Indian Air Cargo Challenges – Part 2

This second part of our review of the Indian aviation market deals with the challenges and growth potential for air cargo in this thriving subcontinent.

Pharma shipments flown out of the country are one of India’s export hits  /  source: CV
Pharma shipments flown out of the country are one of India’s export hits / source: CV

Air Cargo has finally shown some signs of growth in the country in the last financial year 2013-14. In this period, all operational airports taken together had handled two million metric tons (MT) of cargo — 1.4 MT international and 0.8 million MT domestic - registering a 4 pc growth over the previous year.

India’s merchandise trade to GDP ratio has increased significantly from 21.3% in 2003 to 42.1% in 2012, whereas China’s has declined from 51% to 47% for the same period. Though India has contributed just 1% to the world trade, this shows India’s continuing integration in the world’s economy. With positive sentiments all round especially with the formation of a new government with absolute majority, the trade to GDP ratio is bound to increase going forward. This augurs well for the cargo industry, even though the air cargo ratio was less than 1% of the overall cargo moved.

While overall the growth has been positive for the country, the cause of concern is the continuing negative growth for Chennai airport, one of the major metro airports located in southern India. This negative growth rate can be largely attributed to the falling market share of Nokia mobile phones around the world thus impacting their manufacturing performance at their Chennai factory. Electronics, pharmaceuticals, horticulture and meat have been the largest contributor to the export air cargo growth in the country. Off course handicraft, carpets, garments, leather and to some extent engineering products have also contributed to the export basket. Any de-growth in these segments has had immediate impact on the growth of cargo.

Emirates has gained home carrier status in India  /  source: BLR
Emirates has gained home carrier status in India / source: BLR

Pharmaceutical shipments are thriving
Significantly cargo imports which grew very impressively during the period 2003 to 2010, nose dived thereafter dramatically as India’s economy flattered and caused a reversal of fortune for the retail industry. Imports were fueled by high demand for consumer goods of the branded international variety, which was also aided by the mushrooming of the retail industry specially the Mall Culture. The imports of cheaper goods from China including electronics and mobile phones further added to the growth rate.

With high cost of labor in China, the price advantage with India has been eroding fast. India’s manufacturing capability improving dramatically over past decade has seen manufacturing picking up in the country. Not only that Indian manufacturing has been slowly riding up the value chain. Bangladesh’s trouble with its garment industry and China’s decision to move away from low value manufacturing is benefitting India’s garment industry. Exports of garments from India have picked up though they are not of the value and volume of early 90s. The ever expanding pharmaceutical industry with a growth rate of +15% predicted is clearly a boon for the air cargo industry as a significant quantity of exported pharmaceuticals move by air. As India’s middle class population size increased and demand for quality health care, import of high value patented drug have been increasing and these again are moving by air.

Domestic cargo is growing fast
The most important element of the India’s cargo industry is the growth of domestic air cargo. The potential is huge as India is a large country with manufacturing region specific and the need to move products quickly and safely assume greater importance. India’s road transportation, which moves the majority of domestic freight, is beset with problems of missing cargo, pilferage, delays and increasing cost. Domestic air cargo which remained largely untapped until the advent of low cost carriers into the Indian market suddenly boomed from 2009 onwards. A few years back it was hardly significant. Today it is 0.8 MT and growing at the rate of +10% year-on-year.

The biggest impact on the growth of domestic air cargo is the e-Commerce business industry in India. Online retail in India is already worth $3.1bn, or 10% of the organized retail market, and is estimated to grow to $22bn, or over 15% of the organized retail market in five years, according to a November 2013 report by brokerage firm CLSA. Speed to consumer and the need to centralize distribution centers to save cost and control operation for air cargo appears to be best bet to move products quickly. The spread of the domestic airlines to newer and remoter airports in the country has helped further tap the latent demand for air cargo. The government through the Airport Authority of India has initiated several steps to augment the infrastructure needed for catering to the growth of domestic air cargo.

Unloading of Lufthansa shipments at Hyderabad Airport  /  source: HYD
Unloading of Lufthansa shipments at Hyderabad Airport / source: HYD

More excess cargo capacity than demand
As the Union government plans to expand domestic air connectivity, the Civil Aviation Ministry has identified 24 airports, specifically at Chennai, Ahmedabad, Coimbatore, Trichy and Mangalore for development of dedicated domestic cargo terminals.

It is not to say that infrastructure has been ignored for international cargo. With the privatization of major airports, except for Chennai, cargo infrastructure development has been the focus area for these airport developers. Even in Chennai new infrastructure has been added. All in all, this has ensured that for the first time, India will have much higher excess capacity for cargo than demand. Mumbai remains the only place where there is a challenge. Unfortunately lack of space has demanded a solution not easy to find though the airport has taken major steps to augment capacity for cargo within the constraints to space they have to deal with. It is important to know that with the focus on pharmaceuticals both for export and import, almost all airports today have temperature controlled handling capabilities. However, what is now needed are efficient process and skilled trained human resources.

Hub is a foreign word in India
With India’s economic growth projected to be 5% in the near-term future and +8% in the mid-term future, air cargo demand will shoot up higher and higher. With passenger growth fueling increasing deployment of capacity by airlines into the Indian market, cargo carriage capacity will not be a problem. The problem, however, will be how to make a profit out of transporting air cargo. This appears currently to be a challenge for many international carriers with the exception of Gulf carriers. Pricing of air cargo products and transparency in pricing will play a key role in increasing the contribution of air cargo in the trade basket.

Cargo always played a major role for Air India (here one of their A330s)  /  source: Air India
Cargo always played a major role for Air India (here one of their A330s) / source: Air India

One very important differentiator of India’s air cargo scenario is the fact that there are no hubs in India and none are likely to come up anytime in the future. Almost every ton of India’s air cargo is generally handled within the country and hardly any transshipment cargo exists. This is primarily because there is no national carrier with any significant network. Air India lost the battle in the late 90s to create their global presence. With Etihad acquiring a stake in Jet Airways, the latter has aligned its network with Abu Dhabi. Today and rightly so, Emirates is considered as the national carrier of India, with the amount of flights they operate to India. It is obvious that they are not only the largest passenger airline in the country for international traffic, but also the largest cargo carrier out of the country for international cargo

High growth figures, despite worldwide economic turndowns, are an encouraging sign for the Indian aviation and air cargo market.
It will be interesting to follow this development on a regular basis.

John Mc Donagh & Radharamanan Panicker

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Comments: 2
  • #1

    Dwarakanath (Monday, 11 August 2014 20:00)

    Can some one share the trend of occupancy level of air craft space by e-commerce business in India. My mail is is

  • #2

    Heiner Siegmund (Monday, 11 August 2014 20:39)

    Dear Dwarakanath
    Thanks for writing.
    We'll pass on your inquiry to a colleague and industry expert in Mumbai asking him to look after it and get in touch with you.
    Best wishes