Tim Stake
On a recent late-winter evening, a group of reporters and editors stood at a weather station directly beneath the approach to Frankfurt Airport’s southern runway. Over a 45-minute period, freighters from LAN Cargo and Korean Air Lines touched down at FRA, together with passenger aircraft from Oman Air, El Al, Turkish Airlines, Thai Airways, Air Astana, and many more. It was a veritable United Nations of the world’s carriers coming into Europe with main decks and bellies full of cargo.
Besides helping to explain why plane-spotters still gather with their telephoto lenses on the nearby perimeter road, the aircraft show highlighted the competitive threat facing European cargo carriers. To Europe’s “big three” combination carriers, every one of those aircraft arriving from Asia, the Middle East and Latin America equated to another incremental loss of cargo market share and declining yields. Defeating the carriers of the world will not be easy for Lufthansa, IAG and Air France-KLM.
From a freight-forwarding perspective, the long-established European airlines are still a match for anyone when it comes to price competitiveness, ability to spot price, and flown-as-booked performance. “Those who have a strategic focus on cargo can easily match the newer competitors’ service offering,” said Henk Venema, global product director air for Geodis Freight Forwarding. “But some European carriers seem to have lowered their expectations as regards a more profitable cargo market, even though there is modest optimism about the next few years.”
Airfreight volumes to and from the European Union grew by 3.7 percent last year. The biggest trade lane was Europe-Asia at 4.8 million metric tons, a figure that aviation consultant Seabury Group expects to grow at 4 percent per year over the next five years. The Europe-North America market totaled 2.4 million metric tons, but is forecast to grow at only 1.2 percent per year over the same period. Growth in excess of 3 percent per year is predicted from Europe to Africa and South America, but from a smaller base.
This shift away from the European carriers is not new. Michael Blaufuss, vice president of airfreight for forwarder Agility, said it’s only natural to see a geographic shift in the balance of power for carriers, given the alternative routings and increased capacity that newer players can offer. As a result, Agility’s rapid growth in air freight forwarding means it has expanded its preferred-carrier list to include Asian and Middle Eastern carriers. Service standards for non-European carriers are “very competitive and compelling” even away from their main hubs, Blaufuss said. Their introduction of new products and services is “refreshingly good” for a logistics services provider.
On the trans-Atlantic side, the Middle Eastern shift is minor, Venema said. “We mainly depend on U.S.- and E.U.-flagged belly capacity, with some additional freighter capacity.” Still, despite reducing its overall base of core carriers in recent years, Geodis is putting more business with Middle East-based operators. It’s a simple global reality, Venema added.
To adjust to this new reality, the top three European carriers are creating new airfreight strategies and rearranging their business models to handle more e-commerce freight, better compete with foreign carriers and, in some cases, join forces with rivals where cooperation make more sense than confrontation.
AF-KLM losses deepen
The hardest-hit of the three, Air France-KLM-Martinair Cargo (AF-KL) saw its tonnage shrink, and revenues drop faster still, to deepen its losses in 2014. Chantal de Grandcourt, senior vice president for marketing, revenue management and network for AF-KL Cargo, said market deterioration in Asia and South America, exacerbated by the Air France pilots’ strike last September, wiped out the benefits the group could have expected from its cost-cutting efforts. Ten percent of the group’s cargo tonnage through Paris Charles de Gaulle Airport (CDG) and 30 percent through Amsterdam
Schiphol, as measured by available tonne-kilometers (ATKs), was carried on freighters last year. This share will fall as the group chips away at the 15 freighters with which it began the year, leaving just five by the middle of 2016.
De Grandcourt insisted its cargo division can break even at an operating level by 2017 with this reduced freighter fleet. “It’s not a pleasure to cut capacity, but it’s really challenging to manage full freighters profitably, especially 747s and MD-11s,” she said. AF-KL has also terminated Asian full freighter routes, including Tokyo, Seoul and Chennai this year. The group makes clear that the Middle East is the source of its strongest competition. Emirates, for example, introduced a weekly Dubai- Paris 777 freighter service in March on top of its large bellyhold cargo capacity into France: 20 weekly flights to Paris and 12 to Nice and Lyon.
“On the Asia-Europe trade, however, the Middle Eastern carriers are not fully up to their potential as they are all making an attempt to attract the higher yielding Asia-Africa business on board,” said Venema of Geodis. On these routes, the forwarder has made a slight strategic shift toward Chinese flagged carriers at the expense of European carriers.
