Summary
While a partial recovery in commercial flights is underway this is focussed on intra-European flights, with inter-continental flights excluding the EU, still less than 60% of their January levels. With East-West routes better able to bear rising freight costs, African exporters will face continued air freight challenges, particularly as air freight demand rises in the face of the rolling out of a global vaccination programme. Given the economic significance of the air freight export sector to the Kenyan economy, there is a need for the designation of East African focussed air freight services as a ‘strategic autonomy’ sector, with normal rules related to state supported lending being waived. There is also a need to systematically review Kenyan production and export patterns, to see which export products remain commercially viable at higher freight rates and which export products can be shifted to sea freight. This review will need to take into account the increased costs which will be faced in trading into the UK market via initial ports of landing in mainland EU countries. These new costs along triangular supply chains are now inevitable given the state of play in EU/UK trade negotiations, with the only uncertainty being the scale of these increased costs. This will be impacted by the basis on which the UK finally leaves the EU customs union and single market.
Despite a surprisingly strong export earnings performance, which saw Kenyan horticulture sector earnings from January to May 2020 increasing around 11% compared to 2019 (up to Ksh 72 billion compared to Ksh 65 billion) (1), export volumes have remained low at 211,000 tons compared to 230,000 tons (down 8.3%) (2). It is unclear whether the rise in revenues in Kenyan shillings was sufficient to cover the increased cost in getting cut flowers and horticultural products to overseas markets. What is clear is that developments in the air freight sector will be critical to the outcome of Kenya’s overall 2020 horticultural and floricultural sector net earnings.
While some level of recovery in commercial passenger flights is underway, following the massive fall in services of 80% which occurred from January to April 2020, this has been most pronounced along intra-EU routes, where commercial flight services have risen to 95% of the January 2020 level. Excluding intra-EU flights, services have only recovered to 57% of their January 2020 levels (3).
Against this background there remains globally, a continued lack of air freight capacity, with analysts suggesting there will be ‘a supply shortage of dedicated freighter aircraft for the foreseeable future’ (4). While freight charges have fallen from the peak level in the early stages of the pandemic, commercial pressures from air freight charges facing Kenyan exporters are likely to continue (5).
This will not be helped by the a massive upswing in air freight demand which is expected as a result of not only normal seasonal factors but also the huge demand linked to need to rapidly move Covid-19 vaccines from major centres of manufacturing to market markets where immunisation programmes are set to be rolled out (5).
This is a matter of serious concern, with disruptions to Kenya’s export trade in the 8 months to August 2020 seeing Kenyan cut flower production down a reported 20%, and production in the vegetable sector down a reported 23% (2). ‘The first round of lockdowns in Europe saw the fresh produce sector in Kenya hit hard by cancellation of orders, costing the economy billions of shillings.’ The high value cut flower sector was particularly severely affected by the closure of the Dutch flower auction and many high street florists across the EU, as well as the collapse of demand from the events sector (weddings, funerals, conferences etc) (see companion epamonitoring.net article ‘Collapse of European Cut Flower Demand Threatens Immediate Future of Kenyan Cut Flower Sector’, 19 March 2020) (6).
With more and more areas in Europe entering local and even national lock downs or further restrictions in social contacts, it is becoming clear a second wave of Covid-19 linked trade disruptions is now imminent. This needs to be seen in a context where the coming period normally accounts for 60% of annual earnings from Kenyan horticultural and floricultural exports (4). This makes effectively getting to grips with inter-continental freight challenges a matter of critical importance.
The hard reality faced is that in a context of intense competition for available air cargo freight capacity the more lucrative East-West routes are better served than South-North routes. As a consequence, in the coming months it is envisaged perishables exporters in Africa and Latin America will struggle to secure competitively priced freight shipment capacity ‘because the value density of these goods cannot be carried at higher rates’ (7).
Against this background exporters in Africa are being advised to ‘commit to certain volumes and block space capacity for the entire year’ so as to incentivise carriers to supply capacity by making longer term commitments. It is argued such ‘long term contracted volumes could drive down the average price’ paid for air freight space. What is clear is that spot market freight services should be avoided wherever possible (7). The likely continued pressure on air freight prices is seeing some products being shifted over to cheaper sea freight services, although this is only possible for a limited range of products.
Given the reduction in passenger flight-based freight capacity, regionally based freight operators in East Africa have seen an expansion in demand for their services. Nairobi based air freight carrier Astral Aviation (which handles cargoes from Africa to Europe) has seen a 50% increase in demand since March, with 14 dedicated freight flights now being operated up from 9 previously (7).
The need to fill the freight haulage gap left by the reduction of passenger flight-based services has seen some stop gap measures being adopted. Okisegere Ojepat, Chief Executive Officer at Fresh Produce Consortium of Kenya, has praised Kenyan Airway for its close cooperation with fresh produce exporters and its willingness to utilise redundant passenger planes to fly cargoes to Europe, despite the unprofitable nature of this cargo handling arrangement (1). With a trend towards seeking out more local supply chains in Europe, in the short term maintaining a presence on the European market was seen as more important than making money (1).
However, converting passenger planes to freight service operations is not economically viable in the long term. Even undertaking a systematic conversion of passenger service Dreamliners to freight cargo aircraft has its limitations. Against this background Kenya Airways is looking to acquire high capacity B777 for its long-haul freight trade, with these being able to carry 100 tons of cargo compared to 40 tons in a temporarily utilised passenger aircraft (8).
