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Transportation

Asian airlines flock to cargo for reprieve from coronavirus havoc

Radical cuts in passenger flights lift freight business, but earning outlook dim

Fewer flights coupled with relatively healthy demand for freight services means air cargo loads factors are running high this year.   © AP

TOKYO -- Demand for cargo services is serving as a lifeline for airlines across Asia amid the coronaovirus outbreak even as pressure on core passenger operations pushes others, like Australia's Virgin Airlines, into dire straits.

Virgin Australia Holdings announced it was entering voluntary administration on Tuesday, though it would continue operating both domestic and international flights for the time being.

In contrast to the Brisbane-based company's immediate crisis, its peers elsewhere in Asia, particularly China, are enjoying a temporary reprieve thanks to solid need for air cargo services.

Demand for air travel plummeted in March, outstripping even the deep cuts that airlines have already made to passenger capacity. Reducing passenger capacity, however, also means less capacity to carry cargo, yet demand for air freight services has remained relatively resilient. As a result, cargo load factors shot up, in many cases surpassing airlines' average figures for last year.

The stand-out among mainland Chinese carriers on this front is Shanghai-based Spring Airlines. Its March load factor was 116.77%, meaning it handled more than its stated capacity. The 68-point improvement from a year ago and more than doubling from last year's average of 51.19% were results of carrying 6,845 tons of cargo in March, which was 35.76% more than a year ago, while freight capacity was cut by 40%. The private airline did not respond to the Nikkei Asian Review's request for comment on its load factor surpassing 100%.

While Spring's figure may raise eyebrows, the trend holds for its bigger rivals as well. All three state-owned mainland airlines -- China Southern Airlines, China Eastern Airlines, and Air China -- saw their March cargo load factor rise by around 17 points compared to a year ago, bringing them higher than their respective 2019 averages.

China Eastern explained in its filing on Friday evening that the Shanghai-based airline "has promptly carried out freighter conversion for some passenger aircraft" to deal with strong demand for aerial shipment, especially medical and anti-epidemic materials.

The Civil Aviation Authority of China, or CAAC, has been encouraging a "passenger-to-freighter conversion" program as one of the six-point directives issued to airlines in order to ensure cargo demand is met despite the sharp cuts in passenger flights. Normally, excess space on passenger flights is used to carry cargo.

Jin Junhao, a deputy inspector of the aviation administration's transportation department, said last Monday that there were 1,690 scheduled cargo flights in the week to April 19, 66.7% more than the pre-contagion period. Of those flight, 656 were carried out using converted planes.

According to Wang Jian, China Eastern's board secretary, the company now operates six A330s converted into cargo planes as of Friday.

"By the end of March, the Group had grasped the changes in market demand," the board of Air China said in its Friday disclosure. The Beijing-based carrier has "dynamically optimized the deployment of transport capacity, refined marketing control, and actively sought to increase revenue through flexible adjustment between domestic and international flights, passenger and freight flights," it said in the statement.

Cathay Pacific Airways, one of the largest cargo operators globally, carried 119,277 tons of cargo in March. That was 35.6% less than a year ago, but due to a 37.2% cut in capacity, its load factor rose 9 points to 77.4%.

"To support global supply chains at this critical time, we have been adding cargo capacity in the form of more freighter flights as well as a total of 257 [round-trip] cargo-only passenger flights in March," said Ronald Lam, chief customer and commercial officer, on Thursday. The Hong Kong airline is maintaining similar cargo flight arrangements this month, including some long-haul routes such as in southwest Pacific where he stressed "air cargo capacity is extremely tight."

The gradual pickup in production in China has helped increase exports from both Hong Kong and the mainland to the world. Like China Eastern, Cathay noted a change in its cargo mix, with more medical supplies, such as face masks, protective clothing and hand sanitizer, and fewer garments, automobile parts and other consumer goods.

SF Express, a major Chinese logistics supplier, announced last Tuesday to launch a new cargo service from Hangzhou to Los Angeles this month, on top of its existing freight link to New York. The new cargo route is expected to add 240 tons of capacity a week across the Pacific using a B747-400F cargo aircraft. The Guangdong-based company anticipates the U.S. bound service to mainly carry general freight for automotive, spare parts, heavy machinery, chemicals, electronic products, and fresh food.

The two major Taiwanese carriers experienced a historic reversal in cargo and passenger revenues in March. According to its monthly disclosure, China Airlines said its cargo revenue grew by 29% to 5.056 billion New Taiwan dollars ($168 million) from a year ago, while its passenger revenue fell 71% to NT$2.211 billion. It was a similar story for its competitor Eva Airways, where cargo revenue increased 21% to NT$2.690 billion as passenger revenue dropped 68% to NT$2.631 billion in March. The company said it transported more medical items to Europe and America.

For Eva, this sort of reversal is the first since 2009, when the airline sector was suffering from the global financial crisis. Eric Lin, a public relations official at the Taiwanese airline, told Nikkei on Monday that the carrier intends "to increase revenue thorough sufficient utilization of the fleet space to carry cargo," including shifting passenger planes to freight use, like its regional peers.

Cargo items wait at the terminal of Hong Kong International airport. Airlines across the globe have cancelled flights, postponed or adjusted their services in response to the coronavirus outbreak.   © AP

Moving further south, Singapore Airlines, the largest Southeast Asian freight carrier, saw a rare silver lining from resurgence in cargo load factor. Although the company said it has "confronted the greatest challenge in its history due to the global Covid-19 outbreak, which had an unprecedented impact on its business," the tone of its statement was far less bleak when it came to cargo, saying "demand has held up and our freighter aircraft operate as planned." The airline said it has been "selectively deploying passenger aircraft on cargo-only flights to meet the demand from global supply chains."

However, cargo alone cannot cover the substantial hole created by the devastating blow to its passenger business, on top of the continued global spread of the disease and the lack of clarity going forward.

Nomura aviation analyst Ahmad Maghfur Usman maintained a reduce rating for Singapore Airlines on Wednesday following the monthly disclosure of its operations. "Singapore faces a new wave of COVID-19 outbreaks, where the number of cases has been on a worrying rise for a small, densely populated nation," he said. "There is also the risk that border controls across the world and delayed demand recovery could prompt lengthy suspension of capacity, posing downside risk to our projected earnings," he added.

The view of its regional rival Cathay is similar. Kelvin Lau, a transport sector analyst at Daiwa Capital Markets, kept his hold rating for the Hong Kong carrier on Thursday, "as many countries have declared a lockdown due to the COVID-19 outbreak." The longer the virus impact remains, the greater the risk for the carrier.

It is much the same story for the mainland airlines. Toliver Ma, an analyst at Guotai Junan Securities, kept his neutral rating for China Eastern on Friday, even though the 12-month forward looking price-to-book ratio based on its Hong Kong-listed shares was down to 0.6 times. Though its valuation is already quite cheap -- a 40% discount on its market value versus its book value -- Ma believe a low stock price "could linger for a period of time" as passenger demands "will resume in a slow manner."

Indeed, all three Chinese state-owned airlines admitted on Friday that their results will be quite underwhelming.

Air China's board, despite claiming to have "grasped the changes in market demand," said its results for January-March "will be significantly affected." China Eastern's Wang said the company anticipates it will "suffer significant losses in the first quarter of 2020." China Southern said "a substantial loss is expected" for the first quarter, and the Guangzhou-based carrier went further, saying the virus will "adversely affect" its results for the first half of the year.

The big three airlines are scheduled to release their first quarter results on April 29.

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