Episode Transcript
[00:00:00] Speaker A: This isn't a situation that resolves itself overnight very quickly.
[00:00:04] Speaker B: What the Gulf carriers could do is they could take pricing action.
[00:00:09] Speaker C: We're certainly disrupted. But getting on with as best of a life as we possibly can and making trade flow economically and safely.
[00:00:16] Speaker D: There's always a slight lull before the storm. We'll see which way it goes.
[00:00:20] Speaker A: This crisis, it's a reality today. And on a supply side, it's very.
[00:00:34] Speaker E: Hello and welcome to Air Cargo Unpacked, a Freight Buyers Club Production, brought to you by Ontegos Cloud, the freight forwarder, profitability specialist. I'm Mike King and with me, as always, is Neil Joneshar.
[00:00:47] Speaker A: Thanks, Mike. Coming up, we have a great show. The Middle east war and what it's doing to air cargo capacity and rates and whether a ceasefire actually changes anything for the industry.
We have some great guests lined up for today. First up, we'll have Baki Spiga from DHL Express Middle east, followed by Neil Wilson and Peyton Burnett from the TAC Index on the rates picture. And later, industry legend Ram Menon, who spent nearly 28 years building Emirates Skycargo on what recovery from here actually looks like. Plus a freighter conversion story from the capacity front. Fun show today, Mike.
[00:01:28] Speaker E: Yeah, I'm looking forward to it. Let's get into it.
So the war began on February 28 and we are now several weeks in. Last week, just to update everyone, we had a ceasefire announcement between the US and Iran. And I want to say something about that before we really delve a little bit deeper onto the air cargo side, because a ceasefire, normally that means all participants stop fighting. And that doesn't really appear to have be what exactly happened this time. And I want to mention the straight of Hormuz specifically, because that is pretty critical to what all this means for global supply chains and energy costs. The problem here is that nobody seemed to define what open means in this agreement. And if you don't define what open means, one of the world's most important shipping lanes, then you sort of have a problem.
This was all done overnight with no detail on what was actually agreed.
And that's not really something insurers are going to accept or vessel owners or crew. Now, for a bit of context, I covered the Black Sea grain initiative during the Ukraine conflict quite a bit. That was the deal that allowed Ukraine to start shipping grain out, and it took months to negotiate and it was tremendously bureaucratic and it still was still a bottleneck throughout. So the idea that we could jump from active conflict one day to Hormuz fully open the neck seem to me sort of from the outset at least pretty optimistic at best. We've very quickly now gone from a ceasefire to a double sided so called blockade. But as we're talking now at the end of the second week of April, we seem to be back more or less where we were at the start of the month. Very few ships transiting. So the point here is that it's very unlikely that when normal returns, and hopefully it will, that it's going to arrive smoothly or quickly. And I think that's also true to a lesser extent for air cargo. Now, Damian Brayer, Air Cargo News has covered how even if this ceasefire had held, full recovery would take a fair amount of time. Airspace restrictions remain in place, airlines of course need time to reset and shippers are not going to restructure freight plans on the back of a two week agreement.
So Neil, my question to you as this latest truth seems to be rather flawed at best. What does this mean and what are you seeing in the latest capacity data in terms of how capacity is being juggled?
[00:03:55] Speaker A: Thanks Mike. And it's a great question. And our friends at Rotate have produced some great real time capacity data and we can see some seismic shifts. We started to see this in the last round of data they produce and we, we're continuing to see this. And I think first and foremost global capacity is down 4% after a 6% increase in January and February. And by my math, and I'm not great at math, that is a 10% shift. That's huge. You know, when you're going from really robust market conditions from a capacity standpoint to it's the situation we have today, 10 point swing, but it's, it's actually quite uneven. Right, in terms of how this is playing out. And so what we see obviously is carriers desperately trying to bypass the Middle East. So we see direct capacity from Asia to Europe, for example, up 28%, return capacity from Europe to Asia up 24% and basically every other trade lane down in the red by varying degrees, right between 18 and 20%.
Actually capacity out of the Middle east is down between 18 and 28% depending on which direction you're flying. And this is actually quite consequential because the two largest air cargo carriers are based in the Middle east with Emirates and Qatar obviously. So we're in a tough capacity situation right now, obviously with demand down only about 3%, global capacity down 6%.
This means yields are going to get tight and I suspect Neil and Peyton are going to tell us about that a little bit later on this show.
[00:05:38] Speaker E: For sure. For sure they will. As people watching this on Spotify and YouTube can see now, capacity from the Gulf region has improved, but as of 8th of April, only 57% had returned compared to late February. According to Rotate, we've got Doha and Dubai are around about 50% throughput capacity.
