At least one of the airline cargo alliances seems to be making good progress, but major freight forwarding customers want to see deeper integration
A familiar event at the last three Air Cargo Forums - the biannual get-together of the air cargo industry - has been the SkyTeam Cargo press conference. The alliance was launched at the 2000 Air Cargo Forum in Washington, and has wheeled out its key managers at every event since.
Each time, the line-up gets longer and more impressive. Aeromexico, Air France, Delta Air Lines and Korean Air were joined in 2002 by Alitalia and Czech Airlines, and this year by KLM, now under the same ownership as Air France, and - from the audience - by prospective member Northwest Airlines. Wags might joke that if the alliance gets much bigger it will not be able to fit all its cargo managers on to one podium.
As well as boasting an impressive line-up, SkyTeam Cargo has made solid progress. Its members are all adopting its single product portfolio - based originally on that of Air France - and the alliance is committed to joint handling as far as possible - currently 72% of its cargo moves through facilities shared by at least two members. It also has a joint venture which handles all outbound US sales for Air France, Delta and Korean, with Alitalia and KLM expected to join too by the end of the year. Meanwhile, Air France acts as European general sales agent for Delta.
The alliance is also well on its way to getting global coverage. Adding KLM has given it a dominant presence at two of Europe's four largest cargo hubs and made it the largest European player, overtaking Lufthansa Cargo. There was some doubt that Northwest would join the cargo arm of the alliance despite signing up as a passenger airline earlier this year, but this now seems to have been resolved. Assuming that Northwest does now join by the end of the year, as it has said it will, SkyTeam Cargo will also have two of the largest transpacific freighter operators, with the other being Korean Air. It will also have the only freighter operator among the US majors.
Heavyweight potential
There are two other SkyTeam recruits with heavyweight cargo potential. Ken Choi, president of Korean Air Cargo, says members of his staff have already been to Guangzhou to prepare China Southern to join SkyTeam Cargo. Marc Boudier, executive vice-president of Air France Cargo, says that the carrier has had contacts with Aeroflot, though he stresses the Russian airline will have to meet certain standards before it is accepted as a member.
There is a ghost at this feast, however. Presumably alliances are created to provide a global offering to the major freight forwarders, the key customers of airlines accounting for over half of global air freight. But they remain distinctly lukewarm about them. "In their present set up, alliances have very little impact on our capacity-buying policies," says Thomas Mack, senior vice-president airfreight at freight forwarder Schenker. Other leading forwarders such as Exel and DHL Danzas agree.
Instead, such forwarders seek global coverage through their own preferred carrier programmes, where they concentrate traffic with 10-12 partner airlines. Thus, in effect, they create their own … la carte alliances. "The majority of our capacity is done with our global preferred carriers," confirms Mack. The selection process is based on various factors, he adds, "but not on membership of an alliance".
From Mack's point of view, the big deficiency in the formal cargo alliances is that they do not have a shared bottom line. "The result is that carriers in the same alliance offer different rates on the same flight for the same business," he says. "A true breakthrough would be an alliance that assures global harmonised processes, pricing and capacity based on the global revenue and standing of the customer within the alliance."
Such comments are echoed by Tony Widmer, director of air freight at the world's largest forwarder, DHL Danzas. He concedes that harmonised products and processes offer benefits to forwarders, but points out that forwarders also in effect create their own seamless products across their partner airlines, for example in DHL Danzas's case by offering special services for medical and pharmaceutical cargo.
There is, however, some evidence that forwarders are open to persuasion. Ole Ringheim, senior vice-president global airfreight at Exel, says it is exploring how alliances might fit into its buying strategy. "In effect, we are looking at four networks and trying to find the best combination. Those networks are our own network, our network of preferred carriers, and the two main cargo alliances." But for Ringheim, as for Mack, the key task for alliances is to "manage globally, as opposed to the traditional outbound way of looking at the cargo market".
Whether alliances will ever manage to achieve this global approach is an open question. In practice, national rivalries persist, and alliance partners are reluctant to merge their identities or even co-ordinate freighter schedules in any way that goes beyond traditional freighter sharing or block space agreements.
WOW, the other major cargo alliance, which links Japan Airlines, Lufthansa, SAS and Singapore Airlines, is a good example. Founded six months before SkyTeam Cargo, it promised deep integration in areas such as handling, IT, sales and processes, and said it would be a "serious" cargo alliance in a way SkyTeam, with its passenger origins, would supposedly not be able to match.
Four years later, WOW has little to show apart from harmonised express and general cargo products - which nevertheless still retain their individual carrier branding - and a commitment by each carrier to reserve 10% of the capacity on each flight for the express products of the other, something members insist is proving successful.
Work on moving handling under one roof and harmonising back office processes supposedly also continues, but the alliance has failed to make an impact with freight forwarders, many of which do not even seem familiar with its deliberately outlandish name (chosen to represent "the feeling you get when words fail you").
Lufthansa also seems to be quietly losing interest in the venture, or at least hedging its bets with initiatives in other directions. In a recent management restructuring it cut its WOW co-ordination team to one person, and sources say it is now backpedalling while it waits for its Asian partners to show commitment to deeper integration.
Deepening relationship
By contrast, the German carrier has a deepening relationship with express operator DHL, which has already extended into areas such as the joint planning of freighter capacity, where WOW has never reached.
The relationship dates back tothe 1990s, when Lufthansa had a 25% stake in DHL, although as a largely passive investor. Lufthansa sold that stake in 2001, but in 2002, when it phased out its Boeing 737 quick-change fleet which provided night-time freighter feeds into Cologne, it replaced that capacity with co-operation with DHL on its intra-European network of Boeing 757 freighters.
In February this year it added a "strategic partnership" with DHL on five intercontinental routes to the USA and Asia, which the German carrier operates using its Boeing MD-11 freighters, sharing the capacity with its express partner. Lufthansa managers speak warmly of the success of both these projects and admit that it is easier to work closely with an express operator that is not a direct competitor, than with its WOW partners that are.
Lufthansa is also extending its global offering in other ways. Its Cargo Counts subsidiary manages the capacity of other carriers, while in August Lufthansa Cargo sealed a deal to sell all European capacity for Star partner US Airways. Plans for an intra-Asian cargo carrier as a joint venture with Shenzhen Airlines also extends its capacity into this key market. Lufthansa Cargo sources say what the carrier is in essence doing with these operations is growing its global offering without having to invest in new aircraft or pilots.
Air France and KLM also show what true integration of cargo operations can be like when uncomplicated by company egos. As part of their merger plans, they have moved to create one cargo organisation, with a single management, harmonised sales force and common IT platform, and to to align freighter networks - with Air France flying some long-haul routes and KLM others. All of this work is due to be completed by mid-2005, a stark contrast to the sluggish timetables and lower aims of the two cargo alliances.
Future models
So are alliances really the model for the future? In the end, carriers prefer to achieve global reach in their own right, and that is also the best way to achieve the integrated global offering forwarders want. Possible strategies include extending the brand through joint ventures and strategic partnerships, as Lufthansa is doing, or overcoming regulatory barriers and merging with other operators, as Air France and KLM have done.
Given the web of bilateral and ownership restrictions in aviation, both approaches are tricky and time-consuming. Alliances should offer an easier way to get the same benefits more quickly, but unless they do just that, forwarders will continue to make their own arrangements.
REPORT BY PETER CONWAY IN LONDON
Source: Airline Business
