`Easy Money' Runs Out for Singapore Air, Korean Air as Cargo Demand Slows

Asian airlines expect cargo demand to slow as rising U.S. inventories and waning growth in Europe curb shipments of electronics and luxury goods.

Korean Air Lines Co., the world’s largest international cargo carrier, said demand will fall this month because of rising stockpiles of liquid-crystal display televisions, computers and MP3 players. Increases in yields, a measure of rates, are also likely to “moderate in the near term,” said Singapore Airlines Ltd.’s cargo arm, the fourth-largest.

Freight demand may wane after U.S. retailers’ inventories climbed to an 18-month high in September, helped by restocking that drove a 28 percent jump in Asia-Pacific carriers’ cargo traffic through October. Europe’s economic growth may slow to 1.8 percent next year, according to the International Monetary Fund, while tighter lending in China may sap demand for shipments of luxury goods in the world’s most populous nation.

“The easy money has been made for cargo operators,” said K. Ajith, an analyst at UOB-Kay Hian Research Pte in Singapore. “Things are not hunky-dory in Europe and unemployment is still high in the U.S. Growth for cargo in the first two quarters of next year is going to be unremarkable.”

Photographer: Jean Chung/Bloomberg

Freight demand may wane after U.S. retailers’ inventories climbed to an 18-month high in September, helped by restocking that drove a 28 percent jump in Asia-Pacific carriers’ cargo traffic through October. Close

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Photographer: Jean Chung/Bloomberg

Freight demand may wane after U.S. retailers’ inventories climbed to an 18-month high in September, helped by restocking that drove a 28 percent jump in Asia-Pacific carriers’ cargo traffic through October.

Both Korean Air and Cathay Pacific Airways Ltd., the world’s second-largest international air-cargo carrier, get about 30 percent of revenue from freight.

Cathay tumbled 7.2 percent in Hong Kong trading today, the most in more than a year, to HK$22.00. The carrier has jumped 52 percent this year. Korean Air fell 1.1 percent to 71,300 won in Seoul. It’s gained 30 percent this year. Singapore Air declined 2 percent. It’s risen 3.5 percent this year. In New York, FedEx Corp. has climbed 12 percent this year, while Delta Air Lines Inc. has jumped 15 percent.

Freight Slows

Asia-Pacific airlines’ freight growth has slowed after a “sharp rebound in global trade” caused demand to surge earlier in the year, the Association of Asia Pacific Airlines, which represents 15 carriers, said in a Nov. 24 statement. In October, cargo traffic rose 17 percent from a year earlier, compared with a 39 percent jump in May, according to the group. The region’s carriers fly about 40 percent of world air-cargo, it said.

Southeast Asia-Europe cargo yields have fallen 45 cents per kilogram from a high of about $3 earlier in the year on a seasonally adjusted basis, according to the International Air Transport Association. The decline takes yields to 11 percent below the pre-recession peak, the group said.

Global air-cargo demand growth may slow to 5.5 percent next year from an expected 18.5 percent this year, the group said yesterday. Yields will be little changed, it said. Asia-Pacific airline’s profits will fall 40 percent next year to $4.6 billion, the group said.

Overcapacity Concerns

“We are concerned about global overcapacity next year but believe the market will absorb the capacity,” said EVA Airways Corp., Taiwan’s second-biggest carrier. Asia-Pacific carriers boosted cargo capacity 15 percent in October from a year earlier, according to the Association of Asia Pacific Airlines.

Holiday season demand this year will likely slow from last year, according to Korean Air, as European governments tackle deficits and after U.S. unemployment climbed to the highest since April last month. Europe, where a debt crisis prompted bailouts of Greece and Ireland, remains in a “troubling” situation, IMF Managing Director Dominique Strauss-Kahn said on Dec. 8. The U.S. economy is barely expanding at a sustainable pace, Federal Reserve Chairman Ben S. Bernanke said this month.

“Global consumer spending hasn’t fully recovered yet amid ongoing fiscal tightening policies and still low employment rates,” Korean Air said in an e-mail reply to Bloomberg queries.

‘Leveled Off’

Demand growth has “leveled off in recent months” and the seasonal peak in the quarter ending in December is unlikely to be as “pronounced” as last year’s, Singapore Air’s cargo unit said. A year earlier, demand was surging as retailers restocked in anticipation of an end to the global recession and a rebound in consumer spending.

Asiana Airlines Inc., South Korea’s second-largest carrier, said holiday cargo demand this year is weaker than in 2009 partly because the global economy hasn’t recovered as strongly as expected. The introduction of more direct China-U.S. flights is also sapping transshipment traffic, the carrier said.

This year’s pickup in airfreight has caused Korean Air to forecast record annual volumes. Cathay Pacific, which may surpass Korean Air as the world’s largest international cargo carrier this year, is expecting a record annual profit, helped by rising freight and passenger demand, as well as asset sales.

Cathay Pacific

Cathay’s cargo traffic jumped 24 percent in the first 11 months. The Hong Kong-based airline carrier expects its cargo fleet to be “pretty busy for the whole of next year” helped by Chinese exports and the use of long-term contracts with freight forwarders, outgoing Chief Executive Officer Tony Tyler said in a Nov. 25 interview. The carrier is also increasing cargo capacity by under 10 percent, less than it expected, because of delays in receiving new Boeing Co. 747 freighters.

Hong Kong, which neighbors the Pearl River Delta, China’s main manufacturing hub, is on course to surpass Memphis, Tennessee as the world’s busiest air-cargo airport this year. Memphis is the home to FedEx’s main hub.

China Slowdown

Hong Kong has benefited from Chinese exports and rising inbound shipments of luxury handbags from Europe and of fresh foods from Australia and Asia as China’s growing number of millionaires stokes demand for higher price items. This demand may slow next year as the government tightens lending and winds back stimulus measures to cool inflation after consumer prices climbed 5.1 percent in November.

“When you have higher prices across China, it’s hard to believe that conspicuous consumption can continue to grow,” said UOB-Kay Hian’s Ajith.

The slowdown in China and cooler demand in the U.S. and Europe means that air-cargo carriers are unlikely to match the pace of demand they have seen this year, said Rohan Suppiah, an analyst at Kim Eng Securities Ltd. in Singapore.

“The rate of growth in cargo demand will be lower next year than in 2010,” he said. “We have already seen the big recovery in cargo.”

To contact the reporter on this story: Chan Sue Ling in Singapore slchan@bloomberg.net

To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net

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