DWC Dubai World Central is still below 50% and Bahrain and Q8 are more or less at zero, or they were on 8th of April. So, Neil, what does this recovery but this ongoing shortage of capacity mean in practice for a forwarder or shipper routing cargo right now?
[00:06:20] Speaker A: Well, in practicality it means your job just got a whole lot more challenging, Right? So no easy day at the office, you know, right now, especially if you're routing cargo through the Middle East. And you also, you just have to begin by considering unconventional routings, things that you normally wouldn't do, sending freight the opposite direction, right. To find an unbottlenecked gateway or capacity in a market you wouldn't normally sort of transit, which is probably going to mean a lot more expense, et cetera. But in the short term, the goal is to keep your supply chain moving, right? You're not making decisions for the next several months or years, you're making decisions for the next couple of weeks.
And so price tends to be a little less of a consideration in those sorts of scenarios.
But I think the biggest issue here is just uncertainty, right? It's just so difficult to make decisions with the ground constantly shifting under your feet. And I think that's what keeps, you know, Shipping managers and VPs of supply chain up at night right now is because they're going to wake up in the morning and, you know, things will have turned the other direction and the ground will have shifted and they're going to have to recalibrate. So difficult, difficult situation, lots of uncertainty.
[00:07:38] Speaker E: Okay, let's hear how one operator in the Middle east has been coping with all this in real time. Baki Spiga is VP Network Operations at DHL Express Middle east and North Africa.
[00:07:52] Speaker C: So, Mike, thank you very much. So here we are, 14th of April. Thank you for allowing me to meet with you and speak with you. Yeah. When the war broke out, obviously some 46, 47 days ago, had a fundamental impact. It disrupted significantly a number of different areas in the supply chain. The first one being obviously the shipping lines being able to get into the ports in the Gulf. This had a serious impact on goods that needed to get to destination. But similarly, a number of airspaces closed at the same time, thus constraining capacity and the flow, the quick flow of traffic into the airports and to feed a number of businesses. So a significant amount of disruption by air and by sea, basically putting a big impact on the economic activity in the region at that particular moment in time. So, yeah, very, very, very difficult moment to deal with. Not only airspace, not only the straits, but also the human impact of trying to understand what was taking place in such a very, very short time. And almost immediately, without warning. The situation now is obviously 46, 47 days on from that. That, you know, Middle east is a very resilient place and it's a trading hub, always has been, will always continue to be so. So people looking for contingencies, looking for a faster flow, trying to keep the trade going, and that's exactly what's happened. So, you know, on the shipping side, alternative ports are found, alternative areas of discharge have been found. Contingents have been put in place as far as that's concerned. From a airline capacity perspective, obviously more airlines, some, some of the airspaces have reopened, but they're subject to security.
More flights have been put back on, some more capacity overall, and that's exactly where we are today. So, yeah, we're still disrupted, yes, there's still some impacts in a number of areas, but it's obviously a lot better than it was on the 28th of February. So we're in a better place. I won't say we're normal, that's probably not the right comment to make, but we're certainly disrupted. But getting on with as best of the life as we possibly can and making trade flow economically and safely at dhl. We're fortunate. You know, we've been here for a long time and we dealt with a number of contingencies in the past. We've had been here over 50 years. We've invested in infrastructure. You know, when the, when it hit, obviously we had to find alternatives. We've got a. As I said, we've got a great infrastructure. So our airline facilities, road network we sort of rewired and reorganized.
We couldn't use our main hub in Bahrain, so we quickly found an alternative. Alternatives with Riyadh in Saudi and Muscat in Oman, thanks to the authorities there, allowed us to set up and we basically rewired our whole movements from our global network into the Middle East. And then the same thing with our road network. We rewired that to complement the air network in order to feed every country in the Middle east, continue to work, and to this day it is continuing to work, receive goods. We're rewiring a little bit as more opportunities and more airspaces open up so that we can capitalize on the quicker improvement and the quicker feedback into the countries. But I'm glad to say that since pretty much day two of this, this disruption, we've continued to serve all our customers one way or another. We're just trying to do that a bit quicker with the impediments that we have today. But it is improving. Day by day, it's improving, Neil.
[00:11:18] Speaker E: As we heard, their operators are scrambling with, with whatever capacity they can find both, both to serve the Middle east and to work around it.
[00:11:25] Speaker A: Yeah, we can see from the, from, from the data, you know, Mike, that the recovery in the Middle east has been, you know, actually very uneven. And you, you know, you referenced the numbers before, right? You've got Doha and Dubai around 50%, which is still hugely down from where they normally produce. You have Abu Dhabi and Jeddah, for example, at 100%.
