The financial viability of China’s airlines was recently put under Macquarie Research analysts’ considerable microscope.
     While the performance of their respective freight divisions is a major concern for the country’s leading airlines, not all carriers are suffering equally.
     According to Macquarie, Chinese airlines are due for a “choppy ride” in the months and years ahead, with margins set to remain thin despite robust domestic passenger traffic growth.
     International pax movements will prove the “new growth engine” for volumes as disposable income rises, but these are currently loss-making.
     Domestic passenger revenue streams are also under pressure from LCCs and high speed rail alternatives.

     In terms of financial performance, Macquarie estimates China’s leading airlines were all loss-making in the first quarter of 2014 except for Air China, although the analyst expects profits to improve as the year progresses.
     On the cargo side, Macquarie believes China’s airlines have scope to make numerous performance improvements which could help boost bottom lines, but also concludes that major gains will only come when global air freight markets fully recover.
     “The air cargo segment remains a drag on earnings, as we estimate global air cargo markets have remained loss-making this year,” said the analyst, adding that Air China Cargo had reported an RMB 349 million loss in 2013.
     Macquarie said one of the reasons for the losses by China’s airlines was that the global air cargo market was still suffering from excess supply despite global airlines reducing freighters operated.
     “Although air cargo demand has improved, it is offset by capacity increasing,” said the report.
     Macquarie believes Air China, one of the country’s major carriers in terms of its cargo performance due to its lower cost base, may have seen its air cargo segment return a profit in 2Q14.
     “The air cargo sector was loss-making in 2013, but Air China’s cargo business was profitable in recent months due to a change in freighters from B747-400BCF to B777, which offer an estimated 5-10 percent cost savings, and we believe yields have yet to rebound,” said the report.
     “Further, the co-operation with China Postal Airlines on its courier business is a higher margin than Air China’s in-house cargo business.”
     For China Eastern Airlines, cargo losses “remain a drag on earnings despite a strategy to reduce freighters via a long-term plan of operating only 6-8 compared to 14 at end-2013.”
     China Southern Airlines’ cargo operation is currently loss-making, but its exposure is low given that cargo only accounts for some 7 percent of revenue.
     Macquarie agrees with other analysts that air cargo markets are picking up as 2014 progresses, but carriers still face a stern battle for modal share. “We believe demand has disappointed due to sea transport substitution,” said Macquarie.
     “Air cargo is the primary mode of transport for high-tech goods such as handsets and notebooks, and Macquarie’s tech team forecast notebook shipments to bottom in 2Q14. Further, we expect a spike in air cargo yields as new hi-tech products are launched.
     “We estimate air cargo demand is likely to be driven by an improving global economy as this would bring back the ‘feel good factor’ and drive purchases of higher-value goods as low-value consumer goods, such as apparel and furniture, are transported by sea.”
     However, even in an improving market, China’s leading carriers will face challenges on yields and margins. “We believe the cargo business remains under pressure,” said the analyst. “We estimate cargo yields to decline 0.7 percent this year before a gradual rebound to 0.3 percent and 1.3 percent year-on-year in 2015 and 2016, respectively.”
Sky King

The Union Minister for Finance, Corporate Affairs, and Defense Arun Jaitley, ready for the presentation of the Union Budget in Parliament. On his left is the Minister of State for Commerce and Industry (Independent Charge), Finance and Corporate Affairs, Nirmala Sitharaman.

     Newly elected Prime Minister Narendra Modi’s government completed its first test: far from being populist, the government will concentrate on setting up or enhancing infrastructure.
     At least that is what resulted from the annual Railway Budget and the Union Budget for 2014 (while the Railway Budget presented by the Railway Minister contains the allocation of resources for future projects in the Indian Railways—the country’s largest state-owned enterprise—the Union Budget contains the government’s revenue and expenditure for a fiscal year that begins on April 1 of the present year to March 31 of the next year; it is placed in Parliament by the Finance Minister).

Infrastructure Wish Lists

     Heralded as the most important economic event in the country, chambers of commerce and other associations make their wish lists long before the Budget is announced and hope that the Finance Minister will incorporate their demands.
     This time around, while the cargo stakeholders did not actually present their requests to Finance Minister Arun Jaitley, many voiced concerns about the lack of infrastructure.
     In fact, the cries for infrastructure improvement and enhancement may have sounded a tad repetitive, but they have simply carried on because this government was voted in on promises to bring in “achche din" (good days or better times).

