Hanjin crisis only part of Korean air cargo struggles

Amidst the shockwaves emanating from last month’s news of the bankruptcy filing of Hanjin Shipping came speculation of a potential silver lining for air cargo carriers. Would the scramble for cargo originally booked on Hanjin vessels provide a windfall for airlines, with a surge in demand to drive up rates and yields?

Other than a few notable instances where Hanjin cargo was stranded at sea, requiring emergency air shipments, such a spike in traffic has yet to materialize on a global scale. But even if it does, it probably would not have been enough to recoup Korean Air’s losses associated with Hanjin. The sister company of the stricken shipping giant (both are owned by the Hanjin Group), estimated losses on its 33 percent equity stake in Hanjin Shipping and loans to the company at US$344 million – more than one-third of its projected operating income for this year.

KAL would seem to be in a good position to benefit from a surge in traffic. The airline took delivery of two 777 freighters this summer, with five more to join its fleet before the end of next year. In addition, KAL was due to receive its seventh 747-8 freighter at the end of August, but that has now been pushed back to this coming December. That plane, which had been a long time coming, rolled off Boeing’s production line in December 2015, but the Asian airline has been in no hurry to deploy the aircraft.

Once KAL takes delivery of the six freighters now on order, it will have, altogether, seven 747-8 and twelve 777 cargo aircraft in its fleet. It also currently has sixteen 747-400 freighters in its colors, but these are expected to be phased out by the end of 2017.

The airline’s results indicate why management was in no hurry to get the last 747-8F into action. In the second quarter, its cargo traffic, in terms of freight tonne kilometers, was down 0.5 percent, year-over-year, with the load factor down 0.9 percentage points to 76.7 percent, and yield down 5.5 percent. While revenues in the European and Southeast Asian trade lanes climbed four and two percent, respectively, y-o-y, China was down 1 percent and the Americas showed a decline of 15 percent.

Korea’s international trade has also been in the doldrums. Exports finally showed a y-o-y gain of 2.6 percent in August, after 19 consecutive months of decline. Imports inched up 0.1 percent to $34.8 billion, the first rebound since September 2014. Neither turnaround met with much enthusiasm from analysts or government officials, though, who continue to expect challenging times ahead.

The Korean air cargo market is stuttering. According to a U.S.-based airline cargo executive, it is still in a moderate downward trend with no sign of recovery. “Instead, many Korean manufacturers are active in Indonesia and Vietnam, and exports from these stations to the U.S. and Europe are growing,” he adds.

Still, some forwarders are bracing themselves for a rise in airfreight rates out of Korea. “According to airlines, due to limited space capacities ex-Korea and space demand from China and Southeast Asia area for transit shipments via Incheon, we are expecting that rates will be slightly increased by about US$0.40 per kilo ex-Korea from the fourth quarter,” reported C.S. Lee, president of First Express International.

First Express has been trying to develop new markets and pursued business to Brazil, Colombia and Peru, along with the Middle East and Iran, taking advantage of free trade agreements (FTAs), the Rio Olympics and the lifting of sanctions on Iran.

Likewise, free-trade deals that Korea has struck with the United States, the European Union and a number of individual countries have boosted First Express’s inbound traffic, generating flows of wine and frozen fish from Chile; cherries and meat from the U.S and Canada, fruit from New Zealand and a range of goods from Europe, Lee reports.

In pursuit of lobsters and other seafood, KAL added Halifax to its freighter network last year (served in conjunction with Chicago) to take advantage of the FTA with Canada, which came into effect at the start of 2015. According to the airline, lobster traffic from Canada to Korea climbed 50 percent last year.

KAL has been training its sights more on niche markets, in line with its business plan for the third quarter, which stresses two elements: 1) “improve profitability by transporting high-yield cargo items,” and 2) “provide flexible capacity utilizing belly space of passenger aircraft.”

In the summer, the carrier opened new freighter routes to Europe, including weekly 777F service from its Seoul base via Navoi to Vienna and Oslo, and a weekly 747 freighter operation from Seoul to Tel Aviv and on to Milan.

Earlier this year, KAL brought Teheran into the fold, courtesy of its cargo partnership with Uzbekistan Airways, which mounted a twice-weekly freighter operation to the Persian capital, with a 767-300 freighter.

First Express is also looking to boost its position in higher yielding cargo. It intends to invest more in temperature-controlled storage capabilities to serve clients in the healthcare pharmaceutical sector, Lee added.

It may take a lot more than a bump from the Hanjin seafreight crisis to set KAL – and the rest of the Korean airfreight industry – on the path to recovery, but at least some forwarders are seeing reason to hope for better days ahead.

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