And then you have on the other end of the spectrum, you know, Bahrain, Kuwait, you know, still effectively shut down. And I guess it depends on where the Iranians are aiming their missiles and drones. Right. In terms of where capacity continues to be incredibly constrained. And I think that, you know, when you're serving the Middle east and for the most heavily impacted markets, operators are going to need to use, you know, multimodal solutions. They're going to have to, you know, truck around the Middle east from gateways that are open that do have capacity, and hopefully regulators will make that easier to cross borders and get goods and people where they need to get to. But, you know, everybody's going to need to be patient here. Obviously, transit times are going to go up, costs will likely go up. And I think that patience is going to be very key here because we're just dealing with an unprecedented sort of situation.
[00:12:39] Speaker E: Thank you, Mr. Shah. Right, let's see what's going on with rates. I caught up with Peyton Burnett and Neil Wilson at Tacindex, the leading global price reporting agency on air freight rates and the calculating agent for the Baltic air freight indices. And I started by asking Neil what's been going on with pricing over the last few weeks?
[00:12:58] Speaker D: Quite a lot.
Quite a lot, Mike.
So I think we were just beginning to pick up when you talked to Payton last month.
The war in Middle east had kicked off big time and rates were shooting up. And our latest overall index chart, the Baioo, which is our global overall index for airfreight rates all around the world, it's shot back up really rapidly, as you can see from this chart, really almost all the way back to peak season levels as we were anticipating three or four weeks ago.
It's got there in double quake time. This is obviously very unusual for this time of year when we're entering the kind of flatter period after the mini peak, before you get to October or so when the next peak season happens. Obviously we all know why. It's the cancellations, closures of airspace and loss of capacity because of the disruption due to the Middle east conflict.
Plus as we'll get onto in a bit, I think the rise in jet fuel prices, which has been pretty severe as well.
[00:14:02] Speaker E: And the video people can see now, what does this show?
[00:14:06] Speaker D: We've done this heat map which basically tracks how things have gone week by week, route by route. And the red of the line between point A and point B on the lane shows how much it's gone up. As you can see, a lot of lanes have shot up. The one that's up the very most, perhaps unsurprisingly, is Europe uae, which is to do with the fact that obviously there's a loss of capacity on that lane. So there's a lot less planes flying and to move things is costing a lot more. But lots of lanes are up more than that average more than peak season levels. That's just the average.
[00:14:40] Speaker E: Peyton, if I can bring you in here on the corridors most affected, South Asia, Southeast Asia, into the Middle east and Europe.
These are the lanes where Gulf carriers obviously hold the biggest share. Walk us through how the capacity displayment is showing up in the rate indices in some of those individual markets. Yes. So like we discussed last time, a lot of the rates are essentially raiding
[00:15:02] Speaker D: out from the Middle East.
[00:15:04] Speaker E: We're seeing the outbound rates from India to Europe and India USA somewhat flatlining at the moment. And then as we move further afield towards Hong Kong, we're seeing the Europe's flattening out, but the Transpac markets are still going up.
[00:15:19] Speaker D: So there's a bit of catch up there.
[00:15:21] Speaker A: And the same is happening with outbound
[00:15:23] Speaker E: Korea again somewhat flatlining or going up
[00:15:27] Speaker D: a little bit to Europe, but still a bigger push on transparent from Korea
[00:15:32] Speaker E: to the usa, but they've all seen big increases since the start of the war. We're talking flatlining more in the last week or two. Are we flatlining to. Yeah, flatlining towards the same as peak season at the end of last year.
Okay, so we, I think there might be a slight breathing as we're seeing what's happening.
[00:15:51] Speaker D: In Iran and see what happens next. There's always a slight lull before the storm. We'll see, see which way it goes.
[00:15:58] Speaker E: Okay, fantastic. Now I know you guys are both in Hong Kong this week. What are you up to? Is this all about the Hong Kong Sevens rugby, is it?
[00:16:06] Speaker D: Not at all.
[00:16:07] Speaker E: It's, it's all about work.
[00:16:09] Speaker D: Yeah, we've got, we've got, there's a little dinner we do every year. It's become a kind of annual thing where we gather together friends and contacts in the industry, some of our important clients. We have an eclectic user base of shippers, airlines, forwarders and financial market players. It's an opportunity to bring them all together. We have this little dinner. It's a networking event. Chatham House Rules seems to be quite popular. We thought we'd be impacted a little bit this week by people having other things on their minds. So some people were unable to travel for long distances but we've got virtually the same number of people as we've had the previous two years. So it's looking very, very good.