Business Speaks

     Regional Vice President, Indian Subcontinent and Managing Director, India of UTi Worldwide, India, Sameer Khatri spoke plainly: “Our ports, our roads, our airport infrastructures are in need of immediate improvement.
     “We do see a fair amount of work being done to upgrade the airport infrastructure in the metros—that is a welcome sign.
     “However, we do not see that kind of an initiative being taken on the port infrastructure, which is quite a worry as there is a huge shift from air business to ocean.
     “I think it is important to upgrade our infrastructure to cater to the growth happening in the ocean business.”
     Khatri is not alone. One of the country’s veteran freight forwarder and Customs brokers, Shantanu Bhadkamkar (right), he was immediate Past President of FFFAI–the Federation of Freight Forwarders' Associations in India and recently appointed Chairman of the International Federation of Customs Brokers Association–IFCBA was more forthright. Talking to FlyingTypers, Bhadkamkar offers a reality check regarding the country’s urgent need for good infrastructure.
     “Planning needs to be 10 years ahead of the international quality standards, 10 years ahead of the estimated capacity requirements at the time of the execution.”
     He also said that the infrastructure should be made available at competitive prices while rendering top class service.
     “That isn't a tall order,” Mr. Bhadkamkar insists. “It is something every single successful economy has done.
     “The ability to compete, to realize our potential and to be competitive in the global marketplace is the least we should expect as transportation fuels growth.
     “Today, our entire infrastructure is used beyond its capacity.”

Other Voices

     Another person who expected more from this year’s Budget was Bharat Thakkar (right).
     The immediate past President of the Air Cargo Agents Association of India (ACAAI) and a veteran freight forwarder, he had made an impassioned plea to the new government to set right the wrongs that have plagued the cargo and logistics sector.
     He said that the cargo industry should have been given ‘Industry’ status—a demand that has been pending for a long time—to enable it to access capital to upgrade the physical infrastructure to international standards and bring down operating costs to benefit the export-import trade.
     As an important player in air cargo, Thakkar pointed out that “a cargo facility was an window that showcased the capability of a country’s economy.” The PPP model, according to him, was a turning point in the history of India’s economic growth, especially in airports.
     The significant changes enabled by the PPP model have upgraded the passenger facilities, but it should not have been done “at the cost of and at the neglect of cargo facilities.”
     Thakkar has virtually been waging a lone battle to ensure a better deal for air cargo from the government.
     He underscored an obvious point: in India today, there are no benchmarks for critical services, including the performance of Airport Custodians.
     “From the time a flight touches down to the physical removal of cargo, Custodians should be provided with a time frame for completion of every activity and there should be accountability (including financial accountability) for any delay in clearance of cargo,” he demanded.
     The government was well aware of the issues faced by the cargo and logistics industry,” he insisted.
     “The new regime of Narendra Modi is obliged to correct the wrongs,” Thakkar said.
     One of the major ‘wrongs’—and that lies at the doorstep of the Finance Minister, since he heads the department that has controls over the Customs—was the slow, erratic, and often non-functional ICEGATE system (the Indian Customs Electronic Commerce/Electronic Data Interchange—EC/EDI—Gateway).
     The Indian Exim trade faces serious challenges from the global market and must be spared from delays at airports due to shortage of staff and frequent ICEGATE System breakdowns, Thakkar concluded.

Nearly everybody in transportation carrying cargo anywhere in India looks (or at least hopes) for “achche din,” which that translates to “good days or better times” in Hindi. A new government under Prime Minister Narendra Modi has promised to enahnce the sorely lacking airport and infrastructure.
But stakeholders have heard all of this before and are taking a “show me the money” view.

ATF Fluctuations
     
     Other than the complaints about infrastructure, the government has yet to act on the rising ATF costs.
     Perhaps, it is only in India that the price of ATF varies from state to state within the country (thanks to the various taxes imposed by the states).
     Said Reiner A. Allgeier, Managing Director, (left) Schenker India Private Limited:
     “As a service provider, we expect the government to work on fuel prices—a direct proportion of logistics cost, to bring India under a uniform tax regime, make provisions for necessary infrastructure development for transport, and encourage economic zones for optimized growth.
     “The logistics sector is a backbone industry for the economy, and needs elightened policies and measures adopted by the government.”
     Samar Nath, (right) CEO, DHL Global Forwarding, was optimistic. Nath said that the “government’s emphasis on economic development is a welcome step in the right direction.
     “For any progress to take place, it is essential to have a robust logistics and supply chain industry, which will support the growth aspirations of the government.
     “A serious focus on development of infrastructure, i.e. cold storage, ports, airports, and road construction, is required, with these projects being closely monitored, to ensure timely completion of the same,” Nath said.

Financial Assurances?

     Other than the emphasis on creation of new airports by the government, what has given rise to “better times” is the assurance given by Finance Minister Jaitley that his ministry would work to implement GST (Goods and Service Tax) around the country. (The country still does not have a uniform GST, and freight transported from one to any of the 29 states of India are subject to taxes.)
     Samar Nath notes: “The implementation of GST within a timeframe will go a long way in the re-structuring of supply chains, which will eventually lead to an increase in trade for the country.”
     UTi’s Sameer Khatri is equally vocal:
     “GST is going nowhere,” he said.
     “While we do see the fact that there are a lot of Inland Container Depots and Container Freight Stations mushrooming across the country, connectivity is something which is missing.
     “We are putting the cart before the horse. There is definitely a need to look at the situation in a more seamless manner to make them successful as an entity,” he advised.
     “If you are creating infrastructure to facilitate business and if you don’t bring in the connectivity for a seamless service, then you are doing a disservice to the industry.”
Tirthankar Ghosh

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