Nov 12, 2014

Nippon Cargo Airlines reinforcing calls for rate restoration

Fukashi Sakamoto, president, Nippon Cargo Airlines (NCA)

In an interview with Daily Cargo recently, Fukashi Sakamoto, president of Nippon Cargo Airlines (NCA), looked back on the company's business results in the first half of fiscal 2014 and talked about its future undertakings. Against the backdrop of the increasing trend in cargo traffic, NCA successfully posted surpluses last September for the first time since November 2013 in terms of monthly results. However, it still projects Y7.3 billion in current-account deficit for the entirety of 2014. Sakamoto acknowledged that, "Though we have reverted to the black in our monthly results, we almost didn't make it if not for the various measures we took. The restoration of rates is still not enough. If we do not execute it, we would be unable to secure sustainability." Rate restoration (RR) also leads to securing space for ex-Japan cargoes. Meanwhile, the company is expanding the list of airports where it uses the electronic Airway Bills (eAWB), targeting the use of eAWB in 32% of the total AWB transactions by 2016.

Based on its business results for the April-September 2014 period, NCA chalked up sales amounting to Y46.3 billion, up 10.2% from the same period a year earlier, and ordinary deficit of Y3.3 billion (Y4.8 billion deficit in the previous year). For the whole of 2014, the company projects sales totaling Y91.3 billion and ordinary loss of Y7.3 billion.

Of the aircrafts owned by NCA, the sixth B747-8F was received in late October, with the seventh and eighth units slated to be turned over within fiscal 2014. The company owns 10 units of the B747-400F aircraft, five of which are operated through its own network. Of the other five B747-400Fs, two units continue to be dry-leased by AirBridgeCargo Airlines (ABC). The company has also begun to dry-lease aircrafts to Kalitta Air in August and to the Slovakian airline company Air Cargo Global (ACG) in late October. The last remaining aircraft in this fleet is currently moored, but negotiations are ongoing for its dry lease. NCA aims to expand its company-owned fleet to 13 aircrafts (eight B747-8F and five B747-400F) during the period covered by its new medium-term management plan, or from next fiscal year until fiscal 2018.

As for the fixed costs related to warehouses, NCA promoted the shift of terminal costs in the U.S. into variable cost. With regard to its own warehouses in the U.S., the one in New York is currently subleased to another company. As for the ones in Chicago and San Francisco, they will be leased to other companies in conjunction with their contract renewal, and NCA will use just a portion of such warehouses.

Salient points made by Sakamoto in the interview are as follows.

[Business results in the first half of fiscal 2014]

*Our forecast itself was formulated in a rather strict manner, but the results have largely been as we have expected. Ex-Japan export air cargoes reverted to an upward trend starting October 2013 in comparison with the same month a year earlier. In fiscal 2014, the export volume manifested single-digit growths in May and June, but enjoyed double-digit surges for the rest of the year. Cargo volume in Japan and Asia ballooned, and together with the synergistic effects of cost reduction, the supply-demand balance tightened, leading to improved yield and enhanced load factor (LF). The growth became remarkable starting September in particular, causing our company to revert to the black in terms of monthly results. The momentum in cargoes also spread to Asia in October and November, and is projected to prevail until mid-December.

*However, there is an imbalance in the Asia-North America cargo traffic as the volume of cargoes in the outbound leg is large, but that in the inward voyage is small. If we look at the world market, the North America-Europe and Asia-Europe trades are virtually balanced. In the case of the Asia-North America route, however, the inbound cargoes amount to just about 70% of the shipments in the outbound leg. In light of this, we think that we should not engage in the delivery of export cargoes only, as we need to build our business in the inbound and outbound segments, including the return flights.

[Targeting 32% in eAWB-based transactions in 2016]

*Though we have reverted to the black in our monthly results, we almost didn't make it if not for the various measures we took. The restoration of rates is still not enough. If we do not execute it, we would be unable to secure sustainability. We have already carried out a considerable portion of our cost reduction measures. Now we want the forwarders and shippers to understand the need to restore rates to adequate levels.