De Grandcourt is concerned at the speed of the Gulf carriers’ expansion into North Asia, North and South America, and is downbeat about cargo prospects for European operators. The 2014 peak season was disappointing for AF-KL Cargo, and January and February were “not strong,” she said. “Asia was also weaker in March, but we saw very strong flows to and from North America.”
The carrier has not found good fortunate in niche markets, either. Yields on flowers and perishables have fallen sharply as new carriers move into South American markets. De Grandcourt noted that Valentine’s Day and Mother’s Day produced less of a spike in volumes this year than last, and said the Russian crisis has also hurt volumes.
A special path
So where will AF-KL Cargo find better fortunes? De Grandcourt has a plan.
“We believe we differentiate through our knowledge of pharmaceutical, secure and high-value products. The margins are not perhaps as high as before, but there is still a premium,” she said. “That’s why we have invested in a new express facility – not to handle what the integrators do, but to manage two- to three-day e-commerce related traffic.”
She referred to the unit recently opened at CDG by Aeroports de Paris and Sodexi, 65 percent owned by AFKL and 35 percent by the French post office parcel subsidiary Geopost, which offers express freight handling for its parent airlines and a range of third-party carriers. AF-KL is also building new facilities for special cargo at Schiphol.
All this might not matter, though. Industry observers increasingly question whether Air France and KLM are closely integrated enough – the sticking- point being that the carriers are required by their respective governments to remain financially independent entities – and are speculating whether Martinair, the company’s cargo subsidiary, can survive at all. De Grandcourt responded that she “can’t comment on speculation” and simply said, “We have had a fully joint sales force selling Martinair, KLM and Air France worldwide for more than 10 years. We are three brands and that’s it.”
One of the names frequently touted as potentially interested in acquiring Martinair is Etihad, which has an existing commercial relationship with AF-KL, but it would only be allowed to hold a minority stake. As a European Union carrier, Martinair must be 51 percent owned within the EU.
Faith in freighters
Doing considerably better than AFKL is Lufthansa Cargo (LC), which attributed its improved operating profits last year, in part, to an expanding freighter fleet, from 16 at the beginning of 2014 to 21 today. This faith in freighters is in sharp contrast to AFKL’s ongoing disposal of its freighter fleet and IAG Cargo’s retreat from their ACMI-lease main-deck operation. And that’s not all. Peter Gerber, CEO and chairman of LC, said the total number of world aircraft will increase 3 percent this year, but observed that cargo capacity will be 4 percent higher, thanks to the larger bellies of the incoming passenger 777s and A350s. On paper, this would accommodate the annual cargo growth that analysts predict through to 2020, if global growth was distributed evenly. But Gerber believes that, while passenger services can meet most customers’ freight needs across the North Atlantic, Europe-Asia and other markets will continue to require supplemental capacity. LC plans to provide at least some of that capacity.
“Those who can operate freighters cost-effectively will have a competitive advantage,” Gerber said. “We manage to be commercially successful while our colleagues in Air France have suffered. This explains why they are getting out. And it’s going better for us than our colleagues in London.”
He commented that London Heathrow is unrivalled in Europe for passenger traffic because of the city’s huge catchment. “But for cargo it’s the opposite — Frankfurt is for cargo what London is for passengers,” he claimed.
Frankfurt, where LC maintains a stronghold, handled almost double Heathrow’s export freight volumes last year, because Germany lies at the heart of European manufacturing industry, boasts the largest freight forwarder presence of any of Europe’s consolidation hubs, and is accessible by road feeder services from anywhere across the continent. In other words, for LC, its strategy is based on location, location, location.
Finding space to share
Steve Gunning, CEO of IAG Cargo, does not dispute Gerber’s analysis. However, he describes his own carrier’s replacement of freighters with space agreements on key trade lanes as “sensible capacity management.” IAG calculated that, on a like-for-like basis – that is, adjusting for the termination of its three loss-making 747-8 freighters in April 2014 – it increased its commercial revenue last year. Yield was down more than 3 percent, but IAG is looking to turn this around by expanding the share of premium products.
Gunning highlighted the success of Constant Climate, IAG’s temperature controlled cargo service, which “grew terrifically” at 54 percent in 2014, and Prioritise, the carrier’s express product, up 8 percent last year.
Most of the global improvement in air freight in 2014 was achieved by Asia Pacific and Middle Eastern airlines, Gunning said, while Europe and Latin America remained relatively weak. He sees potential growth in the North Atlantic and Europe-Asia export markets, but believes economic problems in Brazil and Argentina will continue to depress Latin American traffic.