[00:16:45] Speaker E: Again, sold out again, Neil Peyton, thank you both. We'll be back with you next month.
[00:16:50] Speaker D: Thanks Mike. Thanks Mike.
[00:16:52] Speaker A: Cheers Neil.
[00:16:54] Speaker E: One of the drivers of these rate increases is higher fuel costs. Jet fuel was already more than 30% of total operating costs before any of this. It's nearly doubled in price since the war began and it's still around 70% above its pre conflict level according to Rotate even after easing slightly on, on ceasefire news. And we are starting to see a supply crunch in Asia. China and Thailand have suspended jet fuel exports. Vietnam is cutting domestic flights. The Philippines has declared a national energy emergency for freighter operators on the lanes most exposed to this particularly less fuel efficient aircraft. How concerning is all this for operators, for charterers, for their customers?
[00:17:39] Speaker A: Yeah, thanks Mike for the question. I mean I'm going to take a minute here to respond because there's sort of multiple components to consider, you know, when it, when it comes to this question of jet fuel and also just the impact that it's going to have not only sort of in the next couple of weeks but over the course of the next several months. Right. Because this isn't a situation that, that resolves itself overnight even if the conflict ends tomorrow and the, and the strait opens up. You know, these supply chains have, for, for crude have been disrupted for so long now that the implications are going to take weeks if not months to, to resolve, you know, further downstream. But if you look at what you had mentioned, you know, earlier, right there are many countries in the world that don't have their own sovereign production of refined products. Right. And you mentioned several of them. You know, Vietnam, Hong Kong, New Zealand, Australia weren't at the top of your list. But you know, these are countries that do not refine a lot of their own products that they consume. And so it doesn't matter what the price, if nobody is willing to export these refined products to them, they are going to run out of supply. And I think in many of these countries they are getting dangerously close to, you know, to the line where there will be sort of severe, severe impact. And in fact, you know, when this crisis started, what was the first airline to structurally cut capacity that was not in, directly in the conflict zone? Air New Zealand. They cut 7% of their capacity. They were the first carrier to announce that. Now several others have announced since then, but you think, oh, why these guys? Well, they knew they were going to have a problem coming up.
And so this crisis, it's a reality today. And on a supply side, it's very, very real. Now, let's think a little bit longer term about what happens here, right. And how capacity is going to be impacted both on the freighter and belly side. Right. Because as this thing drags on, there are going to be two different impacts. Right. So on the freighter side, yield increases on a global basis aren't enough to cover the increase in fuel. Fuel is up 100% plus. Right. In many markets. And so yield growth has been relatively uneven. Carriers have put in fuel surcharges and all, but yields still haven't kept up to the extent they need to to make some borderline flying or remain sort of even break even. It's become quite unprofitable, which is why you've seen capacity declines even in markets like us to Latin America. How is this impacted by the war? You know, people will think, well, it's because, you know, the input costs have gone up and all of a sudden, you know, they can't operate five days a week to Montevideo from Miami. Can only be three because that's the only way they can make their, you know, their flying profitable. So you're inevitably going to continue to see more route trimming from the freighter operators as they get rid of unprofitable flying. On the passenger side, it's a slightly different story. And so if you think about the passenger carriers, they're not all built equally. They all pay the same for jet fuel maybe, but they're not all built equally. There are premium carriers which are much more insulated from this crisis because their passengers are less impacted by the price of gas or the price of food or other input costs. And because they rely much more heavily on premium traffic, their demand has held up very well. If you look at the stock prices of Delta and United, the two most premium US carriers, they've barely been impacted by this crisis and it's because their balance sheets and their PNLs have remained intact. Delta even owns their own refinery. So they're slightly hedged from jet fuel. You know, that's going to contribute $1 billion in profit to them this year alone, at least because they're managing the crack spread between crude and jet. There are other carriers whose demand curves are much more elastic. They rely on leisure travel. These carriers are going to start to get really impacted as we get into the early summer and through the summer because their demand is going to evaporate. And so you're going to see a lot of route cuts as a result of that. And these are global. You can think Spirit and frontier in the U.S. airAsia or scoot in Asia. You can think Ryanair and, and other carriers in Europe. You know, they're the ones that are going to be more heavily impacted, you know, over time and I suspect we're going to lose quite a, we're going to lose a material amount of belly capacity as a result. So complex story, complex implications.
[00:22:18] Speaker E: There's various stories that have come out and say, oh well, those that have hedged their fuel, future fuel costs are going to have a competitive advantage. They might need to cancel services. We discussed this off air a little. Can you explain why we work? That won't really be a massive factor for most operators.
