Business

Saturday March 21, 2009

Falling global trade weighs on cargo players

By YEOW POOI LING


Freight traffic declines for eighth consecutive month.

The trade numbers don’t look too good for cargo and container players.

According to statistics released by the International Air Transport Association (IATA), cargo markets worsened further in January with a 23.2% year-on-year drop in demand, following a 22.6% decline in December.

“This is the eighth consecutive month of contraction for freight traffic. Alarm bells are ringing everywhere. Every region’s carriers are reporting big drops in cargo,’’ IATA said in a press release last month. “The industry is in a global crisis and we have not yet seen the bottom.”

Asia-Pacific carriers led the decline in cargo with a 28.1% year-on-year drop, followed by carriers in European (down 23%) and North America (19.3% lower).

“While this may appear to be relatively stabilised compared with the precipitous December drop, it is too soon to call a bottom in the air-freight market,’’ IATA says.

“Manufacturers are still shedding inventory and cutting production which is expected to lead to further falls in freight volumes,” it adds.

Last week, statistics released by China showed exports in February tumbled by a record 25.7% year-on-year after a 17.5% decline in January.

India posted its first back-to-back decline in industrial production in 16 years. Output of factories, utilities and mines fell 0.5% year-on-year in January after a revised 0.6% drop in December.

The United States, the world’s biggest car market, is struggling to revive demand. Vehicle and autoparts sales plunged 4.3% in February, the lowest level since 1981. US vehicle sales in the first two months of the year averaged 9.3 million units on an annualised basis, the weakest since 1982.

Closer to home, Singapore released February export data this week which showed non-oil domestic exports falling 23.7% year-on-year, after declining a revised 34.9% in January.

The island state, the busiest port in the world, posted a 19.8% year-on-year reduction in containers handled at Singapore’s port terminals in February while the container throughput dropped 6.3% from January.

The slump in global trade will continue to weigh on cargo and liner operators as their aircraft and ships lay idle without sufficient load to generate profits.

Airlines, to a certain extent, are less affected by the poor cargo shipment, as this segment constitutes only a small portion of their earnings. Most analysts consider passenger load as the more important factor for earnings.

According to an analyst at a local brokerage, if airlines can manage the cargo capacity well, they may be able to limit losses due to weak demand.

“While revenue will come off, cutting capacity will help reduce the scale of fixed costs,” he says, citing the plan by Malaysia Airlines (MAS) to cut cargo capacity by as much as 40% in anticipation of lower freight volumes to curb substantial losses.

In that sense, MAS may be in a better position given that its aircraft are leased from parent Penerbangan Malaysia Bhd (PMB). If the planes are not used, they are likely to be returned to PMB instead of MAS having to bear the lease charges.

Another analyst points out that besides reducing capacity, airlines could also cut costs and rationalise routes.

“Although cargo operations could be a drag on MAS, I don’t think the effect will be significant as cargo revenue is only 15% of the group’s total. The main revenue comes from the passenger side,” he says.

Next month, MAS’s cargo division is expected to disclose steps taken to mitigate the impact of falling freight demand.

Other airlines are also feeling the pressure of falling cargo business. Hong Kong’s Cathay Pacific Airways, which recently released its full-year 2008 results, saw freight traffic declining for five consecutive months since August, erasing the 9% growth seen in the first half.

For its full year, freight traffic fell 0.6% due to the continued fall in output from the Pearl and Yangtze River Deltas. Three aircraft have been pulled out of service.

Singapore Airlines, on the other hand, managed a recovery in its cargo load factor by 2.5% in February from a month earlier despite weak trading activities.

This was attributed to intensive reduction in cargo capacity for the past two months, leading to 8.3% and 7.6% month-on-month drop in cargo capacity from December 2008 to February this year.

Container operators, meanwhile, are also badly affected by the weak trade. MISC Bhd, in its third-quarter results, posted an operating loss of RM328.8mil, almost double the second quarter’s RM171.3mil.

The shipping company operates a relatively small container business versus its core activity of transporting liquefied natural gas.

An analyst at a local brokerage says MISC’s container business is bleeding as the number of idle ships is on the rise.

“There will be delivery of new containers coming onstream over the next two years, which would definitely mean over-supply. Containers are the worst-hit segment of the shipping sector,” he explains.

Another analyst says the options are limited for operators in view of the global economic crisis.

“Shipping companies can narrow losses only by restructuring their routes through elimination of non-profitable routes,” he says.

MAS and MISC were not available for comment.

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