*Freight rates have been dipping in the past few years. We thought about restoring the rates, but the movement of ex-Japan cargoes had stagnated and we saw that if we carried out RR, the use of air transport would only further decline. But the supply-demand environment has quite tightened at present, giving us the momentum to lobby for RR. Outside of ex-Japan cargoes, we also want to raise the rates on ex-Bangkok shipments by 15%. They understand the addition on top of the "peak rate", the rate during the peak season, for ex-Hong Kong cargoes that are enjoying brisk activity.

*Our flights are virtually booked in the North America lane at present. With regard to ex-Asia space, the ideal state is that we secure a certain volume of ex-Asia Japan-bound cargoes and then load ex-Japan export cargoes on the space that has been vacated after unloading in Japan. As regard freight rates, however, given the peak season element, the rates are higher on ex-Hong Kong cargoes than on ex-Japan cargoes. Even outside of the peak season, the rates go toe-to-toe with the rates on cargoes from Japan. When viewed in terms of position, a large portion of ex-Japan cargoes are lightweight, while those from Hong Kong and Shanghai are extremely heavy. With regard to the position revenues of our company, the revenues are better on ex-Asia cargoes. Given these circumstances, if we do not realize RR on ex-Japan cargoes, we will be faced with an environment where it would be hard to provide space for ex-Japan cargoes. We have already requested for the restoration of rates and we are in the process of getting the understanding of those concerned.

*Our temporary and charter services are fully booked until the first half of December and we will not be able to dispatch aircrafts. We project that there will be demand until before Christmas.

[Compliance with eAWB]

*We are currently at the stage of applying eAWB under the eFreight program that promotes the shift to paperless transactions. Our company kicked off trials with major forwarders in September 2012. And in November 2013, we became the first Japanese airline company to enter into the Multilateral eAWB Agreement (M-eAWB) with the International Air Transport Association (IATA). Such agreement is a comprehensive accord that aims to computerize the master AWB that traditionally came in paper form. The airports that complied in the early stages of the program were Narita, Kansai, Singapore and Amsterdam, but Los Angeles, Chicago and Hong Kong joined last September, while San Francisco, New York, Dallas and Malpensa, Frankfurt-Hahn are slated to enter the list by the end of December. Forwarders are now individually advancing trials on system matching, with the full-fledged application of the system expected to take place in additional bases one after another. We hope there is extensive participation in the program. Of the AWB-based transactions, we aim to boost the ratio of eAWB by 6% within fiscal 2014, 23% within fiscal 2015 and 32% within fiscal 2016.

*Transactions will definitely come in two forms - paper and eAWB. However, in the world outside of Japan, "computerization" is rapidly spreading. The IATA has also strongly pushed for eAWB. At a certain point, even if we want to engage in computerization, it does not necessarily follow that we could do it right away. When that happens, we will be forced to deal with a substantial difference with other companies abroad. Also, we might be charged for the work done with paper by warehouses at foreign airports that advocate computerization.

[Delivery service]

*Notwithstanding the leveling of airborne cargo traffic throughout the year, the highest surge in volume is registered from September until November. While there had been cases wherein there had almost been no peaks, such as in the past 2-3 years, the volume of shipments is finally expanding again this year after quite a long hiatus. Our Sales/Marketing Department opines that we will be able to boost our revenues/profits if we increase our services a little more. Our business is pillared on regular/liner cargo transport, but we want to be able to flexibly offer temporary/charter services corresponding to the demand. Cargo demand has peaks on weekly and annual bases. If we manage to build a flexible system that copes with the demand, then we will be able to offer efficient delivery. We are thinking of holding discussions about this together with the crewmembers, and operation and sales/marketing departments.

*The round-the-world regular flights (Narita - Anchorage - Chicago O'Hare - Frankfurt-Hahn - Narita) that we carry out as a measure for return flights from North America have been increased to a frequency of four times per week during the peak season, from the hitherto twice-weekly scheme. In summer this year, we had the return trip to Narita from San Francisco temporarily stop over at Seattle in order to transport U.S.-produced cherries that were then in season. We are also setting our sights on capturing cargoes bound for Singapore from the U.S.

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