Crisis Grinch Steals Christmas From Cargo Carriers: Freight

Cargo carriers worldwide face a grim festive season as declining consumer spending in Europe eradicates the usual peak in airborne deliveries of goods ranging from mobile phones to top-end sports shoes.

Freight traffic will also suffer “a softer start” to the New Year as economies slow, Karl Ulrich Garnadt, chief executive officer of Deutsche Lufthansa AG’s cargo unit, the biggest in the world among passenger airlines, said in an interview.

“It’s a long way short of last Christmas,” said David Lara, head of global air-freight procurement at Ceva Group Plc, which counts as clients eight of the top 10 retailers and suppliers including Apple Inc. and Nike Inc. “Normally in peak season carriers would be putting in extra capacity and operating charters to cope with demand, but that simply hasn’t happened.”

Cargo traffic, which generated sales of $66 billion last year, has declined every month since May. Air freight traffic fell 4.7 percent in October, as confidence in manufacturing industries declined and companies switched to slower modes of transport, the International Air Transport Association industry group said in a statement today.

The seasonal peak usually builds from October, with demand strongest on routes from Asian cities such as Shanghai and Hong Kong to western destinations including London, Amsterdam and Frankfurt and New York, Chicago and Los Angeles, according to Hoofddorp, Netherlands-based Ceva, which was formed in 2007 from a merger of TNT Logistics with Houston-based EGL Inc.

Laptops, Clothing

This year, demand began to drop off in the second quarter, with volumes remaining flat through the usual ramp-up as U.S. and European companies avoided over-stocking, Lara said.

Some 61 percent of Europeans will cut Christmas budgets because they’re worried about the economy, Deloitte LLP said in a report this month. Households there will spend an average 344 euros ($455) on gifts, 187 euros on food and drink and 27 euros on decorations, the U.K. Centre for Retail Research says.

“Western countries are importing and consuming less due to debt issues and so on,” said Jean-Claude Raynaud, a spokesman at the cargo unit of Air France-KLM Group (AF), Europe’s No. 1 airline. “People have a conservative philosophy that, since they don’t know what’s coming, they’ll be prudent and reduce orders, make economies. That hurts global trade, making problems for us.”

Capacity Glut

Planemaker Boeing Co. (BA) says data from 17 of the top 20 cargo carriers suggests October traffic fell 5.8 percent in what should have been the busiest month of the year for freight carriage. IATA will release full industry numbers this week.

Fashion items and electronic goods such as personal computers, notebooks and laptops have borne the brunt of the decline, Lara said, with retailers relying on unsold inventories to satisfy demand for Christmas gifts.

The situation has been made worse for airlines by increasing over-capacity resulting from decisions on fleet expansion taken during the optimism of the 2010 rebound.

Carriers have responded by redeploying aircraft on routes serving remaining growth markets such as Latin America and India, exporting items such as auto-components, according to Ceva, the largest transporter of parts for carmakers. The Mid- East and Africa are also among regions faring best, “or not so bad,” said Tom Crabtree, who oversees Boeing’s cargo forecasts.

At Lufthansa, where freight contributed operating profit of 310 million euros last year, or 36 percent of total earnings, shipments from China have “slowed significantly, whereas German exports are still impressively stable,” cargo chief Garnadt said in the interview in Frankfurt, the company’s main hub.

Late Rally?

About half of European air-freight consignments come from Germany, whose 2010 exports were worth three times those of the U.K. and five times Spain’s, World Trade Organization data show.

A possible respite for cargo carriers this festive season may come in the form of a last-minute order surge prompted by changing shopping trends.

United Parcel Service Inc. (UPS), the largest package-delivery company and the No. 2 cargo carrier after FedEx Corp. (FDX), said it’s hoping for a jump in shipments from consumers who buy late online, predicting that 120 million packages will be delivered in the week before Dec. 25, 6 percent more than last year.

“This is always a busy time, but this year we’re expecting even more in the period just before Christmas,” Marian Frings, a spokeswoman for UPS at the Atlanta-based company’s European hub at Cologne-Bonn airport in Germany, said by telephone.

Deutsche Post AG, the biggest carrier of air and sea cargo by volume, said a late rush may boost demand at its DHL unit as companies that allowed inventories to run down rush to restock. While that would present a welcome opportunity, it also makes planning “very difficult,” CEO Frank Appel said Nov. 9.

‘Looking Into Fog’

The outlook for the first half is equally unclear, carriers say, with Andreas Otto, Lufthansa’s board member for product and sales, last week predicting “growth around zero, maybe slightly in the minus,” with the carrier prepared to cut capacity by anywhere between 20 percent and 30 percent.

While Lufthansa said it will stop short of sending planes back to the desert for storage, as carriers did in the last recession, Hong Kong-based Cathay Pacific Airways Ltd. views parking older jets as “a possibility” as it looks at cutting frequencies on established long-haul routes, Cargo Director Nick Rhodes said last week in an e-mailed response to questions.

Air France-KLM’s Raynaud said uncertainty about the demand trend and appropriate capacity levels poses the biggest headache, especially with fuel prices

“The big problem is that we don’t really have any visibility,” he said. “We are looking into fog.”

To contact the reporters on this story: Alex Webb in Frankfurt at awebb25@bloomberg.net; Sabine Pirone in London at spirone@bloomberg.net

To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net

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