EXTRANS GLOBAL - Air Freight News - Week 46

1. Air Cargo General

1)  Sale of Asiana Cargo Business - Bidder for 2 trillion won valuation

- The new owner of Asiana Airlines' cargo business, recently put up for sale, is attracting attention. Initially, domestic low-cost carriers (LCCs), led by Jeju Air, emerged as strong acquisition candidates, but a different trend from expectations has been observed.

- Following the board's decision to sell earlier this month, LCCs, especially Jeju Air, expressed significant interest in Asiana's cargo business. Other potential acquirers include the first hybrid airline in Korea, Air Premia, and cargo-specialized airline Air Incheon.

- The primary reason for their interest is having the 'air transport business license.' Acquiring a cargo business without the necessary license is practically impossible.

- However, if Jeju Air backs out of the acquisition due to liquidity issues, other LCCs' actions are expected to be less active. The major hurdle is the high valuation, estimated to be between 500 billion and 700 billion won, with expected debt of 1 trillion won.

- Despite achieving record-breaking results in the first three quarters of this year, including revenue of 1.2289 trillion won, operating profit of 138.3 billion won, and net profit of 95.2 billion won, Jeju Air would need to pour more than annual revenue to acquire Asiana's cargo business. Additionally, the average age of Asiana's cargo transport aircraft is over 27 years, posing potential challenges in maintenance and additional costs post-acquisition.

- While the consensus in the industry is that acquisition by LCCs is practically difficult, globally competitive logistics companies with strengthened capabilities in sea, land, and air logistics are being closely watched as potential acquirers. This includes Denmark's Maersk, the world's second-largest shipping and logistics company, and Taiwan's Evergreen, ranked sixth globally.

- Furthermore, with the trend of shipping companies enhancing their competitiveness by entering the airline industry globally and addressing monopoly concerns raised by competition authorities in various countries, there is some persuasive potential.

- Industry insiders suggest that while the possibility of logistics companies actively pursuing the acquisition of Asiana's cargo business is low, it is not an entirely impossible scenario. Given that Asiana's cargo business has a robust global network, several companies may be discreetly exploring acquisition opportunities.

2)  Jin Air 3Q Operating Profit of 326 Billion Won: 4 Consecutive Quarters in the Black

• Jin Air announced its financial results for the third quarter, reporting separate basis revenue of KRW 3.225 trillion, operating profit of KRW 326 billion, and net profit of KRW 210 billion on the 9th.
• Revenue increased by 85% compared to the same period last year (KRW 1.745 trillion), marking the highest quarterly performance since its founding in 2008. This represents a 44% increase compared to the pre-COVID-19 third quarter of 2019 (KRW 2.239 trillion).
• Operating profit turned positive compared to losses recorded in the same period last year (-KRW 174 billion) and the third quarter of 2019 (-KRW 131 billion). After turning profitable in the fourth quarter of last year, Jin Air has maintained profitability for four consecutive quarters.
• The strong performance is attributed to increased demand for international travel, the addition of new routes, and expanded supply through increased frequencies on existing routes in response to rising overseas travel demand. The international flight rate in the third quarter recovered to around 96% of the third quarter of 2019.
• Overcoming negative external factors such as high fuel prices and exchange rate fluctuations, Jin Air improved operational efficiency, contributing to its consecutive quarters of profitability.
• Regarding the fourth-quarter performance, Jin Air acknowledged potential challenges, stating, "Due to uncertainties in the international situation, there are concerns about volatile oil prices and intensified competition among airlines. However, we anticipate improvements in the performance of Southeast Asian routes entering the seasonal peak period, and strong demand for Japanese routes is expected to continue."
• The airline added, "We will strive to enhance profitability by flexibly adjusting the supply of new routes through efficient aircraft operation and systematic cost management."

3)  Global Companies Attempt to Escape China, but Finding Alternatives to China's Supply Chain Continues to Be Challenging 

