Diverging paths

Is the long-predicted strategic split finally taking place in the cargo market, with serious players forced to get more heavily into freighters while others question their future in freight?

Ram Menen, senior vice-president cargo for Emirates Airlines, used to do a nice line at air cargo conferences on why it was not necessary for a carrier to operate freighters to be "serious" about air cargo. There was a good reason for this. With its all-widebody fleet and regular passenger flights, Emirates was able to field as much weekly cargo capacity on many of its routes as Boeing 747 freighter operators.

But these days, Menen does not tout the benefits of belly cargo so loudly. Since the start of 2003, Emirates has tripled the size of its 747 freighter fleet from two to six aircraft. It now flies the aircraft to destinations as diverse as Frankfurt, Hong Kong, Johannesburg, New York and Shanghai, and looks much like a traditional freighter-operating Asian carrier.

British Airways, another major champion of belly space in the 1990s, has made a similarly sharp shift. It took a third 747 freighter in 2003, and a fourth this year. In mid-2003, it also started chartering Boeing 757s from DHL Aviation to fly European feeder routes into London Heathrow. British Airways World Cargo managing director Gareth Kirkwood says 20% of revenues now comes from freighters, and the business even has its own freighter unit.

At the other end of the scale, a number of smaller carriers are getting out of freight. Although a relatively small player, Ireland's Aer Lingus shocked the cargo market in August with its decision to stop carrying cargo on all of its 55 European routes except for Frankfurt. Others, such as low-cost AirAsia, German leisure carrier Condor and SN Brussels Airlines, are outsourcing all or part of the cargo business to third parties.

Is this, then, the start of a split in airline cargo strategies, long predicted by some pundits? Georg Midunsky, managing director of Cargo Counts, a Lufthansa subsidiary that manages the capacity of other carriers, thinks it is. "Cargo is considered a side business by 95% of carriers, and carriers worldwide are under heavy economic pressure," he says. "Somehow they must decide where to invest their money, and that means a choice between passengers and cargo. In my opinion most carriers do not have the choice to do both, as they just don't have the money."

The latest ranking of the world's top 100 cargo carriers again gives evidence of this gap between the major players and those who are following. The 10 largest carriers, including the giant consolidators, account for the majority of traffic and the bulk of revenues.

Outsourcing ahead

Paul Jackson, chief executive of UK consultants Triangle Management Services, also identifies a split. "The costs and infrastructure of cargo will make it very costly for small to medium-sized airlines, and you have to question if it is worth it," he says. "Catering has been outsourced, and cargo is next."

These shifts in cargo strategies are being driven by different factors - for the larger carriers by customer demand, for the smaller carriers by low-cost competition. At top of the scale, the larger carriers find themselves under pressure to keep up with the requirements of their largest customers - the dozen or so global freight forwarders such as DHL Danzas, Exel, Kühne & Nagel, Panalpina and Schenker - which control something like 55% of world air cargo volumes.

Following a strategy established by Panalpina in the 1990s, these forwarders are increasingly focusing their cargo on key hubs, looking for deeper co-operation with a dozen or so preferred carriers, and expecting those preferred carriers to operate freighter capacity. Keith Packer, BA World Cargo's senior vice-president commercial, admits that freighters three and four were launched on the back of commitments from forwarders: "They were both supported by agreements where the forwarder paid for space whether they used it or not, or where we gave them capacity on popular routes in return for their commitment to use space elsewhere on the network."

Forwarders favour this approach because it gives them tighter control over air-freight capacity, enabling them to meet the increasingly time-critical logistics demands of their customers, major manufacturers and shippers. "Customers expect integrated services, that is for us to assume control of the whole supply chain," says Thomas Mack, senior vice-president air freight at Schenker. "We are seeing the industrialisation of this industry. Belly cargo will not disappear, but the growth will be in freighters."

Freighters are better for the purpose because they can carry full pallets compiled by forwarders, avoiding handling delays in the carrier's warehouse. There is also no danger of cargo being offloaded for baggage, and perhaps most crucially, freighters fly on routes that the forwarders want.

