Significant Setback
Global air freight rates have declined for the fourth consecutive month by over 40%. This is perceived as a setback for Korean Air, which requires new market entrants for its merger with Asiana Airlines.
On Aug. 16, according to freight analysis firm Xeneta, the global average monthly spot air freight rate recorded US$2.2 per kilogram in the last month, a 41% decrease from the same month last year. This marks a continuous decline for ten months since September of the previous year. Even with the recent rise in oil prices, rates rebounded slightly but the overall trend remains negative.
For the first half of this year, the demand for air cargo decreased by 3.4% compared to the same period last year, while supply increased by 9.7%. The freight rates were cut in half. When compared to the first half of 2019, demand reduced by 2.4% and supply increased by 3.7%, showing a downturn compared to pre-COVID times.
The downturn in freight rates has drastically affected the aviation industry’s performance. Korean Air’s second-quarter cargo revenue decreased by 56% from the same period last year, increasing its overall operating profit decline rate to 36%. During the same period, Asiana Airlines also reported a 54% reduction in cargo business revenue. With ongoing negotiations between shippers, forwarders, and airlines, the second half is expected to further worsen.
This decline poses a particular challenge for Korean Air, which is pursuing a merger with Asiana Airlines. Both the European Union and the United States have expressed concerns about the potential monopoly of the merged companies in the cargo business. In fact, in the first half of this year, the merged companies held a market share of 95% domestically and 68% in the overall cargo aircraft market. To alleviate monopoly concerns, Korean Air needs new entrants in the cargo business. Recent rumors suggested the company might divest some of its cargo aircraft to budget airlines like T’way Air, but the aviation industry conditions aren’t favorable.
Industry insiders note the high barriers to entry in the air cargo business. An industry insider commented, “Before the pandemic, the perception of the air cargo business was that ‘there’s no growth, but it’s a necessary business for national exports.’ The situation improved due to pandemic-specific demands, but whether profits can be maintained in comparison to investment costs post-pandemic is questionable.”