(Exclusive)—Fast on the heels of DHL’s latest quarterly report, FlyingTypers spoke to Tobias Meyer, COO of DHL Global Forwarding (DGF).
     Tobias Meyer was in expansive and optimistic form, and with good reason. Deutsche Post-DHL Group reported decent returns for the first quarter—year-on-year revenues suffered a slight drop due to the sale of subsidiary Williams Lea Tag, but operating profits rose 2.3 percent to €905m. DGF, the Group’s forwarding arm, saw revenue rise 1.3 percent to EUR 3.6 billion in the period.
     However, this did not tell the full story because, once adjusted for negative currency effects, the latest numbers actually represented a 7.2 percent improvement compared to a year earlier.
     Even more impressive, DGF’s profit surged 75 percent year-on-year to EUR 70m.

Overly Cautious Predictions

     Tobias Meyer is convinced the future is bright, not least because he believes the 2018 air freight demand projections by most analysts were overly cautious.
     “Cargo volumes exported in 2017 total up to around 24 million tons,” he said.
     “The projection for 2018 is roughly 25 million tons, so an increase of approximately 4 percent.
     “Looking at market growth rates for just the beginning of 2018, I personally believe full year projections are too conservative,” Mr. Meyer said.

A Closer Look

     Technology, Consumer, and Engineering— by the main verticals on which the industry relies—have dominated demand growth.
     But Meyer also reported “very strong” Perishable and Chemical product volumes and noted that since May 2016 there had not been a single month when growth rates in the Chemical sector fell below 15 percent year-on-year.

Sensors & Sensibilities

     He also said e-commerce was rapidly transforming demand across verticals, while the evolution of products and incorporation of new technology was creating fresh opportunities for air freight forwarders.
     Illustrating the latter point, he highlighted the growing use of sensors.
     “Numerous products across different industries have measuring devices installed,” he explained.
     “And the trend is increasing at a fast pace.
     “Think about ‘Smart Homes’ with their intelligent refrigerators, air conditioning, radiators, etc.
     “Movement or altitude measures are installed in nearly every single mobile phone nowadays.
     “Every halfway modern car on the road has intelligent pressure control.
     “These are just a few examples, but there are definitely more.”

Paradoxically Speaking

     According to Tobias Meyer, these multiple demand drivers have transformed air freight forwarding from a sellers’ market to a buyers’ market since late 2016.
     “At present, demand is exceeding supply, mainly fueled by the strong performance of the largest economies,” he said.
     “Given all the political tension and talk about trade barriers this feels like a bit of a paradox, but this is the situation at present.”

How About Those Rates?

     The imbalance of supply and demand has prompted some carriers to reduce the share of capacity made available under block space agreements to increase their exposure to spot markets.
     “Price pressures are particularly apparent outbound at major gateways in Asia Pacific and Europe,” he said.
     “In both geographical regions, average buying rates have increased significantly by 20-30 percent, comparing the beginning of this year to last year.
     “Export rates in the Americas also increased at a high single-digit rate during the same period.”

The DHL Action

     “Our approach is to secure sufficient lift and remain as independent as possible from the potentially expensive and constrained spot-market.
     “Even if we had some seasonal softness in April also due to the phasing of some holidays, shippers will have recognized the market has turned and accept the fact that rates have tightened and pay a premium for capacity.”

Environmental Impact

     According to Mr. Meyer, space has been particularly tight where regulations have limited capacity additions.
     The Hong Kong Environmental Protection Department, for example, last year introduced a noise quota scheme to reduce noise pollution at HKIA.

Freighter Cancellations

     This meant non-compliant aircraft could not operate at night, which had a major impact in Q3 and Q4. And, he added, freighter service cancellations, particularly by Chinese carriers, have increased.
     “We saw months when 40 or 50 freighter flights were cancelled out of Shanghai alone,” he added.
     “Some of these flight cancellations seemed to be intended to drive up load factors and carrier income.
     “This creates challenges for freight forwarders, in particular during the Tech- and e-commerce driven Peak Season outbound Asia.”

Challenging Other Obstacles

     Regulatory obstacles are also apparent in non-Asian markets. In Europe, as reported in FlyingTypers, double-digit growth at some leading hubs caused congestion last year as well as record volumes. “The increase in demand for air freight coincided with rising demand for leisure travel, with passenger aircraft and freighters competing for the limited number of slots,” Tobias Meyer assures.
     “As an immediate reaction, some high-profile cargo carriers were forced to shift freighter flights from slot-constrained Amsterdam to next door Liege or other nearby airports.”
     He said addressing these shortages would take time given the competing needs and different operational criteria of passenger and cargo airlines.
     “It is in the nature of the air cargo industry that we need to flexibly respond to fast-changing needs,” he said.
     “Air cargo demand for new High-Tech product launches that need to get into the retail shops, unforeseen demand, or factory downtime cannot be addressed through a biannual routing schedule alone.
     “Unlike the passenger market, which is a market dominated by return flights, cargo carriers connect cargo flows using more complex routing and enabling one-way flights.
     “The greater share of cargo moved on passenger aircraft, coupled with slot scarcity and the fact that slots are regulated through administrative bodies on international and regional levels, means achieving short-term flexibility is increasingly demanding.”

No More Parked Aircraft

     Meyer believes that finding a short-term solution to the lack of capacity to help bridge the gap between supply and demand will be difficult.
     “There are no suitable aircraft parked in the desert anymore and most freighters on firm order—82 percent to be specific—are destined for integrators,” he said.
     “The remaining freighters on order for conventional carriers, those that we partner with, serve the purpose of fleet replacement rather than new capacity additions to market.
     “Given that airlines can often yield more with passenger aircraft, airlines have also no real incentive to convert to freighters.”

Leading The World

     “DGF,” he insisted, “maintained its position last year as the world’s leading air freight forwarder in terms of volume and footprint despite turning away some business.
     “In 2017, we consciously stepped back from some volumes,” he explained.
     “We have witnessed a number of very powerful global trends—double-digit growth in general air freight, double-digit growth in Express volumes, double-digit growth in e-commerce—married with stagnant growth in freighter capacity.
     “Buying rates react to shifts in supply and demand.
     “We had to release some contracted business during the course of 2017, because profitability was not attractive.”

Diverse Approach

     “When looking at DGF growth across industry verticals, it is worthwhile to point out that some industry sectors are dominated by a handful of very large shippers. If you have and keep them, you grow with the market; if you give up one of them, you don’t grow with the market. For us at DHL Global Forwarding, it is more important to strengthen the portfolio in industry sectors which have a more diverse structure.”
     Of course, being part of one of the world’s largest transport groups also benefits DHLGF, not least because of the Group’s significant airfreight assets. However, Meyer downplayed the advantages.
     “An air freight forwarders’ business model is asset light by definition,” he insisted. “What this means is forwarders generally do not purchase a fleet of aircraft to accommodate air freight market demands.
     “DHL Express, as an integrator, does have a fleet of aircraft.
     “Close cooperation with DHL Express is a valid option, and wherever possible, we use them, but DHL Express aircraft are very well filled with their own freight.”
     However, despite being asset light, DHL Global Forwarding does operate its own-controlled rotations through ACMI contracts, which are deployed to the advantage of DGF customers.
     “While own-controlled lift has a strong value proposition for our customers and can provide some relief to capacity constraints on certain routes, it only addresses a certain part of the capacity demand,” he added. “Therefore, we also increased our inventory of signed Blocked Space Agreements for 2018 to provide a reliable service, despite paying higher rates for them,” Tobias Meyer concluded.
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