Even US major United Airlines has felt the force of this trend. In August 2003 then vice-president cargo, Roger Gibson, cited just such arguments when he said United should re-enter the freighter business. In January, Gibson retired, and his successor, Scott Dolan, is being more cautious about the freighter plan, saying it will not happen until 2006 and maybe take the form of partnership with other carriers, but he has not backtracked on the necessity for freighters. "I believe it is important to offer our customers a complete product line, and main-deck capacity is part of that," he says.

The growing power of the big freight forwarders leads Jackson to predict that the air cargo business will soon be like sea freight. "I think airlines will soon be receiving palletised cargo only, just like NVOCCs [non-vessel operating common carriers] in sea freight supply shipping lines with whole containers. The top 10 forwarders have the volume to provide those unit loads themselves: the rest of the market will rely on a new breed of cargo management companies."

The power of the larger forwarders is not the only thing driving larger airlines into freighters, however. Another factor is change in the passenger fleet. BAlaunched the European freighter feed programme, which uses aircraft from DHL's express network during their daytime downtime, precisely because the BABoeing 767s were being downsized to narrowbodies on most passenger routes.

Belly crunch

Emirates also faces a belly crunch. To date its fleet has consisted of cargo-friendly Airbus A330s and A310s, and Boeing 777s. But going forward longer-range aircraft such as the Airbus A340-500, A340-600, A380 and 777-300ER are due to arrive in the fleet in numbers. All of these aircraft offer only restricted belly capacity for cargo. "That means that from 2006 our cargo capacity will be challenged," says Menen. "We are preparing now by moving freighters from supplemental capacity to our core business."

While all this suggests that big carriers will get more freighter-dominated in years to come, at the other end of the scale the low-cost revolution is making carriers question being in cargo. For Aer Lingus, it was a matter of simple mathematics, says the carrier: "We carried out an economic analysis of the whole cargo business, and short-haul routes were only 12% of total cargo revenue." The vast majority of the carrier's 28,400t of cargo in 2003 came from its five transatlantic routes, with Frankfurt providing a useful feeder to those. "On other routes, such as Berlin, we were doing as little as 2t a week," it says.

Carriers such as Aer Lingus are prime targets for Midunsky's Cargo Counts organisation. Spun off from Lufthansa Cargo in October 2003 as an independent company, it offers a total cargo management service to carriers in return for a fee which usually includes both a guaranteed and a variable element. In return, carriers retain their identity in the cargo market, but get Lufthansa-quality cargo management as well as interline access for their cargo to the Lufthansa network.

To date, Cargo Counts has signed up six carriers. Initially its appeal has been in Europe - Condor, Spanair, and German-Turkish leisure carrier Sun Express were early recruits, and Air Luxor of Portugal and Hapag-Lloyd Flug of Germany joined this year. But it is also spreading its wings. It achieved a major coup in signing up AirAsia in June. Midunsky says at least one other Asian deal is in the pipeline, and he is also focusing on the Americas. In time, his aim is to create a global network of Cargo Counts carriers.

Benefits include improved revenue and assured quality, notes Joao Marques da Cruz, chief executive of Air Luxor. His airline is hoping that its deal will help double cargo revenues to represent 20% of its business and will also guarantee that "our cargo will be handled with the quality standards that only a world leader can provide".

Cargo Counts is not the only player offering to outsource cargo. Another more traditional option for airlines is the use of general sales agents (GSA). Traditional airlines use them for offline destinations or markets which they do not regard as core. Start-up carriers - for example Etihad Airlines - use GSAs to speed their entry into markets, and some airlines, such as Gulf Air and SAS, have also moved from having their own offices to using GSAs in many markets to save costs.

The conventional GSA operates on a fee or commission per kilo. Triangle's Jackson likens them to real estate agents, which focus on selling what is easiest to shift. But one or two more adventurous groupings are also moving into taking a larger responsibility - offering revenue guarantees to airlines, like Cargo Counts, and taking over entire segments of a carrier's business.

An example is European Cargo Services (ECS), a company quoted on the French stock market that has bought up GSAs in the main European countries in recent years, and which is now expanding to the USA and other parts of the world. Since May 2002, it has been managing the entire Europe to Africa capacity of SN Brussels, the carrier that sprung up in succession to Sabena.

