EXTRANS GLOBAL - Air Freight News - Week 18 2024

Air Cargo General

1) Jeju Air, omitted from the acquisition of Asiana Cargo - focusing on modernization of medium and short-haul fleet

Jeju Air has decided to abandon the acquisition of Asiana Airlines' cargo business division and focus on the modernization of its medium and short-haul fleet. This means that they will prioritize their core business rather than venturing into uncertain new ventures.
Last month, Jeju Air announced the abandonment of the acquisition of Asiana Airlines' cargo business division. A Jeju Air representative explained that they conducted due diligence according to the procedures, evaluating the investment value and suitability of the target business. However, they considered the uncertainties in the post-acquisition performance, synergy with the existing passenger business, and other factors.
This can be interpreted as meaning that the profitability of Asiana Airlines' cargo business did not meet the expected level. It also suggests that even if they were to acquire the cargo business, additional costs could arise. The sale excluded warehouses, ground handling services, and other elements, which means that the acquirer would have to arrange these elements on their own.There may be costs associated with replacing the aging cargo aircraft previously operated by Asiana Airlines. The profitability of the cargo business is directly linked to the transfer of contracts with existing cargo customers. Asiana Airlines stated that "it is currently impossible to determine whether the contracts will be transferred, as each cargo customer has different contract conditions.
In this situation, Jeju Air chose to strengthen its foundation rather than engaging in uncertain expansion. On the 25th, Jeju Air announced an additional borrowing of 30 billion KRW, which will be used as company operating funds, including the purchase of Boeing 737-8 aircraft. In 2018, Jeju Air signed a contract to purchase 50 Boeing B737-8 aircraft (including 10 options). Jeju Air currently operates mainly with Boeing B737-800 aircraft but plans to replace all of them with B737-8 in the long term. As Jeju Air mostly operates leased aircraft, owning them can reduce maintenance costs and increase cost competitiveness.
The intention is to enhance competitiveness in Jeju Air's core business of medium and short-haul passenger routes through fleet modernization. The B737-8 has a longer range of about 1,000 km compared to the B737-800. Currently, only Korean Air holds operating rights to Indonesia, including Bali, so Jeju Air can potentially target this regional market. Additionally, it can expand routes to destinations such as Singapore and Central Asia. As approximately 85% of domestic route passengers are concentrated in Asian regions such as Japan, China, and Southeast Asia, increasing market share within Asia alone can generate sufficient profits.
Furthermore, Jeju Air aims to enhance the competitiveness of its subsidiaries, including its hotel business (Holiday Inn Express Seoul Hongdae), which turned profitable last year. Through these efforts, they seek to establish a stable revenue structure.

2) E-commerce market demand: Temporary phenomenon vs. Paradigm shift

Amidst the e-commerce market's strong impact on the air cargo market, many market experts and players have conflicting expectations and concerns regarding the e-commerce demand trend.
While numerous experts are puzzled by this situation, the majority agree that e-commerce volume will not be limited to one-time or seasonal demand.
On the other hand, there is still a perspective that views the surge in e-commerce demand as a trend influenced primarily by a single country, namely China, rather than a diverse phenomenon in the global economic environment.
Although there are variations depending on routes and destinations, a critical view is also held regarding the classification of e-commerce demand items, which occupy 50-60% of the total air cargo volume, as normal.
Critics argue, "Just a year ago, apart from Alibaba and Amazon, we had never even heard of names like Temu. But now, airlines worldwide are eager to engage with Temu, an e-commerce seller with absolute demand. Is this the new normal?" However, many logistics companies and airlines continue to actively invest in and engage with the e-commerce market.
Based on accumulated experience, they instinctively assert that e-commerce is not sustainable in the air cargo market environment. While this is a valid point, it does not represent the majority opinion. Currently, the market at large is proclaiming e-commerce as the dominant trend with a louder voice than these negative warnings.
On the other hand, it is also necessary to consider when the final demand of e-commerce will cease to be transported by air. The current e-commerce market is primarily centered around China's production market. In the past, e-commerce demand initially started with air transportation but eventually shifted to sea containers after a certain period of time.
Amazon has been using over 10,000 containers per month since 2017 until 2021. Especially in European routes, the proportion of sea freight is gradually increasing.
However, the demand shipped from China-based platforms is still not fully absorbed by sea freight transportation. Platforms such as Shein, Temu, Taobao, and TikTok Shopping from China easily reserve air cargo space and even enter charter contracts without cost concerns when faced with a surge in orders.
In conclusion, players in the air cargo market now face the critical task of making a pragmatic judgment on how long the transformation of the air cargo market environment through e-commerce will last.

