With the ongoing US-China trade war showing little sign of abating, and indeed quite possibly escalating, the outflow of production from China into Southeast Asia may accelerate says Richard Forson, Cargolux president and chief executive officer. By Donald Urquhart from Air Cargo Europe 2019.
While it remains to be seen whether the US applies further tariffs on Chinese goods and what China’s response will be, a larger question for the head of what is now a partly Chinese-owned carrier, is whether the trade war will hasten the movement of production out of China.
As Forson notes, the shift of production out of the country and into Southeast Asia is something that started well before the trade, purely for cost reasons.
“This just might accelerate the whole thing and it will be interesting to see how Trump reacts to something like that,” Forson says in reference to goods formerly produced in China, being exported out of countries like Vietnam, Cambodia and Thailand.
“So instead of just doing textiles, for example, they could be going into electronics and this includes Taiwan, as a manufacturing area for high level electronics,” he says. This will of course require these Southeast Asian countries to build up their expertise, he adds.
There are other important considerations as well, he adds. At what point do the tariffs reach a level unsustainable for continued imports into the US? At some point consumers are unlikely to continue to be willing to pay the added cost of some goods. “And if it does stop the imports, is the US going to do without certain things? Because they can’t just switch on production overnight.
“I think it will create inflation on their side with all the tariffs because a lot of the goods they don’t manufacture anymore and if they were to manufacture within the country it would be at a cost. And do they have the skills to restart those production processes, that’s the other thing,” he notes.
“At this point in time if I do the analysis of exactly what gets exported out of China to the US, they’re not all subject to tariffs at this stage. I look at the electronic side, it’s about USD 80 billion of exports out of China. If I look at the smart phones etc. side it’s about USD 70 billion and if I look at textiles and what not, that’s probably in the region of USD 60 billion which are typically the kinds of things that would be flying.
“And there could be a whole host of other issues like toys or whatever that are needed in the peak season that will get flown across to keep inventory levels up etc,” he says.
As at just over a month ago there has not been much direct impact from the trade war on Cargolux. “But if Trump makes good on his threat to put tariffs on the remainder, that will have an effect I believe. Because there’s a certain amount the US consumer can absorb before they’re going to say, ‘look it’s too expensive, I’m not going to upgrade my iPhone’.”
Forson notes it also depends on to what extent the US retailers and companies like Apple are prepared to absorb certain increases in cost and how much they want to pass on to their customers.
For air cargo there will definitely be a significant impact if it turns into a full blown trade war between the two countries and if China starts retaliating against US companies doing business in China, he says.
Certainly Trump’s recent threat only days ago to impose a fresh 10 per cent tariff on another USD 300 billion of Chinese goods from 1 September, effectively taxing all Chinese imports to the US, signal some potentially harsh times ahead.
Noting that trade disputes have spread, with the US also going after India, Mexico and European motor vehicle exports under scrutiny as well, global trade lanes look to be under potentially severe threat.
“If all that starts changing the trade lanes, then we will have to look at our traffic rights portfolio to see what traffic rights are there and how can we service it and what the future trade lanes are likely to be at the end of the day,” says Forson.
“So it’s a continuous process of review in the organisation to make sure that we can be agile enough to adjust very quickly,” he says. The redrawing of trade lanes like the transpacific that has long been the powerhouse driving cargo volumes, “will be a fairly dramatic and whether it’s going to be for the benefit of the global economy is not clear, but it Is extremely doubtful in terms of the US itself.”
In terms of Cargolux’s transpacific services, the carrier hasn’t taken out any capacity, “but we are monitoring it very carefully,” Forson adds. Obviously with the slowdown in growth, or maybe even no growth at all – which is the latest IATA prediction for 2019, basically zero growth for volumes – then there may be a significant capacity issue to grapple with. And of course if capacity once again starts surpassing demand, that’s going to put pressure on yields, he highlights.