"There is a certain guarantee, and if we go over the guarantee, we share the profits with SN Brussels," says Nick van der Weide, senior vice-president sales and marketing at ECS. "It effectively means that we buy the capacity outright, but it is a good market, and the competition is not too cut-throat and we thought it was worth doing."

Jackson thinks this is the way more airlines should go, and predicts the emergence of more such cargo management companies. "Airlines are one step away from the real cargo customer. Instead they deal with forwarders who are smarter and more entrepreneurial than they are," he says. "It makes more sense for them to outsource to an organisation with a similar agility. The only reason more airlines don't do it is that cargo departments will never decide to make themselves obsolete - turkeys will never vote for Christmas."

Indeed, in the SN Brussels case, outsourcing only came about because of the carrier's particular circumstances, says Patrick Dewilde, its vice-president commercial programmes. "When the airline was formed in January 2002, we had no cargo department at all - for the previous five or six years it had all been handled by Swissair," he says. "So it was not so much that we chose to outsource, as that it allowed us to make an opportunity out of a difficulty." Despite this, he admits that it has been a success, raising revenues from an expected €8-9 million ($9.8-11 million) to near €14 million. "We also have no in-house costs," says Dewilde. "We have one person in charge of cargo, and he liaises with ECS."

How widely applicable this type of outsourcing is for other carriers is an open question. Van der Weide admits that for SN Brussels' European routes, it operates on a normal per kilo commission basis. The reason is that these are short-haul narrowbody routes where cargo capacity can be as little as a single tonne, making guarantees too risky, he says.

Helge Lühr, president of the Federation of General Sales Agents (FAGSA), agrees. "To fill 737 bellies, you need very specific cargo, and the handling costs would also be relatively expensive. Many of these carriers also want a fast turnaround, which imposes extra problems." It was for this reason, Lühr says, that FAGSA members failed to respond to a tender from Ryanair recently to put cargo on to its flights. "With a 20min turnaround, you are very limited in what you can carry," he says.

Lack of investment

Jackson also doubts that there will be many GSAs with enough clout to give guarantees to airlines. "Most GSAs are under-capitalised, and lack investment in IT," he says. Lühr concedes that only GSAs with a wide network of offices can afford to give guarantees, something van der Weide agrees with. "It was important that we are a pan-European group which could get support from all our branches," he says. ECS would also not have touched the contract without a reasonable contract period - at least two to three years.

All of this suggests that the carriers that are most likely to want to outsource cargo - short-haul operators under pressure from low-cost carriers in their passenger business - will find it hardest to find someone to take their cargo business over. Many, like Aer Lingus, might simply decide to pull out altogether.

However, Midunsky disagrees, arguing the Cargo Counts product is geared to narrowbody aircraft and short turnarounds. "I don't want to talk too much about our business model, because I don't want other organisations to copy it. But most of our customers are low-cost carriers with a relatively fast turnaround time," he says.

REPORT BY PETER CONWAY IN LONDON

Summary Cargo Top 100 - 2003
Region	Cargo traffic (RTK)		Cargo revenues		Yields ¢/RTK
	million	change	$ million	change		change
Africa	1,620	9.9%	281	23.3%	25.1	6.8%
Asia-Pacific	55,965	4.6%	12,008	8.5%	25.3	2.6%
Europe	37,434	4.2%	8,682	13.7%	26.8	9.8%
Middle East	6,024	13.8%	915	30.8%	23.9	20.9%
North America	41,351	1.5%	25,067	5.9%	68.5	-1.0%
Latin America	3,624	-0.5%	1,066	7.3%	34.4	-18.8%
Grand Total	146,018	3.9%	48,019	8.5%	38.1	1.9%
N.Am excluding Fedex	27,520	0.2%	8,600	5.1%	36.3	-1.6%
NOTE: Figures are based on the latest Top 100 ranking. Change/yield figures rebased for carriers that gave full sets of data. Yields=nominal only RTK=revenue tonne km 1 mile=1.6km.1 USton=0.9 tonnes

 

Source: Airline Business