Peak Season Market Forecast 2006

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Issue 523, July 28, 2006

Asia Pacific to Americas

Peak season is now a predictable trend in the Asia Pacific export market during the latter half of the year. The main drivers for this are the continued economic (export) growth out of Asia exceeding available capacity; the growing imbalance between import & export trade; as well as general inflationary economic trends and spiraling fuel costs, which are driving price increases not only in the airfreight industry, but throughout all sectors of the global economy.

Export Growth and Air Cargo Capacity

You can note from Schedule A that economic growth has been extraordinarily strong this year out of the major peak season markets - this growth is primarily driven by their exports to Europe and the Americas. At the same time, the incremental growth of air cargo capacity - now primarily served by freighter aircraft - is markedly slower. To make matters worse, the distribution of demand is heavily skewed towards the latter half of the year, particularly from the August - December period, but until Chinese New Year in Greater China. Therefore during this period, backlogs build to hundreds of tons at any given time. For extra capacity deployed during this period, and even for regular fixed year-round allocations, there is a premium to be paid in order to get and keep freight moving.

This export orientation of the Asian economies leads to an ever increasing demand for outbound freighter capacity. However, the Asian import volumes required to finance the round-trip operating cost are just not there. So as more flights are added to support Asian exports, the static pool of import cargo to support the round-trip cost remains flat, and there is less import revenue per flight, driving up Asian export airfreight rates (Schedule B). This imbalance will only become worse in the future, and as import yields decline or stay flat, export rates inevitably must rise to finance the increased cost of operation.

Consequences: Increase in Tonnage Demand and Market Rates

Please see Schedule C which shows clearly the upward trend in cost and demand during the past three and one half years, particularly during the periods highlighted below.

Year after year we are seeing a steady increase in transportation costs, which have emerged slowly from a long down-ward trend financed by cheap fuel and recession in the industrialized economies which bottomed out during 2001-2002. As commodity prices rise and inflation takes hold, strong economic growth in Asia Pacific is still spurring supply chain demand for extra airfreight capacity during critical periods. Production costs, currency fluctuations, imbalanced demand and restricted capacity growth during 2006 will further aggravate the situation, leading to significant increases in market rates for the remainder of the year, much like we had during the same period last year.

As a result of these market forces, DHL Global Forwarding will begin charging Peak Season Surcharges as a freight accessorial charge on the HAWB, as per Schedule D.

While market forces are driving prices upward rest assured DHL Global Forwarding is doing everything possible to plan and block capacity for this critical period. Should you have questions, please contact your local sales representative for more information.

Sincerely yours,

Brian Lindholm
Executive Vice President - Operations, North America