IAG sees trans-shipment of Asian exports via the Middle East and Europe to North America and Latin America as a way to stimulate disappointing westbound Asia-Europe flows. It is just as valid to fly generic pharmaceuticals produced in India westward as it is eastward across the Pacific, Gunning explained. “It’s not the length but the integrity of the journey that is key. You can’t have temperature excursions.”
IAG Cargo’s approach is to buy 400 tons of freighter capacity per week from Hong Kong to London Stansted “at a commercial rate,” Gunning said, on Qatar Airways’ five weekly 777Fs. It supplements this core route with “more tactical deals” ex-Pakistan and Bangladesh.
Last January, Qatar Airways acquired nearly 10 percent of IAG, and Qatar described its acquisition as “part of efforts to enhance operations and strengthen existing commercial ties initiated through codeshare agreements with IAG, as well as its membership of the oneworld alliance.” But Gunning insisted that the deal changes nothing on an operating level at IAG. “We have looked at other ways of working together. But in one sense we’re still competitors.”
He emphasized the importance of other collaboration models, including IAG Cargo’s expanding Partner Plus program, which Finnair joined in February. Members can interline cargo on each other’s aircraft on a commercially booked basis, allowing each to benefit from the routes of other members, which currently include Qatar, Japan Airlines, the Avianca group and American Airlines. “Partner Plus is much more than a standard interline program, where capacity is usually only held for partners on a stand-by basis. We aim to treat our partners’ cargo as we would a customer’s,” Gunning said.
“This is a hugely cost-effective means of growing our network reach.”
Pioneering venture
At least that’s Gunning’s view. For both Agility and Geodis, airlines alliances have little relevance to their choice of carrier for their cargo. “Except for a few attempts, such as [Qatar] making freighter capacity available to IAG, there seems to be no real alliance focus on cargo,” Geodis’s Venema said. “One wonders why Air France and KLM don’t show more ambition in engaging further with other SkyTeam partners, like China Southern, for example.”
Lufthansa’s Gerber plans to change this attitude with his carrier’s joint venture with ANA Cargo, hailing it as a world first. It took more than a year to deal with antitrust legal issues before the companies could start putting sales teams together and harmonizing their IT processes, he said. Matthias Brazel, LC’s director of business development, admits, “IT integration has been the most costly part, though we expected this.” He said Japan started thinking about e-freight later than neighbors such as Hong Kong and South Korea. However, the benefits of the JV are clear from the Frankfurt-Tokyo schedule introduced in May, which replaces one daily passenger service and one freighter with two ANA and two Lufthansa passenger services, plus the LC freighter.
“This allows immediate re-booking and dispatch within a few hours if cargo has to be offloaded,” Brazel said. He adds that Lufthansa customers now have direct access to Osaka and Nagoya as well as Tokyo Narita, while ANA customers can reach Munich and Düsseldorf in addition to Frankfurt. Some non-German destinations including Paris have been integrated, though not London at time of writing. And while express services have been aligned, the partnership does not yet extend to temperature-controlled or DG products.
Brazel said the former WOW alliance between Lufthansa, SAS, Japan Airlines and Singapore Airlines allowed partners to feed and de-feed one another’s services, “but there wasn’t full network integration. There were too many [entities] round the table and we didn’t get the benefits we expected. Our combined services are now open to both partners — we’re not talking here about capacity allotment,” he said.
LC is talking with more prospective partners on a bilateral basis and promises more details in the fall. Brazel said, “It won’t again be a four-way or five-way agreement. You need antitrust immunity for that, or it’s a cartel.”
AF-KL has nothing comparable, but the carrier is “still tightening up our relationships in SkyTeam,” Chantal de Grandcourt said. “While we have our own freighters, we don’t want to be buying capacity externally. It’s an option in the future, but not now.”
Now, or at least in the first quarter of 2015 as their Middle East- and Russia based rivals reported double-digit increases in cargo traffic, Lufthansa, Air France-KLM and IAG reported declines of, 4.8 percent, 8.3 percent and 4.2 percent, respectively. Each has new strategies in place to reclaim at least some of the market share they have lost. Time will tell whether those strategies will work, but at the moment the one certainty is that the big three will be fighting uphill all the way. Just look up at the sky above FRA for evidence.
IAG is comprised of British Airways (BA), Iberia,