“But there’s a floor that I’m prepared to go to and after that, I take capacity out, which we’ve done in other parts of the world, taking capacity out, consolidating flights. But at the same time I have to keep in mind the service that our customers require – I have to maintain a certain consistency,” he adds.
Capacity reductions that Cargolux has taken in certain markets involved reducing the number frequencies, or by looking at the routing that’s being flown and tweaking it to make it more optimum, Forson says. One key factor working in Cargolux’s favour is the fact the carrier has quite a heavy maintenance programme this year with several ‘D Checks’ having to be performed, which automatically constrains capacity.
Three B747-400Fs are in various stages of joining the Cargolux fleet, with two entering service already and third one undergoing its bridging check. As for the rest of the fleet the carrier did its first D Check on its fleet of B747-8Fs, “which went very smoothly” Forson says, and then another D check on a B747-400F. “So you can see we’ve got a lot of checks to do – Our maintenance facility this year is at capacity.”
Cargolux’s physical & digital future
And speaking of capacity, with Cargolux’s slow and steady build-up of freighter capacity, what does this mean for its facilities in Luxembourg? “That’s obviously an issue,” Forson says. “We are in discussion with the authorities, but what we’ve seen obviously this year is a drop in volumes, so that’s a continuous question and Luxembourg Airport (LUX) has a certain footprint as well.
“So in terms of growth going forward, in the future do we grow out of Findel (LUX) or are there other opportunities of growing elsewhere. We also have an AOC in Italy where we have four aircraft operating at this stage. But in terms of Findel, it handled the peak in 2017 which was an all-time high and in 2018 we handled the peak as well, although it was shorter.
“Of course we learn the lessons in terms of our processes etc. and speaking to my team and ground operations, by optimising processes and in a bit more automation, we will be able to increase throughput at the warehouse,” he says.
And while the carrier is mulling over its options in terms of physical space, it’s chest-deep in digital revitalisation. “My view on digitalisation is rather focused at the end of the day,” Forson says, highlighting that he’s not interested in going out and just throwing money at the latest digital solutions. “In actual fact the airline today is undergoing quite a significant transformation overall, by re-looking at our processes.”
As part of this, the carrier is also re-insourcing a lot of its business applications that were previously outsourced, as well as moving its substantial data storage needs to the cloud. It’s also looking at the processes that were driving those systems and also upgrading a number of those systems with the latest versions.
Forson cites the example of the carrier’s ERP platform which is an SAP product. “That was implemented 15-20 years ago and just doing the upgrading exercise alone, it’s causing us to have an in-depth look at all the processes in the organisation.”
In many cases he says the exercise is provoking the realisation that much of the work remains manual. “We’re saying: ‘Hey, why are we doing this manually? Can we automate with robots that will do the work automatically?’.” The company is also looking at the increasing use of artificial intelligence and how it can be applied at the carrier.
“So digitalisation from our perspective involves quite a bit and more importantly though, it’s the use of all the data that we have in our systems that really takes the forefront,” he says adding that it’s crucial to develop the necessary tools to analyse that data. “It’s not something you can buy off-the-shelf,” he adds.
Cargolux already extracts substantial value out of its information resources in its maintenance department, where it is able for example, to do accurate predictive maintenance based on its specific requirements.
While substantial work is being done in-house, Cargolux is of course tapping the expertise of a number of third party IT solutions providers to assist them. “But yes, it’s transformation that’s happening at a rapid pace. I haven’t got years to do it in,” he says with a laugh, I’ve got to do it in 2 to 3 years!”
There are of course multi-faceted challenges with such a far reaching exercise. Re-insourcing the IT functions that, have been outsourced for some 30-40 years “is really a challenge,” he says – both in terms of getting the expertise onboard and changing systems and mindsets as well.
“Typically what you find is a lot of change management is required in convincing people that what you been doing for the last 15 years, it’s experience, but it’s not 15 years of experience – you’ve done it once and you’re just doing it over and over and over again,” he says.
And then of course there’s also the digital connections with Cargolux’s customers which Forson says will allow for quicker response times and instant access.
