Asia’s Air Cargo Industry Struggles with Continued Fuel Surcharges

“Nearly Two Years of Drastically Inflated Fuel Costs are Stunting Growth with Air Freight Forwarders and Airlines ”

Hong Kong , November 3, 2005 - Halloween wasn’t the only scare for freight forwarders at the end of the last week in October. A notice to various Aeroceanetwork partners went out from Legend Global Logistics’s Hong Kong operation.
It was a notice of yet another dreaded fuel surcharge increase, including Legend Global’s received notices from Eva Air, Dragonair , China Airlines, Thai Airways and Cathay Pacific. When will it end?

The air cargo industry around the globe is seeing its golden egg fried in oil these days.
Oil prices that is.
Airline fuel prices have been setting new records this year, on top of non-stop increases in the past two years. It is estimated that the average price for crude oil for 2005 will be roughly 40 per cent higher year-on-year. Due to the fact that air cargo was growing faster in the Asia-Pacific routes, nowhere is the fuel bite felt greater than in
Asia.

“ Fuel Surcharges are affecting freight forwarding industry, factories and buyers,” say Steven Chiu of China based Aeroceanetwork member Shanghai Rijin Top Express, “especially within these two months, every two weeks has increased the fuel surcharge. To avoid our own losses, we should pass on the increases to shipper or consignee accordingly, but sometimes we can't increase this rate and our profit margins are decreased.” ( Aeroceanetwork is a non-exclusive major industry network for professional logistics companies and international freight forwarders.)

The Association of Asia-Pacific Airlines (AAPA) recently voiced their chagrin that high oil prices were increasingly becoming a concern for Asia-Pacific carriers despite healthy growth in volumes and capacity. This is because jet fuel, currently in a continued steep upward spiral, is after labor the second-biggest cost for airlines.
Fuel can account for up to 20% of operating expenses in the best of times, but soars even higher when the prices run away. In September the International Air Transport Association increased its estimate of airline industry losses for 2005 to USD 7.4 billion from USD 6 billion as oil prices continued to rise.

High energy costs don’t just affect carriers but also hold back economic growth and add to inflation throughout the world in all industries.
In fact, according to forecasts, in the Asia-Pacific region’s main growth engine,
China, this year's price increases will knock 0.5-0.7 percentage points off China 's GDP, bump up 0.8-1.2 percentage points for the domestic consumer price index and 3.2-4 points for the producer price index. As well, there is an extra outflow of tens of billions of dollars in spending as China 's economic growth is more and more closely tied to oil prices.

“In fact, fuel surcharges are being increased during this time, but air traffic is not only one involved,” says Stephen Yau, managing director of Trek Logistics in
Hong Kong, “the currency adjustment factors and bunker adjustment factors with ocean traffic still are happening... Most of our customers are facing the same pressures and have to pay more for these extra surcharges.”

The carry on effect means overall less air cargo to feed the airlines and air freight forwarders. The International Air Transport Association (IATA) reported that International freight traffic continued its slowdown to 1.3% in September 2005 over September 2004 from the 2.8% growth recorded for August. Compared with the first nine months of 2005, from the same period in 2004, freight traffic has only showed growth of a mere 3% in the traditionally robust air cargo market.

"The continued slowing in freight volumes indicates that high oil prices are taking a bite out of economic activity," said Giovanni Bisignani, IATA's Director General and CEO. Bisignani went on to add that "the extra-ordinary high price of fuel means that cost reduction has gone beyond urgent. Every dollar added to the price of oil adds USD 1 billion to airline industry costs. The battle is to keep these costs from reaching the bottom line. Airlines are dramatically increasing efficiency and cutting costs. It is time that all partners in the industry's value chain do the same," said Bisignani. This has led to the much loathed fuel surcharges.

And virtually every airline around the world has had to incorporate these major hikes in fuel surcharges. China's three major airlines, Air China, China Eastern and China Southern, have started to levy a fuel surcharge on international routes to offset rising costs resulting from high crude oil prices.

Two poignant examples of the effects of fuel cost on major Asian based airlines are Singapore Airlines an Malaysian Airlines.

On October 27 the Dow Jones Newswires reported that Singapore Airlines, the world's second biggest airline by market capitalization, would report an 8.9% fall in earnings for its fiscal second quarter, with rising fuel costs offsetting traffic growth.
They expect the airline's fuel costs to account for more than a third of total costs in the second quarter, up from 32% in the first quarter. SIA has battled high oil prices for more than a year, first imposing a fuel surcharge in mid-2004 when jet fuel prices hit US$40 per barrel.
The airline increased the surcharge several times when jet fuel prices reached US$50, US$60, US$65, US$70 and US$80 per barrel.

Malaysia Airlines, which has been suffering from high oil prices, has announced their third hike in fuel surcharge rates in less than six weeks. "Given the current level of fuel prices, Malaysia Airlines is compelled to revise the fuel surcharge rates with effect from 15 November 2005," said Malaysia Airlines in a statement.
Malaysia Airlines went on to state "Malaysia Airlines continues to monitor the fuel price situation and will take further measures to review the surcharge if necessary," it said.

Although this is having an overall negative impact on the forwarders’ business, according to Stephen Yau, the forwarders will survive it. In a way, it is just a nuisance but forwarders must go about as if it were ‘business as usual’. “There is no difference if customers choose airfreight or sea freight, or switch any cargo from airfreight traffic to sea-air or ocean traffic,” says Yau, “The principles are subject to market conditions and the expenses incurred will need to compare between the said routing.“

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