Regional report: Europe-Asia

posted on 3rd April 2018

The directional air freight imbalance on some Asia-Europe lanes has reversed in tonnage terms, carriers confirm

In a review published at the start of this year of some longer-term trends in the world’s main geographical markets since 2010, air freight data specialist WorldACD highlighted some noteworthy developments on the key Asia-Europe market, which has been such an important source of income and growth for European and other international air cargo operators over the last two decades.

Whereas most the world’s main geographical markets continued to show the directional balance – or imbalance – they already had in 2010, the market between Europe and Asia Pacific did not, WorldACD noted. Analysis of its data, which is based on a couple of million transactions every month between more than 60 airlines and many thousands of forwarders, covering more than 200,000 origin and destination points (O&Ds) or trade lanes, revealed that, during those six years, “there was hardly any growth from Asia Pacific to Europe, but growth was 39% in the opposite direction, creating a reversal of the balance: air cargo volumes from Europe to Asia Pacific have now overtaken the volumes in the opposite direction, speaking for the increasing purchasing power of Asia,” WorldACD observed.

WorldACD confirmed to CAAS that its observation was based on analysis of the overall Europe- Asia Pacific market as experienced by the carriers in its database that operate on those markets and reflects the origins and destinations as stated in air waybills. Within that overall average market trend, there were obviously variations − some lanes where the directional reversal could be observed to a greater extent, and others where the tonnages continued to be greater in the westbound direction.

The data specialist identifies the markets of the major western European countries to east and northeast China, Korea, and Japan, as the main drivers for the general trend observed. The markets between the Pearl River Delta (Hong Kong and southeast China) and Europe are the main exception to the general trend: on these lanes, volumes are still much larger westbound than eastbound – at least for Germany, France, the United Kingdom and the Netherlands. Italy is different, however, with more traffic eastbound.

Several major air cargo carriers operating Asia-Europe services confirmed some of these trends – that recent increases in eastbound loads had exceeded westbound growth, resulting in a rebalancing of traffic or eastbound tonnages exceeding westbound tonnages on some lanes – even if the westbound direction remains the ‘head-haul’ direction in terms of yields and overall revenues.

Cathay Pacific’s general manager for cargo sales and marketing, Mark Sutch, says the Hong Kong-based airline began to see a reversal in the directional imbalance on Asia-Europe routes from 2011 onwards, particularly to China. “We are also seeing good tonnage growth from Europe into northeast Asia, such as Japan,” Sutch notes. “The strong purchasing power of the growing middle class in Asia, particularly in mainland China, is driving the growth. There has been increasing demand for quality food, as well as high-value fashion garments, pharmaceuticals, and consumer products from Europe into Asia.”

In terms of pricing, he observes: “Over the course of the past few years, Asia-Europe rates have been under more pressure, whilst Europe-Asia rates held up relatively better. The price gap between the two directions has narrowed. Having said that, there has been some bottoming out of rates on the westbound.”

He underlines that Europe-Asia demand is a key factor in Cathay’s decisions on freighter capacity, and eastbound shipments also made an important “contribution” to the bellyholds of its passenger operations.

Lufthansa Cargo’s director of sales and handling for eastern China, Hasso Schmidt, confirms that the German cargo carrier has also observed growing eastbound tonnages over a number of years.

“The market tonnage from eastern China to Europe was 30% higher in 2012 than in the other direction. In 2015, the market tonnage for both directions was roughly on the same level,” Schmidt observes. “Preliminary figures indicate that exports to eastern China could exceed the imports to Europe in 2016.”

He says the two markets are “equally important to us, since we have to achieve ‘economic’ load factors for the whole aircraft rotation”, adding that rates − east and westbound − had developed “according to demand”.

Europe’s largest all-cargo airline Cargolux, which has been significantly expanding its capacity to and from Asia as it pursues its dual-hub strategy at Luxembourg and Zhengzhou, also reports a recent trend of eastbound growth outpacing westbound.

“Since last year, we have seen a healthy growth on the Europe-Asia leg, whereas the westbound has remained stable, resulting in a more or less balanced situation in both directions,” says Cargolux’s vice president for Asia and Pacific, Kevin Shek. “The most significant growth we see is into China.”

This growth in Europe-Asia eastbound demand comes at a good time for Cargolux; it has ramped up its Europe-Zhengzhou flights from zero in 2014 to 15 per week in 2016.

“The improvement that we have seen in the balance of freight being flown into and out of China indicates that Chinese consumers have an increasing buying power, and we see a significant increase in exports from Europe into China,” Shek observes. But westbound traffic remains crucial, he stresses: “China is still a massive manufacturing powerhouse and as a consequence, Chinese exports remain a main driver of the Chinese economy. From our perspective, the Far East is going to be the largest economic region in the world within the next five to 10 years and our footprint in China, with the setting up of a regional hub in Zhengzhou, is a strategic move,” Shek adds.

Airport anecdotes

Anecdotal tonnage figures from two of Europe’s largest air cargo airports provide further support to the observation that Europe-Asia eastbound tonnages are now at least on a par with westbound volumes, even if they don’t show evidence of a clear recent pattern favouring eastbound growth.

Analysis of cargo traffic carried to and from Europe’s largest cargo hub, Frankfurt Airport, between 2010 and 2016 indicate that westbound or ‘inbound’ loads recorded their highest proportion of the airport’s total Asia-Europe traffic in 2010 (50.4%), and its lowest a year later in 2011, when westbound tonnages had dropped to just 47.2% of Asia-Europe traffic.

