REGIONAL MARKET OUTLOOK: Rising power

posted on 3rd April 2018

India’s air cargo volumes are surging ahead as the country’s economy continues to expand – despite a slight recent slowing and ongoing infrastructure challenges and reforms. By Donald Urquhart

It is a buoyant, yet challenging time for the air cargo supply chain across the Indian sub-continent region, with record air cargo growth figures piggybacking impressive economic growth. Although straining against infrastructure and bureaucratic hurdles, governments across the region now recognise many of the impediments to this growth and are racing to remedy them.

India has risen to become the sixth largest economy in the world, and its GDP since 2014 has been growing at between 6.5% and 7% per year, one of the world’s highest growth rates.

There has, however, been a slowdown during the last two or three quarters due to Prime Minister Narendra Modi’s major structural reforms to the economy, including the controversial demonetisation of high-value currency notes and implementation of the Goods and Service Tax (GST).

“Nonetheless, major international organisations such as IMF, World Bank, global rating agencies, etc., as well as business and industry leaders in India and abroad, are bullish about the Indian economy and expect the growth of the economy to once again pick up in the medium and long term after the effects of the economic reforms have settled,” notes Keshav R. Tanna, member of the Advisory Board of the Air Cargo Agents Association of India (ACAAI). “The continuing growth of the Indian economy augurs well for the air cargo sector in India.”

This growth has led to forecasts that India will be in the top ten largest international air freight markets by 2018. Domestic Indian air cargo has been growing at nearly 7% in the first six months of 2017, while international air freight traffic has seen a 10.8% rise compared with the same period in 2016.

For international freight carriers serving the Indian market, this has been one of the bright spots in the global market. According to Lufthansa Cargo’s senior director for sales and handling for northern and eastern India, Ivo Seehann, the volume growth is also occurring at a point where there has been a noticeable rationalisation of capacity on offer in the market.

“So it is more of a ‘demand vs supply’ game, and demand is out-stripping the supply,” says Seehann, adding that this has led to a “steady increase in the yields” over the last few months.

Lufthansa operates a mix of passenger bellies and full freighters into the market, uplifting a variety of commodities, which differ greatly from city to city – for example, pharmaceuticals, spares and automotive parts from Mumbai; automotive parts from Chennai; and garments and pharmaceuticals from Delhi. Inbound cargo includes pharmaceuticals, high-value chemicals, plant and machinery. The vast bulk of both the inbound and outbound cargo involve the key markets of Europe and the US.

Meanwhile, Virgin Atlantic Cargo says the market for its daily B787-9 UK-Delhi service has been “solid” so far this year. Volumes to India are up nearly 7%, year on year, while inbound to the UK is over 11% higher than for the first nine months of 2016.

“We have seen some much-needed improvement in our yields in recent months, helped obviously by growth in demand on the route,” says Dominic Kennedy, managing director of Virgin Atlantic Cargo. “India and the UK are strong and growing trading partners, so we hope that level of demand will prove to be sustainable.”

Offering a cargo handler’s perspective, Ramesh Mamidala, CEO of Celebi Delhi Cargo Terminal Management India, says the growth in imports is continuing to be driven by electronics, although this may change with increasing emphasis on the Prime Minister Modi’s ‘Make in India’ campaign – which is already bearing fruit, he says. Machine spares needed for capital projects is another major import commodity.

Exports are being driven by garments, textiles, carpets, perishables, and pharma, for example. “The ‘Make in India’ drive, to me, will significantly increase this trend, with more commodities being added,” Mamidala says.

While the bulk of what Virgin is carrying is general cargo, pharma volumes on its Delhi route have made a positive contribution to the 20% overall growth it saw in its pharma business in the first six months of 2017, Kennedy says, adding: “We expect the opening of our new Pharma Zone at Heathrow to help us gain market share on all the major healthcare lanes to and from the UK.”

Mamidala highlights that Delhi Indira Gandhi International Airport has plans to soon open a dedicated large airside transhipment facility to process transhipments within 3-, 6- and 12-hour connection windows – along with reprocessing and rescreening capabilities. This facility will add about 50,000 tonnes a year of transhipment volume in the first year and should become a reality by the end of 2017, he says.

Celebi has invested close to US$60 million so far in its Delhi Cargo facility. That includes modernisation of its import and export infrastructure and development of a brand new “global-standard” pharma logistics centre. Although collectively perishables and pharma contribute close to 8% of total export volume from its facilities – and about 10% for the airport overall – a number of other airports in the country have significantly larger pharma and perishables traffic volumes.

All six of the busiest airports in the country in terms of cargo ¬– Delhi, Mumbai, Chennai, Bangalore, Kolkata and Hyderbad – see growth in perishables and pharma as a great opportunity, he says. And most airports have invested in upgrading their respective perishables and pharma export facilities to take advantage of this growth. “I believe the possibility is immense, once we get our logistics right,” he says.

Express and e-commerce

E-commerce is also one of India’s fastest-growing business segments, and one that it is expected to grow at a CAGR of over 50% to reach US$36.7 billion by 2020. This trend is expected to continue during the coming years as the purchasing power of the Indian middle class consumers is increasing rapidly. The younger generation of Indians, who are very comfortable with technology, digital commerce and digitisation, are increasingly switching over to e-commerce companies to meet their consumption needs, Tanna says.

This holds out the promise of added growth for not just the general air cargo players, but express players like Blue Dart. But not all is rosy. As Anil Khanna, managing director of Blue Dart Express notes, the economy is still recovering from the aftereffects of demonetisation and more recently, the GST. The removal of currency from the market led to a cash crunch, thereby impacting the Cash on Delivery (COD) model for e-commerce players and a major part of Blue Dart’s services to them.

