Europe's New Frontier

Europeans like to refer to Eastern Europe as "our little China" – Europe's boom area for low cost manufacturing. For many cargo operators it can also seem something like the Wild West.

Where once there was the Iron Curtain, now there is a vast new territory waiting to be explored. Forgotten places such as Bratislava (Slovakia), Timosoara (Romania) and Katowice (Poland) long on the margins of the European economic map are suddenly the focus of major industrial investment and a welcome source of new shipping business.

The sites also are on the growing new frontier of competition for air cargo business as shippers redraw logistics routes while carriers and airports jockey for position on the changing European landscape.

The activity is especially evident in Vienna. The city until 1989 was at the extreme end of the Western world, with communist countries just a few dozen miles away to the north, east and south. Now, as in the days of the Austro-Hungarian empire, which brought the grandiose buildings that line Vienna's downtown streets, the city is once more the center of an important economic region.

Within a radius of 200 miles or so are Krakow, Budapest, Prague, Zagreb and Ljubljana. Even the border of Ukraine is only 300 miles east.

And Vienna is also only some 35 miles from Bratislava, the capital of Slovakia, which is Europe's hot location for manufacturing.

Asian electronics companies such as Samsung, and automotive makers such as Hyundai Kia have all invested here, attracted by the country's flat rate tax, highly skilled workforce, low costs, and proximity to the center of Europe. It is said by the end of 2006, Slovakia will be the largest car producer in the world per head of population.

This surge of investment in Slovakia was triggered by its entry into the European Union in May 2004, along with seven other Eastern European countries.

Now, the same is happening in Romania and Bulgaria, which are due to join the Union in January 2007. The western part of Romania, which faces Hungary, is seeing investment from contract manufacturers for technology companies, for example.

Air freight operators say such investment must be kept in perspective, however.

Hermann Filz, the Vienna-based regional head of Austria, Eastern Europe and CIS for DHL Global Forwarding, estimates the entire air freight volumes out of Eastern Europe are only one-twelfth of those out of China, and for good measure he notes the region's predicted growth rate of about 5.9 percent is actually less than the generally forecast global average growth for air freight.

Yet for a mature market such as Europe the region represents an exciting opportunity and the competition going on now for manufacturing and logistics business may set the borders for the direction of Europe's air cargo business for years to come.

In airport terms, many experts assume the main beneficiaries of European Union enlargement will be Frankfurt and Vienna, the former for its central location and sheer volume of air freight, and the latter because it has assiduously promoted itself for the past decade or more as the natural gateway to Eastern Europe.

Geography is also on Vienna's side. It not only is substantially east of Frankfurt, it is even some 150 miles east of Prague.

But will the growth in cargo flows to the region, and particularly the migration of manufacturing ever eastwards to even lower-cost countries such as Romania, Bulgaria and the Ukraine, not inevitably lead to airports further east attracting cargo traffic?

The question is more acute for Vienna than for Frankfurt. With its 1.9 million tonnes of cargo a year, the German airport's status as the leading European air freight hub is secure. It undoubtedly does attract large amounts of trucked cargo from Eastern Europe – particularly from the Czech Republic and Poland which are on its doorstep – but is not able to produce figures.

"Cargo from Eastern Europe is undoubtedly consolidated here, but it is difficult for us to quantify it exactly," says Bernhard Lessman, head of sales and marketing for the airport's CargoCity. "The forwarders and airlines are the ones who organize the road feeder services here."

Frankfurt can afford to be sanguine, perhaps, because it has many other sources of cargo. For Vienna, however, Eastern European traffic is a major factor, and the chief thing that distinguishes it from being just another regional European airport. In cargo, in particular, Eastern Europe has given it double-digit rates of growth in recent years.

In 2005, for example, its flown cargo rose 15 percent to 167,494 tonnes, and in the first four months of 2006 it was up 24 percent over last year. The airport also had 67,183 tonnes of trucked cargo in 2005, and in the first four months this figure rose 30.9 percent.

Longhaul passenger services to Asia are growing at the airport, and Asian freighters have been the mainspring of this cargo growth. EVA Air was the first to dip its toe into the water, with two MD-11 freighter services in 2003, and Korean Air, Asiana, and China Airlines have since followed with 747 freighters. Emirates also started A310 freighter service earlier this year.

Attracted by Korean investments in Slovakia and Hungary, the Korean carriers have been particularly active. Asiana is now up to five frequencies a week, while KAL has nine and is due, according to Markus Klaushofer, head of airline marketing for Vienna Airport, to boost that to 12 to 14 a week in the next year. "Vienna is going to be their biggest cargo station outside of Korea," he says.