[00:22:33] Speaker A: Yeah, and you know, hedges sort of fell out of favor, you know, over the past few years as fuel stabilize. Right. So many carriers don't even have hedges in place today. You know, none of the US carriers, for example, have any, any material hedge position. I did mention Delta owning a refinery, which they've owned now for 12 years.
That is a natural hedge against the crack spread. Right. Which is now yielding significant benefit to Delta on the tune of about 25 to 30 cents a gallon. But there are carriers around the world who are hedged 15, 20, 30%. And, and they will now benefit from that hedge. But, but I think there's not a single carrier that's immune to, to what's going on. It's not like they've, they've got a hundred percent hedge in place and all of a sudden they're still paying $2 a gallon for jet Fuel.
[00:23:22] Speaker E: Thank you, Neil. One more story before we hear what this all means for the long term viability of golf hubs. From one of the men who helped build Dubai and Emirates into what it is now. Ram Menon Mam Freighters has received FAA certification to convert Boeing 777200 long range passenger aircraft in to dedicated cargo jets. First aircraft going to Qatar Airways. DHL has committed to 11, Ethiopian Airlines is two on order. It's a 116 ton payload, nearly 5,000 nautical miles range. 18% more fuel efficient than a 747 400. All good news for capacity, is it Neil?
[00:24:07] Speaker A: Well, I mean of course getting the 777200 LR approved is good news for capacity, but honestly Mike, it's going to be a drop in the bucket. You know there are, you know, I love the LR by the way. I think it's a great airplane. It's got good payload, it's got super long range. But here's the problem. Only 55 to 60 of these airplanes were ever built. And so the feedstock is very limited. Several of them are still in passenger service.
You know, Mammoth does have, you know, the bulk of the ones that are on the market, they've scooped those up and so know they're going to get converted. But remember, I think it was January we Talked about the MD11s, right. All of a sudden now the MD11s are, are being grounded. Well, you know, there's no talk about any of them coming back and in fact UPS has retired all of them. So you can think about this as just an offset, maybe even for the lost MD11 capacity. It's a little bit more than that. But we're not going to get 60 airplanes this year. We might get 60 over the next four to five years.
Right. You know, we'll get five or six or seven this year. But it's going to take a while to convert all of these. But again, a great airplane.
I'm excited for it, I'm looking forward to it. It's going to be expensive, but great to have it approved finally.
[00:25:21] Speaker E: So Neil, this is not really even a short term answer. It's a sticking plaster on, on these problems we have with backlogs of, of orders.
[00:25:30] Speaker A: Yeah, you know, I think so. Overall, you know, Mike, and conversions, freighter conversions are going to continue to be important. We know there's backlog. The OEMs are only producing a certain amount of aircraft. All of the new aircraft are delayed by years. Right. And all the early slots are of course all gone. So Conversions are going to be important part of the picture going forward. But even the conversion costs are the on ramp costs for converted aircraft are now very high. Between 60 and 90 million dollars for the 777200 LR versus the 777 300. So we're looking at a pretty hefty on ramp costs. So the financial, I think modeling isn't as clear cut as it used to be. So, you know, we'll see. But conversions are clearly going to play a role going forward. Big role.
[00:26:19] Speaker E: Thank you, Neil. We'll just take a short break and then we'll be back with air cargo legend Ram Menon to hear all about how Middle east air cargo hubs can rebuild from this seismic shock to the region.
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[00:27:05] Speaker E: welcome back. We just saw that Dubai is sitting at 54% of its normal cargo throughput at the moment. That tells you something about what has happened to a hub that our next guest spent nearly 28 years building. Ram Menem joined Emirates in 1985 and served as de facto head of cargo until 2013. He helped build Emirates Sky Cargo from the ground up and was central to making Dubai one of the great air cargo hubs of the world. Ram, welcome to Air Cargo Impact.
[00:27:37] Speaker B: Thank you, Mike.
[00:27:38] Speaker E: Ram, the the geographic advantage that made Dubai and these other regional hubs so powerful, being that midpoint between Asia, Europe and the Americas has become a vulnerability almost overnight. What's your take on what this jolt of the system means for the region and for those hubs that have been prospering?
[00:27:59] Speaker B: I mean, yeah, you can't get away from the geographical, the geocentric advantage. I mean, if you just open up the map within 14 to 18 hours, you can get anywhere. So you can go anywhere to anywhere with one stop in Dubai and the landmass that you have, that is what gives us the, gives Dubai the advantage. It's not only east, west, it's got north, south.
Don't forget Africa.
The African continent is a huge continent and lots of countries there are all landlocked. So they tend to depend on the air cargo and air transportation as a whole for their growth.