“If they’ve got allocations with us they can directly get into the allocations at the rates that we’ve agreed and make their bookings and if they’ve got soft blocks then they can make their booking and confirm a rate with us. If they want to buy off the spot market they can automatically access what the spot rates are and overall greatly reduce the turnaround time of transactions,” he says.
He does highlight an interesting aspect on the digital front. “We do actually have a platform ourselves for the small and medium-size forwarders, but to be honest it’s not used extensively,” he says.
This seems surprising when a significant chunk of the industry is clamouring for digital connectivity. Forson reckons it’s probably down to forwarders going with larger players as a co-load, thinking they will get a better rate that way.
And if that’s not enough, the carrier also has its headquarters project underway. With a new headquarters building currently being built, the completed facility will be leased by Cargolux and enable it to co-locate virtually the entire LUX operation.
Located next to its maintenance centre in Luxembourg, the bulk of the organisation will be in one area instead of being split into four different buildings. This has the obvious gains in terms of organisational efficiency. But again, change management is crucial.
“So we have quite a lot going on,” Forson says, if somewhat understatedly.
Recent new routes for Cargolux include Jakarta on 23 June and Incheon on 16 July. “Jakarta is a new destination for us – we’ve had a look at the market there and we believe it’s economically viable for the company to serve and we can incorporate it in our routing for Southeast Asia.”
The transpacific and transatlantic remain the core trade lanes of course, but Africa is performing “not too badly,” Forson says. “We do see a pick up on the exploration side of the oil and gas sector.” With demand picking up, Cargolux is considering whether it will warrant putting in a dedicated service from Houston to Lagos.
“We used to do that service but we stopped it because the wheels went off the rails in Africa in that respect. But whether the current oil prices encourage exploration that’s another question,” he adds.
The carrier will also be reintroducing Santiago back into its network. “On a continuous basis we look at our markets to reintroduce, but on the basis if we do go back in, it’s not for six months and then we pull out again. We will consistently be there,” he says.
Belt and road
With the carrier recently doubling its services through Budapest (BUD), Forson says the Zhengzhou (CGO) and Hong Kong (HKG) flights stopping in BUD before flying to LUX have proved to be very successful.
“It’s a good distribution point into the rest of Eastern Europe and as an airport it’s very efficient from our perspective – we have a very good relationship with Budapest airport and we have a good road feeder service out of Budapest into the rest of Eastern Europe so it’s worked out well for us.
But while flying the air portion of what used to be and is now the new-age Silk Road, what does this up-and-coming railway cargo route mean for Cargolux? “With the train services now, that obviously competes with us,” he says.
It does beg the question as to whether he sees the rail service as a serious competitor? “Yes, if it really takes off,” he says. Once they start taking electronics, it will be more of an issue he says, citing the example of HP sending cargo via the train from China to Europe.
“So if it really starts building up and up, then it’s another form of competition, but initially I think it will take away from ocean shipping because of the physical timing that it moves. But he adds, “it’s something we keep an eye on.”
Remember Cargolux China?
And of course it would be an oversight to not ask the proverbial $64,000 question. What of the long-touted China joint venture airline? “The China joint ventures on hold at this stage,” Forson says pointing to the obviously less than conducive economic climate and trade war.
“The concept is still there,” he assures, but adds that Cargolux is careful as its’ Chinese partners are careful, “so that if we do, do something, it’s going to be a success,” he says.
“I know at one point we were very bullish on that, but no one foresaw this kind of friction arising and between the US and China it’s become a very fragile relationship at this stage.
“So you’ve got India and China in friction with the US and those of the two potential biggest economies in the world based on population size – both in excess of one billion people – and India’s manufacturing high-tech and pharmaceuticals as well.
“Can you really isolate yourself as a country, that’s the question. The other impact although not directly cargo related, is the impact on the passenger side because the more isolationist, the more restrictions on global trade, there is definitely going to impact on passenger traffic, especially on the business traffic which is where the airlines make their money. It’s a vicious circle at the end of the day,” he adds.