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Friday, Jul 17, 2020

Hong Kong’s Cathay Pacific ready to pull plug on ‘many’ passenger flights now being used exclusively for cargo as air freight market weakens

Rates for air cargo, which had soared with the grounding of planes amid travel collapse, is slowly returning to earth, numbers show. A decline in demand for personal protective equipment and the use of alternative shipping methods has been behind the drop in prices

Cathay Pacific, the world’s fifth-largest air cargo carrier, is preparing to cancel “many” of the passenger flights it has repurposed to carry only freight, the strongest signal yet that the short-term boom in the air cargo market is weakening.

Air freight rates have fallen by half from their peak last month, according to TAC Index, the industry’s price-guide bible, as demand for personal protective equipment has eased, alternative transportation methods have been employed and global economies continue to slow.

“Cargo has been tapering off, and as a result, there will be many cancellations of cargo-only passenger aircraft flights, as the commercial decisions are made closer to the time of the flight,” Hong Kong’s de facto flag carrier, which operates from the world’s busiest air cargo airport, told staff earlier this week.

Cargo revenue has been Cathay’s primary source of income for at least three months, as the collapse in air travel has seen passenger revenue dry up. With the grounding of numerous passenger aircraft, which typically carry half the world’s cargo, air freight pricing surged on the shortfall in capacity.

Among Asian airlines, who rank among the biggest cargo carriers globally, a mixed picture was emerging.

Korean Air, the sixth-largest, said it anticipated a “change” in demand, but its capacity was still rising, while seventh-placed China Airlines told Reuters it was concerned about the outlook against a weak global economic environment.

Cathay, meanwhile, planned to “remain agile in the deployment of our aircraft to ensure our available cargo capacity is aligned with market demand,” the airline said in an emailed statement.

They reiterated that dedicated freighters would keep flying at “near full capacity” while “potentially reducing the overall number of cargo-only passenger flights compared with the amount that we mounted in May.”

The airline operated 900 such return flights that month.

An internally discussed plan to convert Cathay four Boeing 777s for special cargo operations, meanwhile, was now thought likely to involve just two of the planes, the Post understands. The airline said conversions were subject to “commercial requirements”.

Korean Air says it was currently using passenger planes for 70-80 return cargo-only flights per week.

“If the global economic recession and trade restrictions due to Covid-19 continue for a long time, the air cargo market is bound to face challenges,” a Korean Air spokeswoman said. “We expect cargo demand to change, but currently cargo transport capacity is on the rise due to the increase in cargo-only passenger flights.”

Cargo freight pricing from China to Europe has halved to US$6 (HK$47) a kilo in June since the end of April, according to TAC Index data. China-US pricing topped US$15 by mid-May, but has dropped by two-thirds. Rates pre-Covid had hovered around US$2 to 3 a kilo.

Rates from Hong Kong to the US and Europe, meanwhile, are all starting to give up the significant gains, but remain 50 per cent higher than at the same time in 2019.

John Peyton Burnett, managing director of the TAC Index, said: “The market is still quite strong, but passenger planes will be the first to go. If you’ve got a freighter that can use that for cargo, you’re not going to stick it on a passenger plane.”

Cathay Pacific operates a dedicated fleet of 20 Boeing 747 freighter planes, and its all-cargo carrier Air Hong Kong flies a dozen more. The airline generated HK$23 billion from cargo income last year, which accounted for a fifth of overall revenue

The airline, responsible for half of passenger traffic and two-fifths of cargo in and out of Hong Kong, was behind only FedEx, Emirates, Qatar Airways and United Parcel Service in terms of air cargo carried last year, according to the International Air Transport Association (IATA).

In an internal memo last month, Cathay said extra freight revenue from cargo-only passenger flights was “under threat”, citing shippers returning to “other modes of transport, and late notice cancellations becoming more prevalent in recent weeks”, among other things.

Separately, Cathay last week joined a long list of airlines raising cash to navigate the pandemic, unveiling a HK$39 billion recapitalisation plan, with 70 per cent of the funds coming from the Hong Kong government.

Frederic Horst, managing director of Cargo Facts Consulting, said passenger plane freight operations had been boosted by high prices, low fuel costs and subsidies. The consultancy tracked 2,220 passenger aircraft redesignated to fly cargo-only versus the 1,900 dedicated freighter planes.

“Now that fuel has gone up a bit and rates have come down, it’s pretty hard to cover even marginal cost,” said Horst of cargo-only passenger flights, noting less demand for medical supplies and an overall drop in air freight volume.

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