So that proposition is probably the, the biggest plus factor. And it's not only Dubai, any of the airports within that line. There you have, starting from Muscat, going right up to Istanbul, they all have the same kind of advantage.
But in Dubai, of course, what we did was when we started the airline, we looked around, it was already a trading hub. They were using the old D to go up and down. And plus you had Saudi Arabia, which is a pretty large market in itself.
And so the Gulf was basically an import destination, basically purely because, I mean, they had nothing growing there or being manufactured there.
And that gradually changed. I mean, as we created this hub, it was the same thing for passengers. I mean, people were just transiting Dubai. It was just a fuel stop for a lot of the airlines which were already operating there. But when we went up there, when we started the airline, we looked around us. I mean, we had probably the best beaches around in six hours, flying anywhere. Plus we had the Indian subcontinent, which was about 2.4 billion people at that time.
I don't know what the numbers are right now. This is going back over 30, 35, 40 years back.
So we started building on that.
So it was just not the air cargo. At the same time, while we were building the air side of the business, Jabal Ali port, though Dubai already had a very, very efficient port in Sheikh Rashid. But they then decided to build the Jabal Ali because as the ruler of Sheikh Mohammed said, you build them big, they will come.
And the last thing that you can do, and I always say this, if you open the floodgates, you better be ready to handle the water because if you can't handle it, it'll destroy you.
So everything that was happening in Dubai was in sync.
It's not only the cargo side of, was also the passenger side of it and the trade, basically, because it was an import based market, there was plenty of capacity going out and that sort of catalyzed the sea air movement.
So gradually you can see, I mean, basically sort of building up on that. And then Jebel Ali, instead of just having the port, created this huge free zone where initially people started stockholding. It was a distribution center for the Africans. And Dubai thrives on three principles. Free skies, free trade and free open skies.
And underlying that was free movement of currency.
So all the ingredients were there for us to build.
So all we did was we layered the foundation together.
The entire of Dubai working as Dubai Inc.
And that's how we started building. And as Emirates started expanding, we were building in more and more capacity coming in. In fact, we were at that stage realized. And the success of Dubai is also the open skies.
Because on itself, Emirates could not handle the growth.
It had to make sure that the others grew alongside Emirates.
So again, when we were creating that hub, we were ensuring that there is enough capacity to grow. And that was the floodgates example, because we needed the water to be taken out. So we needed the flow to be taken out and the flow to be brought in too.
So based on that, we layered it. Layered it, layered it. And there was always, I think the first Gulf War was the one that really, truly taught us crisis management.
As the war was going on, we never stopped operating. Every other airline stopped operating into Dubai and the region, but we kept on operating.
So that gave us a lot of experience in dealing with the crises.
So one of the things that Dubai as a whole, not just Emirates, not just the port authorities, Dubai as a emirate. And when I'm saying Dubai, I'm typically talking about UAE as a whole. They were creating business continuity plans, and there were solid business continuity plans. They were building up.
So come the Gulf War one, then we had the Gulf War two, then we had the SARS in the Far east, and then we had the economic crisis in 2008, 2009, these were all learning points. But the business continuity program was such they were able to bounce back very, very quickly. And that is exactly what is going to happen today.
Now, if you actually look at it, the whole conflict, which is a very senseless conflict as such, in my opinion, it harmed the entire of the Gulf, the allies, as much as it was hurting Iran, okay? But the very fact that they continued on and their defense systems were such that they could take care of all the incoming missiles and stuff like that, they're being neutralized. I think, what, 98, 99% of the missiles were neutralized. I mean, to the extent the World cup horse race that happened the last Saturday of March went on full on, I mean, the confidence of the people living there, although a lot of the tourists stopped coming there, but the people living there were carrying on as normal.
So this is why I think as this crisis is over, the investor confidence in the region is going to be very, very high.
[00:35:01] Speaker A: Hey, Ram, let me, let me jump in real quickly because I think, you know, this is an amazing history lesson, you know, for, for those who don't understand sort of how this whole region was built up and the role that the airline played, right, in getting us to where we are today. But, but let me ask a sort of an. I think it's an important question here and I need to say before I ask it, it's great to have you on the show because I remember when I was a young executive at United, you know, running that division, you really took me under your wing. You, you, you taught me so much, you know, and we're going back where I'm dating myself, we're going back, you know, 25 years. And it was really, really a pleasure and thank you so much for everything you did for me over the years. But I'm very curious, okay, because, you know, take, let's just take Emirates in Qatar, for example. They're not just airlines, right? They're the backbone of belly cargo capacity on some of the most important trade lanes, right? So just think about the belly piece of this. And we all know that 50% of cargo moves in the bellies of passenger airplanes on a global basis. But that belly network is heavily dependent on people's belief, right? Passengers belief that Dubai, Doha, Abu Dhabi, all of these places are safe transit points for them. They can move through there with ease. They can visit Dubai if they feel like it on, on their way in or out. This perception of the Gulf, these Gulf countries as being insulated and ultra safe has been somewhat shattered by this war. And given how the Iranians have responded, my question to you is, is that how long does it take after the shooting stops, right, for passengers to overcome what has been a very traumatic global situation?
