Air Cargo World online_Baltic Cargo Exchanges (June 1)

01.06.2008

The Baltic states and Finland
remain relatively small air cargo markets,
inspiring their carriers to come up with
creative transit strategies

When eight Eastern European countries joined the European Union in 2004, some of them - such as Hungary and Slovakia - enjoyed a rush of manufacturing investment from major multinationals that has made them prospective exciting new markets for air cargo carriers.

Estonia, Latvia and Lithuania, tucked up at the eastern end of the Baltic Sea were less fortunately placed. Too far from the center of Europe, they have remained relatively small air freight markets, producing as little as 35,000 tonnes of air freight imports and exports a year between them, according to one estimate.

Neighboring Finland, a much longer established air freight market tends to be regarded as a niche market for air cargo, and has only attracted the attention of one major freighter operator to date.

Scandinavian Airline System was one of the first foreign carriers to enter the Baltic states after independence from the Soviet Union, starting passenger services to Tallinn in Estonia in 1989, and to Riga in Latvia and Vilnius in Lithuania in 1990. SAS talked up the cargo potential at the time, but the market still appears to be more about potential than the movement of goods.

Daiva Palm, SAS's cargo sales manager for the Baltic states and Russia, says Estonia managed to attract some manufacturing from Finland - for example, mobile phone assembly - while Lithuania has textile industries, which used to export to the United States but now, due to competition from China, have switched the European and Japanese market. Riga, meanwhile, has a maritime spare parts industry.

Riga can also cite a Scandinavian company making spare parts for the brewery industry. All three states traditionally acted as a gateway for transit traffic to Russia, which has been reduced by the opening up of a direct route through Kalingrad, between Lithuania and Poland.

Göran Åberg, chief executive of Schenker Oy, the Finnish subsidiary of the global forwarder, says industry does not use much air freight in the Baltic countries. "Import volumes to each country are about 500 tonnes a month, and exports half of this," he says, adding that companies specializing in the assembly of mobile phones in the region reached their maximum air freight volume in 2005.

Some carriers have considered flying freighters to Tallinn, using it as a hub for Helsinki and the surrounding area.

"It is the only location in the Baltic countries with ferry connections offering short delivery times to Finland and Sweden,"Aberg says. "Tallinn airport still has lower costs, and noise and pollutant emission limits are quite free, though European Union regulations may have an effect on this."

SAS has flown an AN-26 freighter to Vilnius five times a week from Copenhagen for over a decade. But the entire 5.5 tonne payload on the inbound flight is taken by DHL, with SAS only using the outbound leg for exports from Lithuania. From Estonia and Latvia, by contrast, it is easier to truck.

Trucking is the primary way expedited cargo leaves or arrives in the Baltics. It is easy for carriers from the rest of Europe to set up road feeder services in the region. And it is a primary reason the three countries were welcomed into the European Union in 2004.

"Air freight volumes transported by land considerably exceed volumes by air," says Åberg. "Air freight lorries depart for Helsinki for Stockholm daily and delivery takes one day. Frankfurt to Tallinn takes 57 hours.

For Air Baltic, based in Riga and Vilnius, this relative lack of import and export traffic means the cargo department has to be creative. The passenger carrier operates eight Fokker-50s, 13 737s, and just added two 757-200s in April, with more to come later in the year. Its network is mainly European, but has been expanding into the former Soviet countries recently.

Air Baltic started services to Odessa in the Ukraine and Tiblisi in Georgia last year, and added Almaty and Yerevan earlier this year. It also serves Kiev, Tashkent, Minsk and other destinations.

Transit from Western Europe to these countries is two thirds of the carrier's cargo business, says Toms Andersons, head of cargo. "There is very little export traffic from Riga," he says. "The one industry that remains quite strong is medical supplies from Latvia and Lithuania, old Soviet factories, which still do business with Georgia, Kazakhstan and other Central Asian countries. But generally, exports are declining."

Instead, Air Baltic sources cargo in Germany, Italy, France, Spain and Scandinavia, and flies it on to destinations such as Tibilisi, Baku, Yerevan and Almaty. Eastbound traffic volumes are a quarter of westbound ones on these routes.

"It is more seasonal, with some vegetables from Georgia and Uzbekhistan, although Kiev, Minsk and Tibilisi do have other export traffic," says Andersons.

Transit is also a key part of the story at Finnair. It saw a 22.5 percent increase in scheduled cargo tonnage in the first quarter of 2008 due mainly to an expansion of routes into Asia. That followed an 11.5 percent rise in 2007.

Traffic on Asian routes was up 24.5 percent in that year, and 36.1 percent in the first quarter of 2008, and now makes up nearly 70 percent of cargo volumes.

The cargo department benefits from a passenger strategy of expanding into Asian markets. Finnair decided in 2005 to aim for daily services to the major cities in the region. It launched Hong Kong in May 2005, Guangzhou in September, Nagoya in June 2006, Delhi in October, and Mumbai in June 2007. Seoul will be next, in June this year.

Timo Riihimaki, vice president of global sales cargo says over 60 percent of inbound cargo from Asia is transit, mostly to Scandinavia, the northern part of Europe, the Baltics and Russia. Most of this onward transit is by truck, given that Finnair's belly capacity on such routes tends to be limited.