Last year, Frankfurt’s cargo traffic on the trade lane totalled 422,049 tonnes westbound or ‘inbound’ (48.3%) and 451,904 tonnes eastbound or ‘outbound’ (51.7%).

Amsterdam Airport Schiphol’s cargo director, Jonas van Stekelenburg, says the annual trend between 2011 and 2014 for cargo traffic between the Benelux region’s biggest air cargo hub and the Asia Pacific region was of 1% average annual growth eastbound or ‘outbound’ and a 1% decline ‘inbound’ (westbound). That shift towards eastbound tonnage growth accelerated in 2015, when inbound (westbound) traffic from Asia Pacific saw a 3.4% decline and outbound (eastbound) tonnages grew by 4.7%.

In 2016, fewer direct flights to Asia meant figures for the region were down 5% inbound (westbound) and down 7% outbound (eastbound), leaving the total tonnages westbound and eastbound roughly balanced at 290,313 tonnes and 290,560 tonnes, respectively.

In terms of origin and destination points in Asia for Schiphol, Shanghai is by far the leading destination from Amsterdam for outbound cargo, as it is for inbound shipments. “Cargo traffic to and from Schiphol to Shanghai was probably down last year for direct flights but grew when indirect flights are included,” notes van Stekelenburg. “Hong Kong is still a major destination/origin on Amsterdam’s cargo map, but tonnages went down by around 30% on the route last year.”

Van Stekelenburg notes that one of the major developments on the Asia-Europe trade in and out of Schiphol is the continuing strong growth in e-commerce traffic, notably from China. “Last year we had inbound volume growth of 2.5% compared to a decline of 0.7% in 2015, but the number of customs declarations for shipments went up by more than 15%, as it did in 2015. What we are seeing is a shift in the Chinese market towards smaller shipments driven by e-commerce,” he explains.

“Outbound e-commerce shipments to China from Amsterdam are also buoyant, the main categories being cosmetics and baby products such as powdered milk. Inbound, it’s a broad variety of consumer goods, which includes sunglasses and electronics.”

Forwarders’ perspective

Although forwarders don’t necessarily have a clear view of the whole market in tonnage terms, instead seeing the market from the perspective of their clients’ traffic and needs, they have a good awareness of pricing trends and make some interesting observations in terms of trends within the overall demand picture.

DHL Global Forwarding’s (DGF) SVP for air freight for Asia Pacific and head of air freight for China, Li Wenjun, says the company has been seeing “good growth” on Asia-Europe and Europe-Asia trade lanes. “This is partly due to e-commerce development, mainly from Shanghai, Hong Kong and Hanoi to Europe, with popular destinations including Frankfurt, Amsterdam, London Heathrow and Paris,” he notes

He says there has been an increase in rates in both directions in the final quarter of last year, with Asia-Europe remaining the head-haul leg. “From the current yield perspective, the Asia-Europe selling rate accounts for a major part of the overall cost, so a more ‘balanced’ trade volume would be helpful to leverage carrier capacity planning,” he notes. “The demand for capacity is still led by the Asia-Europe lane.”

Panalpina’s global head of air freight, Lucas Kuehner, says the company’s own data for the period 2010-2016 does not indicate any reversal of the traditional east-west directional imbalance in tonnage terms on the Asia-Europe trade lane, although he notes that the growth of these trade lanes varies, “depending on how strong the economies are. A couple of years back, the European economy stagnated, but last year China did not perform as expected. Currency exchange rates also play a role.”

But for Panalpina, Asia to Europe is still the stronger lane, in terms of volumes. “Traditionally, Asia-to-Europe rates have been higher than Europe-to-Asia rates, and this trend is being maintained too,” he adds.

Nevertheless, Kuehner highlights that at the end of last year, Panalpina witnessed an air freight peak season developing from Europe to Asia, with backlogs at a number of European hubs air hubs serving destinations in China. This represented a significant departure from usual market behaviour, the pre-Christmas rush – and certainly pre-Christmas backlogs – normally being reserved for westbound traffic only.

“The peak ex-Asia was extremely strong from China and Hong Kong but also from the traditional airline hubs in Korea and Taiwan as well as Vietnam, and to a lesser extent from elsewhere in Asia. But there was also significantly higher demand on the eastbound route (to Asia) than earlier in 2016,” Kuehner says. “There are several root causes of this, from a year-end rush to last-minute ocean freight conversions and new cargo flows from e-commerce.”

Peak performance

He highlights the Europe-Asia ‘peak’ to underline that, in general, bi-directional cargo flows are crucial for airlines to be able to operate profitably. Kuehner notes: “The seasonality of directional demand continues to be a key challenge for them. Strong exports out of, but also imports into Asia, during the peak season and running up to Chinese New Year, ensure that planes can be filled both ways and as a result there is sufficient capacity in the market.

“But the usual lull after Chinese New Year then forces carriers to cancel flights from Asia to Europe, resulting in a lack of capacity on the return leg from Europe to Asia, which then typically leads to a backlog and higher (Europe to Asia) rates. This is a dynamic that we have observed for the past three to five years.”

The rise in eastbound tonnages suggests backlogs from Europe to northeast Asia may become more commonplace, at least at certain crunch times of the year, placing pressures on infrastructure as well as some supply chains. But it is a good problem to have, certainly for carriers. And if the rise in eastbound volumes eventually translates into higher yields, so much the better − helping the economics of deploying freighters on Europe-Asia lanes at a time of, generally, diminishing westbound freight rates.