Slow progress on the ground

posted on 6th June 2018
Asia’s air freight and logistics sector has seen phenomenal growth, but international cargo handlers have found it difficult to achieve much presence or penetration. Will Waters investigates

Asia’s international air cargo market has seen an extraordinary transformation in the last 15 years, developing to become the world’s primary origin region for intercontinental shipments and the fastest-growing intra-regional market. While international cargo airlines have been quick to take advantage of this boom, supported by gradual liberalisation of traffic rights, the opportunities for international cargo handlers have been more limited and complex, often because the home carriers, the airports themselves, and a variety of vested interests have tried to cling on to their respective licences, market shares or monopolies – as they have in many other parts of the world.

Barry Nassberg, COO of handler Worldwide Flight Services (WFS), says the Asia market still lags well behind Europe and North America, in terms of being open and fostering competition. “But we’re seeing change, one country at a time,” he says. “That said, there is much attention paid to quality and standards. An environment such as we see in North America, where the cargo handling market is open to almost anyone, and the airport owner or operator has virtually no input or oversight of standards, is unlikely to develop in Asia.”

He believes airport operators in Asia continue to see themselves as ultimately responsible for the airport’s service reputation, and will require high standards of performance from their franchisees. “This certainly is a barrier to completely open and free competition, but this is not really the objective of these airports. It’s more about balancing competition with the need to maintain ultimate control and assure service quality.”

Mark Whitehead, managing director for Hong Kong air cargo terminal operator Hactl, agrees, and points out that there is a major difference between an airline and a handler, in terms of their required commitment to start operations. Consequently, limiting the number of licences can be an essential part of building up competition, gradually.

“An airline can start and stop services at fairly short notice, and divert capacity from one route to another in response to opportunities and traffic trends. But a cargo handler is a different beast: to open for business at any airport, he at least needs to commit to a lease on a facility – and these need to be long-term leases,” says Whitehead.

Handlers may then have to upgrade the facility or even build a totally new one, and invest in hardware, equipment and IT systems. “He then has to take on staff,” adds Whitehead. “If it all goes wrong, he cannot pick up his infrastructure and re-site it where it will make him more money. All this adds up to a major leap of faith and long-term investment and commitment; so unless he sees a very real prospect of immediate and quantifiable business, the proposition cannot be attractive. So, if an airport has already taken the path to handling liberalisation, the resulting over-competition for contracts can mean rates sinking to an unsustainable level.”

He welcomes “sensible” competition, “which is always good for service levels and prices: but if it goes too far, it becomes counter-productive – leading to unsustainable handling rates, cost-cutting and lack of investment, diminished standards and, ultimately, loss of reputation for the airport as a whole.”

Whitehead says the Asian cargo handling market is governed by the ‘status’ of the airports themselves. “In cargo terms these split crudely into two categories: those like Hong Kong, Singapore, Beijing, Shanghai and Incheon, which already enjoy major-hub status; and many others who would like to acquire such status, but have not yet done so.”

He says handlers at the existing major hubs are confronted with a variety of competitive challenges. “But at least – subject to how liberal or otherwise the local handling market is – there is enough traffic to provide some prospect of sensible returns on investment. At airports that have not yet achieved international hub status, tonnages would not generally justify the high costs of entry for more than one handler.”

From an airline perspective, Shailendra Kothari, team leader for handling and processes at Lufthansa Cargo Asia Pacific, says the Asian cargo handling market is “as heterogeneous as it can get”, and so it is impossible to make a general statement on the cost and quality of the services available to carriers. He adds: “There are regions where the cost-performance ratio is quite high, but these are far too few. Therefore, the airlines most often have to utilize their own resources to steer the handling agents’ quality.”

But he says a lack of competition “is conspicuous” in a majority of stations. “Either there is a monopoly, or at the most a duopoly, which contributes to keeping the market prices at artificially high levels,” he adds.

Kothari believes there is a huge opportunity for independent international operators to set-up cargo handling bases in Asian stations, where it is allowed. “Some stations are still closed for external companies due to protection of their own handling companies, which in all likelihood are managed by the home carrier,” he observes. “India freed up its market a few years ago, to invite tenders from internationally reputed companies. This has helped in process optimization and reduction of cycle times, benefiting the airlines and their customers.”

He says the barriers to entry for external companies are primarily dictated by the ground handling policy of the respective governments.

“Slowly but steadily some flexibility can be seen in this, except for most Middle East countries,” he adds.

Nassberg says the barriers to entry currently include legislation, local politics, special interests, suspicion of outsiders, and even the legacy of colonialism.

“These barriers are lifting, very slowly, but progressively,” he says. “In the end, there is no stopping globalisation, and with the opening of trade and global markets will come the opportunities for airport services. Once countries come to the realisation that the state doesn’t have to own the national carrier, and then realise they don’t even need to own the airports, it’s just another step to seeing the commercial benefits of opening the handling markets as well.”