The routes are served by seven MD-11s and three A340s, the latter aircraft added to the Finnair fleet since June 2007. Two more A340s are expected, then seven more Airbus widebodies (A340s or A330s) which will replace the MD-11s by 2010. Longer term, the fleet plan includes 11 A350s, due for delivery between 2014 to 2016.

Outbound to Asia, Riihimaki says Finland does not generate enough export cargo to fill the bellies of the aircraft. But Finnair Cargo is "very active" in the Swedish cargo market.

One problem for Finnair is that a clutch of Asian freighter operators - Korean Air, Cathay Pacific, China Airlines and Jade Cargo - have in the past two years started serving Stockholm.

Riihimaki admits the new entrants have "definitely increased the legwork needed to compete in the Swedish market," but Finnair still manages to grow.

Reasons include an efficient road feeder, which reaches Finland by ferry overnight in time to catch afternoon departures to Asia, and also the frequency of Finnair's services.

"With our daily services, we provide a higher frequency option than the freighter services from Stockholm, which are all two to three times a week," Riihimaki says. "This is a big advantage for pharmaceutical manufacturers."

Helsinki enjoys a geographical advantage, sitting right on Great Circle routes from Central Europe to Asia, which gives it better bellyhold payloads. "Our longest sector to Asia is 10 hours, while to New Delhi, the flight time is just six hours. So on an MD-11 or A340 we can get 20 tonnes even with a full passenger load," he says.

Finnair also shares a freighter with Cargolux, the only operator to put main deck capacity into Helsinki; it stops there once a week en route to and from Hong Kong. Unlike the Asian freighters operating into Stockholm, which are looking for westbound export cargo to balance out their European routes, Helsinki is mainly used as a feeder service to channel cargo from Finland to Cargolux's Luxembourg hub, and vice versa, says Robert van de Weg, senior vice president sales and marketing for Cargolux.

"It is a niche market, but big enough to warrant a service on a prime day at the end of the week," he says. "We connect cargo from Finland through our hub to destinations in the U.S. and throughout Africa, the Middle East and Asia." Out of Asia, there is relatively little direct traffic from Hong Kong to Finland, he says, but the Luxembourg to Finland leg benefits from cargo fed in from such Asian destinations as Korea and Singapore.

Inbound cargo includes consumer goods, and also supplies to Nokia and other electronics industries. Nokia manufactures mainly outside Finland, and doesn't generate much export traffic, but it does ship internationally some high-end products by air. The other big Finnish industry is paper mills, which need spare parts and supplies that sometimes come by air. There're also some land-based transshipments of cargo via Finland to nearby St. Petersburg, as well as to Belarus and the Baltic States.

One good business in the past for carriers in the Baltic states had been operating Russian freighter aircraft within the European Union. Europe's regional freighter operators and charter brokers found good uses for the aircraft, usually Antonovs.

But the EU is now tightening up on the operation of these aircraft, citing violation of safety regulations and a number of crashes. The most recent crash involved a AN-32 in Moldova, just outside the EU, in April.

This has hit some Baltic-based carriers hard.

One is Enimex of Estonia, which operates five AN-72s, a ramp-loading turboprop freighter with a 7.5-tonne payload capacity. Until recently, the aircraft was used to ferry horses and for humanitarian work. Andrey Kisli, general director of Enimex, says the carrier is now grounded, because the AN-72 is not type-certified in Europe and because the European Air Safety Agency won't accept aircraft documents written in Russian.

Enimex tried putting the aircraft on the Moldovan register in May 2007, but was blocked by the authorities after only three months. It also tried to lease ATP freighters, but Kisli says local authorities in Estonia then would not accept the carrier's airworthiness certificate, even though it was issued by the United Kingdom.

Crashes involving Enimex aircraft in 2001, 2002 and 2003 may have influenced this decision. The last of those crashes led Estonia's government to temporary suspend Enimex's certificate.

The carrier fights on, but it is trying to sell its AN-72s. Kisili says the company is down to 15 staff, compared to 100 in May 2007. Most of these employees are primarily occupied in keeping the AN-72s in good order.

A Baltic carrier that does seem to be making a successful transition from Antonovs to Western freighters is RAF-Avia of Latvia.

It currently has five AN-26s, a 5.5-tonne turboprop, and two Saab 340 turboprops, each with 3.5-tonne payloads. Jelena Rigere, acting commercial manager says its aircraft fly for TNT, DHL and other express customers, and charter broker Air Charter Service out of the UK's East Midlands airport.

She admits the EU has only given permission for the AN-26s to fly until September, but says the Antonov Design Bureau is preparing all the necessary documentation to satisfy EASA requirements.

That said, she concedes the aircraft has a limited lifespan; they need four flight crew - including a navigator and a flight engineer - which are not required on newer Western built aircraft.

For this reason, RAF-Avia hopes to switch to the Fokker 50, ATP or an ATR-42 or larger -72. Rigere admits the cost of purchasing such freighters is a problem, but says longer term this has to be the solution for the carrier.
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