The express logistics market continues to be “tough and challenging”, as the economic environment and business sentiment has been subdued over the past few years. But despite this flatlining in the express sector, Khanna describes the current outlook as “moderate, but holds the potential for long term benefits”.

The e-commerce sector is also benefiting other links in the supply chain. “It is indeed a great growth space for us in India,” Mamidala says, more on the domestic air freight side of the equation – which is forecast to grow at about 20%, year on year, largely due to this e-commerce cargo.

In 2015 Celebi made a significant investment to build a large automated domestic air cargo terminal with the capacity of about 550 tonnes a day. This facility is currently being used exclusively by Indian domestic carrier Indigo.

“We have plans to develop a central ASRS (Automated Storage and Retrieval System) which should be ready in a year or so, which is expected to free up a lot of our manual storage space in our warehouse,” Mamidala notes. “A part of the freed-up space will be converted into additional domestic capacity to cater to the growing domestic air freight market in Delhi.”

Market challenges

But while the growth potential is substantial, so too are the obstacles to that growth. When asked of the key challenges in operating in this market, Tanna replies emphatically: “Infrastructure, infrastructure, infrastructure!”

Indeed, this is a theme echoed by the entire industry, with urgent calls for the physical infrastructure at airports and the road network across India to be upgraded to meet the burgeoning growth in logistics, air, sea and surface transport.

Road infrastructure is the largest bottleneck, even though over 70% of freight transport in India is by road, highlights Khanna, adding: “Poor road infrastructure in turn leads to delays in delivery, increased diesel costs, delayed clearances, and multiple check posts leading to delay in transit times.”

The government has realised the need for infrastructure and has started infusing huge capital towards developments of ports and airports, but Tanna says the progress is slow and “it might still take some time before results finally start to show”.

The air cargo sector in India has also been seeking official ‘industry status’ from the government. This will help the sector to obtain several regulatory and financial benefits that accrue to any sector which is granted industry status, Tanna notes. “Regrettably, our efforts have not yet been successful in achieving this objective,” he adds.

Other aspects in need of attention include certain aspects of the regulatory regime – particularly customs rules and regulations, which “need review and overhaul to make them contemporary and relevant to the needs of business and industry in the 21st century”, Tanna emphasises.

In agreement on this point, Seehann highlights the “complexity of processes” as a key problem, but one which is being addressed by current government policies. “We are in continuous dialogue with all appropriate authorities,” he adds.

From an express perspective, Khanna says the provision of track-and-trace facilities with RFID, approach roads for heavy vehicles, development of more ‘greenfield’ airports, and easy surface connectivity to these airports are some of the basic amenities that express service providers desperately need in India. “India also lacks the availability of world-class cargo transit hubs, which has resulted in business shifting to other neighbouring countries,” Khanna adds. “Development of dedicated freight corridors for both rail and road transport, which can provide better multi-modal transport (connecting airports), is yet to be conceptualised in the country.”

Khanna also says the air infrastructure in the country is inadequate in terms of cities covered and cargo handling capacities, leading to significantly higher dwell times compared to international standards. “Insufficient aircraft bays, truck docking stations, limited space for express terminals, clearance processes lead to delays and impact operational cost,” he adds.

Another problem he cites is the fact that following the privatisation of major airports, “the operating cost at those airports has also “multiplied manifold” without any significant improvement or differentiation in services offered. “To enjoy the full benefits of integrated air express services, the government needs to address restrictive civil aviation agreements, cumbersome customs clearance procedures, and restrictions on investment in ground transportation operations,” he says.

Government initiatives

The Union Government has unfolded a number of path-breaking reforms in the regulatory and economic spheres during the last three years, Tanna says. Consequently, there has been a significant increase in Foreign Direct Investment (FDI) in a number of major sectors of the economy, which of course correlates to exports. The ‘Make in India’ initiative is also aimed at attracting FDI.

High priority has also been given to upgrading and modernising the physical infrastructure in India and, as part of this, the National Civil Aviation Policy was unveiled in 2016, outlining  plans to upgrade/develop many airports in Tier I, Tier II and Tier III cities across India to augment their capacity and capability to handle more airlines with larger aircraft.

“In due course, these developments will result in substantial increases in the carriage of passengers and cargo from even Tier III cities,” Tanna observes. “This is bound to reduce the transaction costs of the logistics supply chain as air connectivity will be available from cities which are located close to their operational hubs.”

Huge investments for the development of the road network across India are also in the cards. A major plan has been drawn up to build almost 83,700 kilometres of roads by 2022 – including the Bharatmala programme, which aims to build 34,000 kilometres of highways and expressways.

Another key development according to Mamidala has been the introduction of ‘single window’ processing by Customs last year. “I see the officials in Customs and other regulatory departments being open minded, willing to listen, willing to adopt new ideas and more importantly technology,” he says. “I foresee a big positive change in next five years with the government officials rapidly changing the mindset of ‘control’ to ‘facilitate’. We are already seeing this transformation taking place in the country.”

The recent Goods and Services Tax (GST) implementation will have a positive impact on business environment in the mid- to long-term, observes Khanna. The GST is expected to make the logistics sector more organised and push it into the formal economy, with interstate movement of goods set to become easier through reduced procedures and restrictions at state borders, he says.

With the dismantling of check posts at state borders, it will bring about a positive impact on transit times and relief from the complex state-based tax structures. The GST is also expected to create a level playing field between express and traditional transport services through input tax credit. “We are expecting the current teething problems of the GST will end soon, bringing about a positive paradigm shift to the industry,” Khanna highlights.