Freight forwarders turn to air cargo as shipping costs bite

Cargo transporters from Mombasa to various destinations across the East African region are being forced to review their operations as shipping companies pass on new costs, eating into their profit margins.

Rising fuel prices, high inflation, an unstable shilling and insecurity along the coastline have meant that shippers are incurring higher expenses.

Since November 2010, the cost of fuel has jumped 40 per cent and shipping companies have passed this onto cargo transporters.

The International Energy Agency predicts that crude oil prices will climb to $120 a barrel in 2035 implying the surcharges are set to rise, further eating into the margins of container freighters.

“We have a Bunker Adjustment Factor commonly known as ‘BAF’ that follows the price of fuel oil and to the extent that oil prices increase, so will this surcharge,” explained Rolf Nielsen, Maersk Managing director.

Fuel surcharges by Maersk have gone up from $920 and $1,840 four months ago, to $925 and $1,850 currently per 20 foot and 40 foot containers respectively.

Unlike the shipping companies, which can increase surcharges, the air and road freighters said they were tied by contracts that can last as long as five years.

“The Kenya Transporters Association takes time to decide when and by how much to increase on the container charges,” explained Meshack Kipturgo, Siginon managing director.

So even as transporters pay the new shipping surcharges, their container transportation charges across the region remains standard as per KTA’s revision in July.

The charges remain fixed from Mombasa to various destinations. To Kampala and Juba, freighters charge $3,400 and $8,400 respectively for a 40 tonne container, while to Burundi and Rwanda the charges are $6,200 and $5,500 respectively.

KRA restricts containers from collecting goods on their return journey unless from the country of origin. For example, a container from Mombasa to Rwanda should not be loaded with goods on its return trip other than from Rwanda, despite passing through Uganda and parts of Kenya to Mombasa.

“The return trip would fill the margin gap especially for new entrants who don’t enjoy economies of scale,” explained Mr Kipturgo.

Transit cargo to Uganda, Democratic Republic of Congo, Tanzania, Rwanda and South Sudan from Mombasa port is expected to rise to approximately 6 million tonnes at close of 2011 from 5.2 million in 2010.

“This market is anticipated to increase its cargo volume to above 5.5 million tonnes following increased demand for construction materials across the region and drilling of oil anticipated to kick off in Uganda by next year,” explained Bernard Osero, Kenya Ports Authority public relations manager.

Despite all this, traders still prefer air to sea transport that is plagued with delays at Mombasa port. Air cargo transport, remains ive to 10 times more expensive than sea transport for a 30-tonne container.

Freight forwarders have seized the opportunity to diversify their operations. Siginon Freight Limited which transports cargo across the region said it had plans to build a cargo centre at the Jomo Kenyatta International Airport (JKIA) to service increased demand by traders as regional airlines increase their cargo capacity in the coming years.

“It will take us 18 months from January 2012 to complete the centre and tap into the increased demand,” explained Mr Kipturgo.

The company said it was negotiating partnerships with international freighters as Kenya slowly turned into a hub for the regional cargo business for airlines.

Airlines that plan to increase cargo capacity include British Cargo, which expects to buy new freighters with a total capacity of 130 tonnes to replace the carrier’s three existing Boeing 747-400 freighters by 2016.

IAG Cargo, through British Airways World Cargo has agreed to take delivery in late 2011 of the first of three freighters increasing demand for cargo handling facilities.

Kenya Airways announced plans to buy three cargo planes, expected to contribute about 15 to 20 per cent of the airline’s turnover over the next 10 years. Its cargo volume for the three months ended September 2011 jumped 13.5 per cent to 16,021 tonnes.

Meanwhile, the government is expanding JKIA airport, a move hoped to attract more airlines in the region and boost air cargo handling.

business as freighters earn more compared to water cargo that has recently seen surcharges go up as fuel prices and insecurity heightened.

Companies are already investing to reap from this anticipated growth amidst worries about the weakening shilling against the dollar, rising fuel prices and piracy that would increase charges to these foreseen calamities by shipping companies.

“This market is anticipated to increase its cargo volume to above 5.5 million following increased demand for construction materials across the region and drilling of oil anticipated to kick off in Uganda by next year,” explained Bernard Osero, Kenya Ports Authority public relations manager