3) T'way Air and Air Premia Drive Membership in the World's Largest Airline Alliance

T'way Air and Air Premia are pushing for membership in the world's largest airline alliance, Star Alliance. They aim to fill the vacancy left by Asiana Airlines and move beyond being low-cost carriers (LCC) in a more substantial manner.
T'way Air is currently undertaking preliminary work for joining Star Alliance, while Air Premia is also forming a dedicated organization and promoting membership. Star Alliance is the largest airline alliance in the world, established in 1997. It has 26 member airlines worldwide, sharing various routes at 1,200 airports. The alliance brings together large airlines to share routes and mileage programs. As individual airlines have limitations on the routes they can secure, multiple airlines share routes to expand their operational range.
In South Korea, Asiana Airlines joined Star Alliance in 2002. However, if it is merged with Korean Air, which belongs to another airline alliance called SkyTeam, it will be difficult to maintain its position as a Star Alliance member. T'way Air and Air Premia are aiming to fill this vacancy. Air Premia initially focused on long-haul routes, and T'way Air is also changing its identity to focus on long-haul routes to Europe and the Americas. Therefore, their strategy to join Star Alliance is seen as an effort to transcend the LCC status externally.
However, the membership requirements are not easy, and it is expected to take a considerable amount of time. First, they need their own mileage program. Currently, only Air Premia operates such a program. They also need to secure full membership in the International Air Transport Association (IATA). T'way Air became the first domestic LCC to become a full member of IATA in 2016, but Air Premia's status is uncertain.
They also need to meet quantitative criteria. This includes the scale of aircraft operations, route networks, as well as safety records, aircraft conditions, service quality, and punctuality, all of which need to reach a certain level of satisfaction. It is rumored that Korean Air's attempt to join Star Alliance in the past was unsuccessful due to safety accidents. As a result, Korean Air formed SkyTeam with Delta Air Lines, Air France, Aeromexico, and others in 2000. Financial soundness and future growth potential are also factors evaluated when joining Star Alliance.
After joining, they will also have to pay annual marketing costs of tens of billions of Korean won, similar to membership fees. The fact that most Star Alliance members are full-service carriers (FSC), which are mostly large airlines, is also in this context.
Persuading existing member airlines is also a challenge. They need to demonstrate the benefits for existing member airlines in terms of shared routes and mileage programs to gain their agreement. An industry insider stated, "As an airline alliance, it is a kind of privilege organization, so if we fail to sufficiently demonstrate that it can clearly benefit existing member airlines' route networks, there are cases where membership is rejected." Furthermore, Star Alliance also needs to secure member airlines at Incheon Airport, a hub airport, so that is another aspect to consider."

4) The acquisition of Asiana Cargo is expected to be decided at around 500 billion won - New owner's outline to be revealed next week

As the main bidding for Asiana Airlines' cargo business division is underway, the outlines of the acquisition prices proposed by eligible preliminary bidders are starting to emerge. Market insiders predict that the acquisition amount will be determined at around 400 to 500 billion won. This figure is significantly different from the previously mentioned value of over 1 trillion won, even at the early stage of the official sale.
On the 28th, eligible preliminary bidders, including Air Premia, Air Incheon, and Eastar Jet, participated in the recent main bidding for Asiana Airlines' cargo business division. The selling agent is closely examining the conditions presented by each candidate and there is a possibility that the preferred negotiator will be announced as early as next week.
Another point to watch is the competition among private equity fund (PEF) management companies that hold low-cost carriers (LCCs) as portfolio companies.
It is noted that among the strategic investors (SI) invited by each candidate, no major domestic companies are included. However, there has been speculation in the market about the possibility of participation from Hanwha, LX, and Dongwon Group, which have subsidiary companies in the form of trading or logistics companies. Contrary to market predictions, some of the candidates have invited overseas logistics companies as SIs, with domestic financial investors (FIs) playing a major role in the acquisition process.
At present, it is difficult to assess the advantages and disadvantages of each candidate. While some may have a strategy to overpower other candidates with the acquisition price, there are also candidates who focus on post-merger integration (PMI) and future business strategies. The perspectives of the selling side and the EC (Enterprise Commission) differ as they need to determine whether a fair market competition order can be established even after the change in ownership, considering the preference for a high purchase price. Due to the fact that Korean Air and Asiana Airlines have different scoring criteria, the final acquirer will be determined based on various factors in addition to price.

5) Airline/GSA Event update

(1) Korean Air (KE), Lisbon Charter Flights from 9/11 to 10/25

Regular charter flights between Incheon and Lisbon will operate from September 11th to October 25th.
There will be a total of 20 round-trip flights, three times a week on Wednesdays, Fridays, and Sundays. The aircraft model used will be the 'B787-9'.

(2) Air Premia (YP), Commencing SFO Route from May 17th

Starting from May 17th, there will be four flights per week between ICN and SFO. The aircraft model deployed will be the 'B787-9'. This route will be in competition with OZ/KE/UA.
WestJet (WS) will also operate three flights per week on the YYC-ICN route starting from May 17th.

(3) Air Canada (AC), Strengthening North American Cargo Network

Starting from June 2nd, there will be three weekly cargo flights on the YYZ-ORD route. The aircraft model used will be the 'B767-300F'.
Cargo routes to Mexico NLU are also planned, and this year Air Canada will introduce three additional 'B767-300' cargo aircraft, expanding its fleet to a total of 10.

(4) Air Astana (KC), Resuming Astana-Incheon Route from June 15th

Starting from June 15th, the NQZ-ICN route, which was suspended due to the pandemic in 2020, will operate twice a week. The aircraft model used will be the 'A321LR'. The ALA-ICN route will also expand its daily operations.
Starting this summer, there will be an increase in the number of flights on the ALA-TAS route to 14 per week, FRU route to 18 per week, and GYD route to 3 per week.

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