Whitehead agrees. “Liberalisation is already evident in many markets, and is an inevitability for the others,” he says. “The aviation industry and consumers no longer tolerate monopolies, and this will force even the most reluctant to comply in due course.”

In the mean time, Nassberg believes a lot of the countries in the region dostill suffer from a lack of competition.

“Some continue to maintain direct control over cargo handling, and others have seemingly open markets, but in reality the franchises are assigned to national carrier affiliates or other favoured entities,” he says. “The result is high cost, and often an inability to provide the levels of service that are now being required by global cargo operators.”

Another potential barrier to entry is the local business culture – particularly in respect of Customs, observes Whitehead.

“Some Asian governments recognise air cargo as a vital trade tool and revenue generator, and accordingly ensure that local Customs is, at least, not obstructive to business,” he adds. “You can see the effects of this policy in the huge success of airports like Hong Kong. But others place Customs’ roles as a revenue collector and a doorkeeper above trade facilitation. Air traffic control, too, adopts a very different stance as you move from one Asian country to another. Coming back to Hactl’s own base, Hong Kong, everything here is relatively expensive, but Hong Kong is also synonymous with efficiency.”

Whitehead says barriers to entry may sometimes be arbitrary or unintentional.

“On the face of it, the strong and steady economic performance of many Asian countries, and the effect that has had on the growth of air cargo, should mean that this is one of the most interesting parts of the world for air cargo handling,” he adds. “And liberalisation is spreading here, as it is globally. But barriers to entry come in a variety of guises, and they are not always the simple matter of whether or not a particular airport or government is in favour of opening up competition.”

Despite the barriers and challenges, Nassberg firmly believes there is a genuine opportunity for independent handlers to operate profitable handling operations in Asia – but agrees that it is only a market for those prepared to make long-term investments. WFS began operating its Bangkok Flight Services (BFS) joint-venture in 2006, in the mega-cargo-terminal at the new Suvarnabhumi Airport, but the ground work for that project started long before.

“Bangkok is the perfect example that it can be done, but the barriers are indeed high,” he says. “We opened our Asia regional office in Hong Kong in 1996 and began committing significant resources to the region, on speculation – and a belief that there was a future for the independent handler in Asia. But it takes a lot of patience, perseverance, and commitment – certainly financial. It’s not for the faint of heart. But it can be done. There are plenty of informal barriers, and for this there is no alternative but building up a strong network of local partners and advisors. With the exception of perhaps just a couple of countries, the likelihood of a western company walking in on its own, with a few expatriates and hoping to break in to the local market is virtually nil.”

Swissport recently started cargo handling operations at Tokyo Narita airport, and has had ground handling operations in Japan for some time, but the company is not yet convinced that the time is right to invest elsewhere in Asia. It had an unsuccessful attempt to break the handling duopoly at Singapore Changi Airport, but withdrew after concluding that the environment was not supportive of a new handler.

John Batten, Swissport’s executive VP for global cargo, believes that the terms currently being offered to international cargo handlers at airports in most parts of Asia make it impossible for them to make decent returns on investments, at least in the short to medium term.

“I cannot justify a decision to open up an operation where I cannot make a return within five years,” he says.

He does not believe any of the current wave of Asian joint-venture cargo handling operations set up by his competitors are profitable.

Nassberg doesn’t reveal directly whether BFS is profitable yet, although it seems that it was not expected to be in the short term.

He says: “BFS, which is actually a combination of two companies, one for cargo handling, the other for ramp and pax handling, is a very significant investment by WFS and our partner, Bangkok Airways. It’s a long-term commitment to the continued development of the new Bangkok airport, as well as a showcase for WFS in Asia, and a springboard for further projects in the region. We’ve achieved service standards never seen before in Bangkok, in fact not anywhere in the region, and our market share reflects that. So we can say that we’re very satisfied with where we’re at, five years after airport opening.”

Nassberg believes the experience of Bangkok has taught WFS a lot of things about operating in Asia that will be useful as the group attempts to expand its presence in the region.

“Absolutely – from the challenges of construction in a new airport greenfield environment, to management styles and cultural adaptation, to the ways in which handlers, shippers, forwarders and airlines interact,” he says. “We found a lot of differences from our traditional regions of activity, and have learned from these. Without doubt, we’ve shortened the learning curve for future Asian projects.”

WFS’s Asia strategy, in terms of cargo, is to seek out development opportunities at airports with sufficiently liberalised regimes that are open to foreign investors or partners, “in locations that can benefit from our extensive network and relationships with major cargo operators”, explains Nassberg.

He reiterates that it is a slow process, particularly in airports that continue to be state owned. “Nonetheless, Bangkok has been an excellent example of a government owned and operated airport that has successfully integrated foreign service providers, providing the many benefits of real competition and high service standards,” he says.

“We’re seeing movement in India, in terms of opening of the cargo market, and we are devoting the needed resources to exploring those opportunities. In any case, this is not a proposition for the short-term player. Success in Asia is measured in years, and we’ve demonstrated the patience that this market rewards.”