And what sort of impact does that have on belly capacity in particular? Leave freighters out of the equation for now.
[00:36:58] Speaker B: Yeah, I just want to bring in another dimension. It was just not the belly spaces. And when you're talking about belly spaces, you're generally talking about wide bodied belly spaces. And on top of that, the advantage with the passenger frequencies, for example, Emirates and Qatar, I mean, they have this multiple frequencies going into west as well as the east.
So I mean, they were all freighters in disguise. I mean, when you look at the 777 passenger airplane, the Dash 300, they are freighters in disguise. So there was this tremendous amount of capacity that was coming in.
And the reasons that freighters were added was there were feed imbalances.
And that's why these freighters initially were added as supplemental capacity to passenger bellies.
And then as they started going longer haul, it started networking your freighters. And that is what between Qatar and Emirates and Etihad and Turkish To a certain extent that shifted the center of gravity of the world air traffic into the Middle East. And it was just this crisis which exposed how much the world is reliant on the capacities of these gulf 3 and the ones around it. Now Riyadh is coming up. They're going to do very similar things to what is adding on more capacity. Okay, what's going to happen? Right now a lot of the passengers have disappeared, but it's matter of time. But now the record the very fact that during this crisis the whole of the Gulf countries they managed to weather the storm very nicely, creating it, saying that it's still a safe place to transit.
And those who are stuck in the whole of the Gulf area, they were very well taken care of. The word of mouth in itself is going to be a huge publicity for the entities in the whole of the Gulf and Middle East.
Now what's going to happen? How long is it going to take?
Memories are generally very short as we have seen over the past crisis. This is not the first one and this is not going to be the last one.
Very quickly what the Gulf carriers could do is they could take pricing action that will start bringing the flow back.
And the network that they have created, all these carriers have created is so potent. I mean, you go from New Zealand to Santiago to Chile with one stop in Dubai, that's huge. The economies of scale that they have is allow them to operate at a lower cost and that is passed on to the customer. I mean all these carriers against all this myth that they are being subsidized, they are not. They are standing on their own feet.
Why? Because they have the production, they have the inventory that they can use. Because at a certain stage your cost starts going down, your as the volumes go up. But then again you have to be careful, I mean that you don't start getting the diseconomies of scale. But they are very, very good at managing the diseconomies of scale.
[00:40:31] Speaker E: Rabin, are you saying the belly holders all going to come back? Because if they have to, they'll use pricing as soon as this is over. Is that your point?
[00:40:39] Speaker B: They are all on a limited basis. Then they were stopped even during this crisis they were operating.
And it was interesting that Emirates, I mean apart from using the freighters, the dead time on the passenger airplanes, they were using the passenger airplanes as freighters.
So they kept the capacity on. Okay, it was restricted, but capacity is still there.
And as now as they start operating normally, it will just come back and the market is very Fluid. I mean, you put the capacity right. Capacity and the power of the network that they have created is very, very strong pool.
[00:41:23] Speaker A: Yeah, I agree with you. Having worked for two big network carriers, the power of the network is very important. And I think that, I think overall you're quite bullish.
The passengers are going to return and, you know, we're going to get back to some sense of normalcy. You know, the question is how long that takes. I guess is a little bit anybody's guess. You know, one comment you made there that I'll just touch on really quickly and I'm going to ask you a very quick question after that is, you know, the idea of using pricing is great to attract passengers back to Dubai in the face of $5 a gallon jet fuel. It's a pretty tricky equation.
And like you said, these carriers now stand on their own two feet. They don't get subsidies, et cetera. And so that's just a tricky balance. And it looks like these carriers may need to invest heavily to get the passengers back. Now, let me ask you one quick response from you. I'm curious.
You mentioned a lot of the other crises that you dealt with over the years. Gulf War 1, Gulf War 2, 9, 11, SARS, et cetera, financial crisis. Where does this rank in terms of. Just give me, give us an idea. Where does this rank in terms of everything else you've dealt with over your career? When it comes to a crisis, I
[00:42:47] Speaker B: would put this as number two.
I think the biggest threat was the COVID which completely brought down all the capacity around the world.
Now I'm talking in the world context and I would rather put this thing as number two for the region.
