MAJOR regional airlines are grappling with escalating cost in their cargo operations following the onset of the war in Iraq. While most airlines have moved to pass the additional cost over to cargo customers, others have yet to do so, perhaps on the belief that the situation may not last for too long.
One such airline is Malaysian Airline System Bhd (MAS) whose cargo division has held off raising surcharges on cargo shipments, unlike its major peers Singapore Airlines and Cathay Pacific. This, some market observers say, accords the national carrier a competitive edge over other regional airlines that have rushed to do so.
The cost for most of these airlines has gone up due to need to reroute, increasing cost of security, insurance and of course, the rising oil price.
But what had earlier seemed to be a short war is increasingly becoming unlikely and so, the question that begs answering now is how long would Malaysia Airlines Cargo Sdn Bhd (MASkargo) be able to bear the burden of additional costs?
Analysts covering the sector have yet to compute what the additional costs will mean for the airlines bottomline figure. But they reckon that if the war turns out to be a protracted one, as most are prophesying now, the overall effect can turn out to be quite significant.
According to a transport analyst, a 1 per cent increase in fuel price can lead to changes in earnings of between 5 per cent and seven per cent for MAS. With war carrying on, there will also be other costs cropping up like the increasing cost of security, insurance and other related issues.
But he reckons that since the cargo unit has already sunk in the cost, in the sense that it has available capacity, its strategy is probably to maximise that capacity rather than focus on yields at present.
True enough, MASkargos senior general manager J.J. Ong tells BizWeek that the company is trying to hold off imposing additional surcharges for the time being. As the national carrier, we're trying to be as sensitive as possible to the needs of our customers, whose businesses are also being affected by the war.
Ong says the hope is that the war will be short-lived thus making it unnecessary to impose any additional surcharges.
But we're monitoring oil prices as well as the supply-demand situation on a day-to-day basis. If we find that business is strong enough to sustain our cargo business, then we might very well find it unnecessary to levy any sort of surcharge, he claims.
The cargo capacity of some airlines has been reduced as a result of passenger flights being cancelled temporarily or diverted. Some industry participants have anticipated that capacity could be cut by as much as 15 per cent.
Not surprisingly then that MASkargo is also mulling the idea of adding on one to two cargo flights a week in response to request from exporters who now seem to be faced with a cargo capacity shortage.
We are monitoring the situation closely as the decision to introduce additional freight flights will largely depend on the supply-demand situation, Ong explains.
So far, he says the loads heading out of Malaysia have been holding up very well. The West-bound traffic is still very strong. In fact, we scheduled an additional flight to Amsterdam on Tuesday to clear some of the backlog. It's only our East bound flow that has seen a drop in traffic of about 30 per cent.
An industry observer reckons that the cancellation of some passenger flights by regional carriers could actually be working in MASkargo's favour. The more flights that are cancelled, the less underbelly capacity there is available. Some of this demand for capacity will surely spill over to MASkargo, especially since its freight rates are now more competitive compared with some of the other regional carriers, he says.
News that coalition forces had invaded Iraq sent some regional airlines scrambling to issue statements last Thursday that they would raise surcharges on cargo shipments to counter higher oil, security and insurance costs.
Hong Kong's Cathay Pacific Airways Ltd and Dragon Airlines Ltd were one of the first few to announce a raise in fuel surcharges on cargo by 33 per cent to HK$1.60 a kg on long-haul flights and HK$0.80 on short-haul flights. These new rates, which came into effect on Thursday (March 27th) follows closely on the heels of a 50 per cent increase in Cathay Pacific's fuel surcharge on cargo on long-and short-haul flights to HK$1.20 and HK$0.60 per kg, respectively.
The spike in world oil prices in the weeks leading up to the invasion of Iraq has also led to a dramatic increase in the prices of moving cargo using Singapore Airlines Ltd's freight unit.
Since earlier this month, the cargo division had started levying a separate fuel surcharge of 20 US cents per kg to counter the rise in oil prices. This was followed by a war surcharge of 25 US cents per kg for all war-affected shipments following the outbreak of war. This represents a 15 per cent increase in prices for moving cargo from Europe to Singapore.
On top of that, SIA Cargo has also imposed a high-demand surcharge of S$0.80 a kg on cargo leaving from Singapore, to or through Europe, starting from last Friday. The companys spokesman Geoff Breusch says in a written reply that higher demand has lead to rate increases elsewhere, and without the surcharge, there would be severe capacity restrictions in Singapore.
He says: However, in each market we will continue to assess the course taken by the major capacity providers, and may exercise discretion in the application of the war surcharge based on their actions.
It appears as though MASkargos decision to hold off imposing additional surcharges is already giving SIA Cargo cause for concern.
According to a source, SIA Cargo has decided not to impose the war surcharge in Kuala Lumpur and Penang, as MASkargo has not done so.
Breusch, however, maintains that the war surcharge is nothing new as it was also imposed during the last Gulf War. Furthermore, air carriers and shipping lines plying through or around the affected area are also imposing the surcharge now in Europe and other parts of the world.
We believe that most of our customers will understand and accept the need for such surcharges, and they understand that we will only impose them for as long as it is absolutely necessary, he stresses.
Worth noting is that MASkargo's Ong does not dismiss the possibility that a protracted war would make the levying of additional surcharges inevitable.
He says with some flights having to change their paths, this could result in longer routes and extra refuelling stops. Carrying more fuel means carrying less cargo, he explains.