With almost 40 years experience handling cargo at Hong Kong, and with a third handler set to arrive next year at the airport after Cathay Pacific received a 20-year franchise to build and operate a cargo-handling facility at its home base, Hactl is also now looking to leverage its experience and reputation beyond Hong Kong. It is adopting a three-pronged approach: investing in wholly-owned start-ups or acquisitions; management and operation of other parties’ operations, or providing consultancy for start-ups; and developing and selling its Cosac-Plus IT system to other handlers.

“Within this strategy, we are always open to opportunities and suggestions,” says Whitehead. “We receive frequent approaches, and are currently evaluating several possible projects. But we will only proceed with any of them if they provide realistic prospects of a satisfactory return on investment.”

Although he cannot reveal the options Hactl is currently considering, clearly the company’s background makes it an attractive candidate for operating handling services within mainland China.

“Hactl is well-known in mainland China, has an obvious cultural affinity, has the necessary language skills, and has a substantial Chinese shareholder (CNAC),” agrees Whitehead. “At the same time, we have had valuable long-term exposure to the global aviation business, so we can provide a comfortable business interface between China and the rest of the world.”

A lot of the opportunities for entering new cargo handling markets in Asia have so far come through joint ventures, either because of limits placed on the foreign ownership of companies in this sector, or due to the challenge of obtaining licences.

But this suits WFS. “There will be opportunities for independent handlers acting alone, but it’s not our preferred method,” says Nassberg. “BFS has worked very well as a partnership, and BWFS, our India operation, also a jv, has further validated the benefits of a team effort. Each side brings a different experience and area of knowledge. It would take years to build up the network of connections and relations that a strong local partner provides immediately. So it’s the model we intend to pursue.”

Lufthansa Cargo set up two joint-venture cargo handling companies in China in 2003 and 2004, respectively: Pactl at Shanghai Pudong Airport, and ICCS at Shenzhen. As well being seen as commercial opportunities in themselves, the intention was also to help provide an international-class handling operation for the airline’s own operations, which was not available in mainland China at the time. Both facilities are acknowledged to have helped raise cargo handling standards at those gateways, and Kothari says the cargo handling and IT infrastructure at both locations is now of international quality.

“The bottleneck is with Customs regulations, which are rather slow to change,” he says. “But change is coming for sure.”

He says both Pactl and ICCS have done “very well”, both in terms of their commercial results and market shares. “In fact Pactl continues to over-perform, as it has right from the day it came into operations. This is also proven by the fact that due to market demand, Pactl added two more terminals and now runs its operations from three warehouses in Shanghai.”

But there are no current plans for Lufthansa Cargo to expand its own handling activities further in Asia.

“Handling cargo in stations outside Germany is not considered a core business for Lufthansa Cargo, and although the company has been successful in running some of the cargo terminals, its first priority is to contract the best available local quality provider in the market,” says Kothari. “But if the opportunity demands, then it will certainly be evaluated.”

Whitehead says Hactl is open to joint ventures as one possible model.

“In principle we are always ready to talk with any like-minded party about business cooperation. But each party must bring something unique to the relationship, and the opportunity itself must be capable of providing each with an acceptable ROI,” he says.  “So each opportunity must be carefully and fully weighed on its individual merits. Handling can never be a short-term business; the cost of mistakes is far too high.”

Menzies pursues Indian promise

Menzies is pushing ahead with plans to expand its cargo handling business in India, having established a strong presence under the joint-venture company Menzies Aviation Bobba at the ‘greenfield’ airports at Hyderabad and Bangalore, which opened in 2008.

Hyderabad and Bangalore were chosen as the company’s first forays into the Indian market because of the opportunity that ‘greenfield’ developments offer to create international-class infrastructure from scratch, explains Kamesh Peri, Menzies Aviation’s senior VP for India. While there have been plenty of challenges, for example lower volumes than expected at Hyderabad on the ground handling side, four years on he describes the businesses as “successful operations that have been able to deliver what we had promised”.

Plans to expand into Mumbai and Delhi have not yet been fulfilled, although the company is expected to be a strong candidate for two new cargo handling licences at Mumbai, expected to be awarded later this year.

The company successfully obtained three licences that became available at Delhi, although the Indian government deferred the process for a period, and resumed it in 2009 during the global financial crisis, at a time when Menzies was consolidating rather than expanding its activities.

Peri is clear that the company will more than qualify in the Mumbai tender on the operational and technical criteria, with the only question being over the commercial conditions that the airport sets, which sometimes do not accurately reflect the market conditions and therefore may not make it financially viable for a handler.

While Menzies has been satisfied with the performance of its joint-ventures in India, it chose to withdraw two years ago from its joint-venture handling company at Chengdu Airport in western China, despite the rapid growth of cargo volumes there.

Mervyn Walker, executive VP for operations at Menzies Aviation, says: “We sold our shares back to the airport, because we didn’t have management control.”

He doesn’t rule out future involvement in joint-venture handling companies, but says these would be only acceptable if the company has management control of the JV. Menzies is planning to add 18 new stations globally this year, although none of these is in Asia.