Klaushofer believes Vienna is on a roll cargo-wise, and he is working on getting Singapore, Hong Kong, Japanese and Chinese freighter operators into Vienna, as well as Etihad and Royal Jordanian from the Middle East. "We have now shown that the demand is here, and I expect other carriers to follow." he says.

The freighter operations follow the decisions by a large number of companies – both shippers such as Eli Lilly, Baxters and Canon and forwarders DHL, Kuehne + Nagel, Schenker – to make Vienna their regional headquarters. Vienna's position as the new cargo capital of the southeast quadrant of Europe might seem to be secure.

But freight forwarders at the airport have some doubts.

One thing agents universally agree on is that the airport has been far too slow to invest in cargo facilities. A gleaming new 400,000-square-foot cargo terminal has just opened, including forwarder facilities, a road feeder center, and a state of the art handling terminal. It will entirely replace the former 237,000-square-foot facility, which will be knocked down.

But forwarders say it is too late, and perhaps even too little.

"It took them 20 years to invest in cargo facilities, and we still did not get exactly what we wanted," says Filz.

"I still get the impression that they don't take cargo too seriously," says Franz Braunsberger, Kuehne + Nagel's general manager air freight, for Southeast Europe. "They think more of being a passenger airport, and don't want to get it dirty with cargo."

There are also complaints about high charges and poor handling quality – although some insist Vienna is competitive in both respects. Filz also noted the airport lacks good links to the United States – only Austrian Airlines flies there from Vienna, and then only to New York and Washington with A330 aircraft. Because of this DHL Global Forwarding is forced to use Frankfurt for U.S.-Eastern Europe cargo.

These grumbles matter, because they make Vienna vulnerable to possible competition further east.

One problem for the airport is that all of those freighter operators come to Vienna mainly to bring in imports, and almost entirely goods destined for Hungary, Slovakia and others. Most of the Asian freighter operators calling in Vienna hit other European hubs to fill up for the journey home.

Asian freighter operators might defect to an airport even closer to their final markets, but for all the new manufacturing activity there is a shortage of candidates. Prague is probably too close to Frankfurt, and Warsaw is universally reckoned to be not interested in cargo (Filz says his organization bypasses it for heavy freight altogether). Bucharest in Romania and Sofia in Bulgaria are too far southeast, and on the wrong side of mountain ranges.

Braunsberger is a fan of Budapest Airport, noting it is just as convenient for most of the markets Vienna serves, and is closer to some – such as the new high-tech areas of Western Romania, or the Ukraine, where some investment is already taking hold in the west of the country.

Cargolux has been established in Budapest for years. "They are our main carrier from the Far East, and we already route some cargo through Budapest," says Braunsberger. He also praises the positive attitude to cargo of the airport.

Other forwarders are not so sure, however. Filz says Budapest is not really cheaper than Vienna and says handling agents there are not up to Vienna quality standards. "The cargo terminals are also old, there is no security, and so if you are in high-tech cargo, you have to move it off airport to meet customer business standards," he says.

Another forwarder who spent several years based in Budapest and still visits it regularly, calls the airport's handling "slow and expensive, using obsolete equipment." He adds, "the airlines that have started freighter services to Budapest have so far not found them a great success."

Domokos Szollar, a spokesman for Budapest airport, says investment is going into new cargo facilities, however. "We are currently turning away cargo business because we do not have the facilities, but that will soon change," he says.

Whether that investment will continue may be thrown into doubt because of Spanish group Ferrovial's acquisition of United Kingdom airports operator BAA, which manages Budapest. Ferrovial has said they might divest BAA's overseas assets to pay for the deal.

But with Hungary and others of the new E.U. countries about to join the Schengen borderless zone within the E.U. – which would do away with passport and truck controls at borders, in addition to the Customs barriers that have already been abolished – one further barrier to creating a hub in Budapest is soon going to pass away.

At Vienna International Airport, Klaushofer recognizes the challenge, but says Vienna will just have to stay ahead. "We will have to continuously improve on service, price and communications with the market," he says.

He also will have to hope he can get to those Chinese, Japanese and Hong Kong carriers before Budapest does. "One thing you have to say is that Vienna has been successful in attracting carriers," Braunsberger says. "But if the other airports follow this, and have good quality and cheaper prices too, the carriers could all just as easily go elsewhere."