However, the process of acquiring such dedicated freight capacity will not be helped by the $300 million in losses Kenya Airways is projected to make in 2020, in the face of the Covid19 collapse of passenger services. Even with the lifting of some travel restrictions, Kenyan Airways is still only operating along only 37% of its international routes.
The need to get to grips with the freight challenges facing the Kenyan horticultural sector cannot be overstated, since the Covid-19 linked economic disruption are also seeing domestic prices of fruit and vegetables in Kenyan being depressed. This poor local market situation is being compounded by the retrenchment of workers from export orientated commercial farms who often return to rural areas to engage in subsistence farming (something which has been helped by good rains) (9). Getting the export trade operating smoothly once again thus has far wider implications
| Comment and Analysis Given the recovery of passenger flights serving East Africa is likely to be a slow process the need to identify air freight solutions focussed on East African export needs along inter-continental routes cannot be overstated. This Kenyan fresh produce export trade to the EU28 in 2019 was valued at €794.5 million (although not of this was airfreighted), or almost 60% of Kenya’s total export to the EU28 market. To date the model for this air freighted trade has been based on the lower freight rates offered on commercial passenger services. The sharp reduction in these flights saw freight rates double and even triple at the height of the pandemics’ trade disruptions and induced acute shortages of cargo space. With air passenger services between East Africa and Europe unlikely to return to anywhere near pre-Covid-19 levels for a number of years, freight services constraints are only likely to intensify as global vaccination efforts starting in the new year, require the movement of vaccines and other essential equipment across the globe on an unprecedented scale. This strongly suggests a need for public support to the development of dedicated East African focussed freight services, with the necessary financing being mobilised in the framework of what the EU has referred to as a ‘strategic autonomy’ approach (see companion epamonitoring.net article, ‘What Lessons Can the ACP Draw from the EU’s Post Covid-19 EU Recovery Plan’, 25 June 2020). However, such an initiative will also need to be accompanied by a review of production and export patterns, to systematically assess: a) Which products can be shipped to Europe using sea freight services? b) Which products can be air freighted to Europe on a commercially sustainable This process of review in regard to serving European markets will need to factor in the additional costs and complications which will arise in serving the UK market along triangular supply chains once the UK has left the EU customs union and single market from 1st January 2021. It has been estimated the additional administrative costs of moving goods through the newly created EU/UK border will on average around 8% of the value of cargoes. The additional costs faced by goods exported to the UK along triangular supply chains are likely to be even greater in the event of a no-deal UK departure from the EU customs union and single market, given the scale of the road traffic disruptions which are then likely to arise along the main EU/UK cargo routes from an acrimonious UK departure (see companion epamonitoring.net article, ‘Report Spells Out Impact of Brexit Scenarios for Food and Beverage Supply Chains’, 20th October 2020). These developments will further compound the freight challenges facing Kenyan horticulture and floriculture exporters and will need to be fully factored into any post-Covid air freight recovery strategies. This being noted if air freight challenges can be addressed in serving the UK market, then benefits could be gained from the food price inflation which a no-deal UK departure from the EU customs union and single market will generate. This will be particularly the case in products where the reduced availability of migrant labour flows from EU member states will reduce the ability of UK producers to fill the gaps in supply. Where these opportunities lie will need to be assessed on a product by product basis by Kenyan exporters and be factored into their post-Covid air freight recovery planning. |
Sources
(1) Freshplaza.com, ‘Kenyan horticulture exporters fight to secure markets during Covid-19’, 25 September 2020
https://www.freshplaza.com/article/9253320/kenyan-horticulture-exporters-fight-to-secure-markets-during-covid-19/?edition=3
(2) Hortidaily.com, ‘Kenyan growers struggle to meet horti orders from overseas’, 24 September 2020
https://www.hortidaily.com/article/9252395/kenyan-growers-struggle-to-meet-horti-orders-from-overseas/
(3) WTO, ‘Trade shows signs of rebound from Covid-19, recovery still uncertain’, 6 October 2020
https://www.wto.org/english/news_e/pres20_e/pr862_e.htm
(4) The Loadstar, ‘Freighter conversion a way to double an aircrafts life and add cargo capacity’, 21 September 2020
https://theloadstar.com/freighter-conversion-a-way-to-double-an-aircrafts-life-and-add-cargo-capacity/
(5) The Loadstar, ‘Air cargo market going crazy as carriers prepare for a tight peak season’, 14 September 2020
https://theloadstar.com/air-cargo-market-going-crazy-as-carriers-prepare-for-a-tight-peak-season/
(6) freshplaza.com, ‘COVID resurgence in Europe worries Kenyan horti traders’, 23 September 2020
https://www.freshplaza.com/article/9252426/covid-resurgence-in-europe-worries-kenyan-horti-traders/?edition=3
(7) The Loadstar, ‘Continued lack of airfreight capacity has created a battlefield for forwarders’, 21 September 2020
https://theloadstar.com/continued-lack-of-airfreight-capacity-has-created-a-battlefield-for-forwarders/
(8) Businessdailyafrica.com, ‘KQ eyes increase in cargo to 20pc of total business’, 16 September 2020
https://www.businessdailyafrica.com/corporate/shipping/KQ-eyes-increase-in-cargo-to-20pc-of-total-business/4003122-5623610-2ha7gbz/index.html
(9) Reuters, ‘Kenyan farmers count cost of COVID’, September 22, 2020
https://www.fpcfreshtalkdaily.co.uk/single-post/2020/09/22/Kenyan-farmers-count-cost-of-COVID