) talked about the social media-driven IATA survey, which over a 12-month period engaged 3,000 participants from more than 130 countries [17 percent North America, 36 percent Europe, 17 percent Asia-Pacific, 21 percent South America, and 9 percent Middle East and Africa] to communicate what actual travelers would like to see improved.
     Fast travel, an initiative that would give passengers more control over the journey through self-check-in, self-bag-tag, and self-boarding, as well as the use of passenger data to facilitate travel, and the real-time interaction between passengers and travel service providers all show significant potential.
     A "Ready-to-Fly" concept envisions a traveler confirmed by government bodies in advance, ensuring that a passenger can fly from a regulatory perspective, and also arrive without unexpected surprises.


     Mike Muller spoke about intermodality—passenger travel from a single source for seamless transportation between airlines and other modes of transport in a transparent fashion. Ironically, this is modeled after the integrators on the cargo side, aiming for passenger travel using different modes of transportation in a combined, seamless journey with the objective to save time, money, and the environment.      ‘Customer’ is the word being used more and more to describe the passenger who expects one-stop-shopping for all travel—single fare and single ticket—through to checking of bags and single conditions of contract—in short, integrated and harmonized passenger rights.
     The question that comes up is whether the current airline distribution system is a good model.
     What is driving such thinking and initiatives is that with rising numbers of passengers projected to double by 2030, there clearly is a need for some serious innovation in order to serve that growing demand.
     The drivers are convenience, value for money, and—because this is Euro-centric—the push for integrated/intermodal passenger transportation by EU authorities who, it is being said, “love rail and hate airlines” and want to see full service reservation, payment systems, and service in place.
     EC regulations force GDSs to display train services on the primary booking screens to emphasize those competitive services.
     It is hoped that this much ballyhooed NDC (new distribution capability) would provide greater transparency for airline products, and IATA is proactive in wanting to be at the forefront of offering similar transparency for other modes of transportation.
     How much of this is truly proactive or defensive is for you to decide, but IATA has some latitude and funding to explore future-oriented solutions and work on developing the underpinning standards—something that may be embraced by its members when they pan out.
     If history is any indication, e-ticket started out as one such initiative and is now ubiquitous in the business.
     In summary, this “back-to-the-future” concept will entail consistent and predictable processes, without surprises, across the entire travel experience—no repeated queuing up for separate check in.
     What is there not to like?
     WPS will take place in October 2013 in Dublin, Ireland, when updates are expected.


     Ken Dunlap, the Washington, D.C., based IATA Director Security & Travel Facilitation, elaborated on the Checkpoint of the Future, a vision which has been defined and road mapped with key components currently being tested.
     While strengthening security, it also aims at improving the passenger experience, supported by an advisory group consisting of 12 key senior executives from airlines, airports, governments, ICAO, Interpol, and others.
     It remains grounded in the present, taking into account available technology and equipment, yet introducing new and innovative procedures “that maximize the opportunities presented by the existing checkpoint configuration.”
     The concept of “differentiated screening” taking advantage of existing, national, ‘known traveler’ programs, such as those in the U.S. and Canada, plus various other known travel schemes, could be adapted to the security checkpoint.
     The outcome to strive for is an increased throughput rate, reduced waiting times, and the potential for more and more airports offering a guaranteed service level.
     A gradually progressive approach is foreseen with checkpoint 2014, checkpoint 2017, leading to checkpoint 2020, by which time differentiated screening, less intrusiveness, and sophisticated, real-time identity management (from departure to arrival) would be common practice.
     Essentially, passengers go through the same lanes, and screening technology automatically self-adjusts—fast and efficient.
     Component trials were concluded with airport partners at Geneva, Heathrow, and Amsterdam, with more trials planned for 2013 and deployment of the first end-to-end checkpoint in 2014.
Ted Braun

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