• Due to the intensifying conflicts between the United States and China, disruptions in the supply chain, deteriorating profitability due to rising costs, and various political variables such as the espionage law, companies are now considering China not as an 'entry' but as an 'exit' strategy.
• Especially since the start of the third term of Xi Jinping's government in March, companies have been leaving China altogether, with both capital and personnel leaving simultaneously.
• As the US-China rivalry intensifies, companies are advised to 'de-risk' against China, but in reality, 'departing' is occurring. In September, China's foreign direct investment (FDI) was 72.8 billion yuan, a 34.4% decrease compared to the same month last year.
• This marks the largest decrease since 2014, and China's cumulative FDI announced by the Ministry of Commerce also decreased by 8.4% to 920 billion yuan in the first nine months of this year compared to the same period last year.
• Companies like Apple have been shifting their production lines to India, starting with the iPhone 14 model last year. This strategic move aims to reduce China's share of iPhone production, which accounts for 85%. Even MacBook, which was produced in China, is planning to be manufactured in Vietnam as early as next year. Apparel companies like Nike and Adidas have also moved their production facilities from China to Vietnam and Indonesia. As of 2023, Vietnam accounts for 50% of Nike's shoe production, surpassing the second-ranked Indonesia (27%) and the third-ranked China (18%).
• Hyundai Motor has sold Beijing Hyundai's 1st factory among the five factories operated in China in 2021 and is in the process of selling the Guangzhou and Chongqing factories. As Hyundai reduces its business in China, a series of moves by component suppliers to leave China is also underway. Daewon Kangup, which supplied the core component for the hydrogen fuel cell system used in Hyundai's 'Nexo,' sold 70% of its stake in two factories located in Beijing and the southeastern Guangdong region to a local Chinese company in 2021.
• The battery industry, closely tied to China, is also emphasizing 'de-China.' Three Korean battery manufacturers with factories in China are halting additional investments and expanding in the United States. Additionally, there is pressure on companies as bills such as the Data Security Law, Cybersecurity Law, and Amendments to the Anti-Espionage Law pour in, restricting the activities of private companies.
• Finding a country that can replace China's position as the 'world's factory' is not easy, according to analysis. India, considered the most likely alternative to China, lacks significantly in infrastructure, including railways and ports, compared to China. It would take considerable time for India to leap into becoming a manufacturing powerhouse comparable to China.
• Looking at one of the crucial infrastructures, the ports, none of the top 30 ports in the world are in India. The world's largest port, Ning, is located in China. Therefore, even if India invests massively in infrastructure, it will take a long time to compete with China. Even the low-wage labor force, a key factor in attracting companies, is far below China's level.
• Vietnam, which has been drawing attention as a special investment destination recently, is also unsatisfactory in infrastructure compared to China. Vietnam's largest port, C andai-B-d, ranks than China's Ning port. The overall infrastructure maintains a vast gap, making it difficult for Vietnam to replace China.
• If India and Vietnam are considered unsatisfactory alternatives to China, Indonesia and the Philippines are in a worse position. They have smaller economies, less infrastructure, and lower productivity than India and Vietnam.
• It seems that the unshakable position of 'Made in China' is being reaffirmed once again due to the realistic analysis that there is no other place to go, even if the risks are high.

4)  Global logistics recession persists, with a slight recovery expected in the second half of next year.     

• On the 7th, CNBC in the United States conducted a survey of executives from freight transport companies, including DHL Global Forwarding America, C.H. Robinson, and SeCo Logistics, from the 21st to the 31st of last month. According to the survey results, the industry expects the freight market to show little growth in the first half of next year, with an increase in freight volume expected in the second half. The majority of respondents saw no change or a decrease in ocean freight rates in the first and second quarters of next year after a maximum 50% decrease this year. They also anticipate no change or a 10-20% decrease in air freight rates. While truck loading fees are expected to remain unchanged or decrease, 33% predict a 5% increase in prices. 67% of respondents believe that order volumes will not increase before and after China's largest traditional festival, the Lunar New Year. Alan Bear, CEO of OL USA, a maritime transport company, forecasts, "Unless more freight is moved, the supply will continue to exceed demand, leading to continued price declines in 2022 and potentially until 2025."

• The CEO of DHL Global Forwarding America, Tim Robertson, stated, "No one is confident that there will be a surge in demand during the year-end peak season or next year." He mentioned that the survey results reflect the overall uncertain atmosphere in the current market.

• The Chief Commercial Officer (CCO) of SeCo Logistics expressed, "Due to the uncertainty surrounding consumer demand, interest rates, and the international economy, most do not positively anticipate freight volume in the first half of next year." He forecasts a definite rebound in the second half of next year.

• According to Tank Transport, a US transportation specialist, a total of 31,278 trucking companies have closed or transitioned their businesses due to rising fuel costs and falling freight rates. Smart logistics startup Convoy, backed by Amazon founder Jeff Bezos, is also reported to be undergoing a closure process. Elon Musk, the CEO of the world's largest shipping company, has announced plans to lay off 10,000 employees early this month due to low freight prices and reduced cargo volume.

5)  Airline/GSA Event Update

(1)  AirJapan (NQ) - Plans to Operate Narita-Incheon Route from February Next Year

AirJapan, a subsidiary of the Japan Airlines Group (ANA, NH), is positioned as the third brand airline following Low-Cost Carriers (LCC). It aims to provide services focusing on mid-distance routes with the quality of Full-Service Carriers (FSC) and the convenience of LCC. The airline is planning to operate five flights per week on the Narita-Incheon route from February 22, 2024, and will commence its first international route with six flights per week on the Narita-Bangkok route from February 9 next year.

(2)  AMERICAN AIRLINES (AA) - Applies for Operating New York-Haneda Route

After Delta Air Lines (DL) returned slots for daytime departures at Haneda Airport, American Airlines (AA) has applied for permission to operate daily flights using the B777-200 on the New York-Haneda route.

(3)  WESTJET CARGO (WS) - Targets the Asian Market with Flexport

Canadian carrier WestJet Airlines (WS), in its cargo division, plans to expand its services in partnership with Flexport, a digital freight forwarder in the United States. As part of this expansion, WestJet Cargo will operate cargo planes from Chicago to major Asian hubs, including Incheon, Shanghai, and Hong Kong, contributing to cargo delivery in Canada.

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