Goes on. I think this goes on.
[00:43:10] Speaker A: Yeah, yeah, no, no, I think you're right and I appreciate that perspective because if you also look how the markets have reacted, if, whether it's Wall street or the European or the Asian markets have reacted, the response had been far more muted with this crisis than with COVID which sort of destroyed trillions and trillions of value in companies around the world. So I would agree with you and I appreciate that perspective. I do have one last question for you. And then I know, Mike, as a follow up, when you're a forwarder and you're making routing decisions right now and you're just trying to deal with the crisis today, some of them are building alternate routes. They're establishing new relationships with carriers, bypassing the Gulf because they have to. Capacity is still down 50%. At what point do you think forwarders potentially find A different solution to their shipping needs and like, oh, I don't need to go through the Gulf anymore. I found another option for myself. I'm curious, I don't think you believe this is going to happen or have a long term impact. I'm reading your mind a little bit, but I'm curious what you think about that.
[00:44:27] Speaker B: I think there will be an effect.
I would separate out two.
One is the ocean, one is the air side of it. Air side will have absolutely no problems in coming back very, very quickly.
The ocean side is going to be a bit more of a challenge depending on, on what happens in the state of Hormuz. If they start levying Thor, it is going to be a challenge for the merchant ships. But the other thing is that there are two choke points at the moment. One is the state of Hermus and the other one is the Babal Manda, the entry into the Red Sea.
Now both of them being challenged.
A lot of the shipping is not going around the Horn of Africa.
So for them to go Sri Lanka onwards in the deep sea, deep ocean, it's probably faster than coming via the Gulf area. But at the same time, Gulf is a huge market in itself.
So once this is over, some of those capacities will start coming back into the Jabal Ali area.
Pretty sure all the ports out there are going to incentivize their movement from there. And the Gulf act, you know, the creation of that hub in the Gulf area is so potent, you know, this is this whole episode of this Gulf conflict.
I'll call it a Gulf War iii. It was just have a small dent. It'll come back.
[00:46:08] Speaker E: I've got a little follow up question for you on that Ram, just to finish up. You talked earlier about the symbiotic relationship or the dual pillars that helped you, helped you build up Emirates in Dubai and that was that relationship with Jebel Ali as a free trade zone. We've seen similar hubs built up in Qatar. We've got Khalifa down in Abu Dhabi. Saudi Arabia is doing similar sorts of processes. Are you saying that if the Strait of Hormuz wasn't to open again, that that would then affect that second pillar, that all these ports and these free trade zones, because the transshipment status would be affected slightly. I mean, there'd still be the import traffic, but the transshipment element of it might be less attractive and that would then maybe have a knock on effect on, on the region's economic growth and maybe also on the air cargo side.
[00:46:58] Speaker B: No air cargo side, there is no two Things that it'll just continue to grow purely because the world is short of capacity, period.
That's the situation. And they will also grow because the shipping is under threat.
And then you look at the supply chains in itself now, more and more inventory is not being held on land.
They're just being manufactured. It's just in time, manufacturing of inventory. Inventory is only produced when it's needed, so it needs to get to wherever it needs to get to very, very quickly.
But the ocean side, it will be slower to come back because the logistics on that side is a lot more sensitive at this stage because of the Iran, the Strait of Hormuz, all that situation. But the fact remains that being a big market in itself, those vessels will come back, but it'll take a bit longer than what it's taken on the air side of the business.
So I would say if the state of Hormuz will open freely now that there's no more danger, no more threats, I think it would probably take about six to eight man months, whereas air cargo would probably take about a month in normalizing, provided the capacities all come back. And it's not the capacities of just Emirates, Qatar or Etihad or Saudi Arabia. Saudi Arabia.
The others have to also come in at the same pace as Emirates has, and they will.
It's a big market.
Nobody can ignore that market anymore because it's so potent.
[00:48:48] Speaker E: So Gulf War 3, temporary setback, not existential crisis. Ram Menon, thank you very much for joining us on Air Cargo Unpacked today.
[00:48:56] Speaker B: Yep, thank you very much for having me.
[00:48:59] Speaker E: That is all for this episode of Air Cargo Unpacked. Thank you to Neil Wilson and Peyton Burnett Attack Index for the race analysis and to Backy Spiga at DHL for his insight and what's going on on the ground at the moment, and especially to Ram Men and for a conversation that puts the Middle east story in its proper historical context. As always, big thanks to Ontegos Cloud for their support for this show and to Karen Ball and Tom Matthews for their production skills. I'm Mike King.
[00:49:27] Speaker A: And I'm Neil Jones Shaw. We will see you next.
