Air cargo: still overshadowed by its passenger big sister

09 / 08 / 2013

  • Former head of Delta Cargo, Neel Jones Shah, who now runs his own business JS Aviation Consulting

    Former head of Delta Cargo, Neel Jones Shah, who now runs his own business JS Aviation Consulting

CARGO has always been a bit of a Cinderella business compared to its passenger big sister, but was the contrast between the two ever greater than it is today?

Neel Jones Shah, who quit a year ago as head of Delta Cargo, and who now has his own consultancy, JS Aviation Consulting, as well as acting as chief commercial officer for leading US perishables forwarder Able Freight Services, finds the difference quite striking.

He contrasts the self-confidence of the passenger business, which has successfully transitioned to electronic ticketing and which has billions to invest in upgrading its fleets, with the “struggling state” of many cargo businesses.

He sees airlines dragging their feet about e-freight and innovative cargo managers retiring and not being replaced. He asks who is outlining a bold new vision for air cargo, or arguing its case as an essential part of supply chains.

The contrast is perhaps most stark when it comes to investment in aircraft. “What is interesting is that fleet renewal on the passenger side is incredibly robust, with lots of B787s, B777s and A350s due to be delivered in the next few years. There have been hundreds of new widebody passenger aircraft orders recently but how many for freighters? How many freighters were ordered at the Paris Air Show?”

In particular, he asks how many of the leading freighter operators have a coherent plan for upgrading their fleets, never mind expanding them. “That is a pretty good indicator of which of them are going to survive as freighter operators in the longer term.”

You might feel that such a remark is a bit rich coming from Shah, who after all presided over a rapid dismantling of Northwest Airlines’ 14-strong freighter fleet when it merged with Delta. He certainly does not regret this decision, and thinks that more and more carriers will follow it.

“As soon as we took over from Northwest, I started quitting the freighters,” he says. “We kept five for a while to meet customer commitments, and to get them to transition over to belly capacity, but we eventually managed to replace all the freighter revenue with belly revenue and profitability tripled. If you are a combination carrier that looks at that, you think: ‘Wow: do I really need to be in freighters?’”

So does anyone? Shah reckons a few operators will remain, but they will have to be prepared to invest in re-fleeting, be flexible on routing, able to ground aircraft quickly when the market turns down, and have a pliant labour force. He points to the current labour issues at Cargolux as an example of how a lack of the latter can trip up an airline.

On re-fleeting, he thinks very few airline boards will be prepared to make the investment. “Lufthansa, Air France-KLM, the Middle Eastern carriers, Cathay, some Chinese carriers may renew their fleets, but most others won’t. Even Air France-KLM should probably not be on that list, as they don’t have a fleet renewal strategy and have a belly-first policy.”

Elsewhere, he predicts a gloomy future for all the US freighter operators who have been kept going by flying to Iraq and Afghanistan in support of the US military. “That traffic is due to dry up in a year or a year and a half, and we will then see lots of these aircraft retired. I don’t see any of these guys having the financial capability to order a new [fleet of] airplanes,” he says.

He predicts that, integrators apart, only Atlas will be left as a North American freighter operator, and notes that even they have become a lot more involved in passenger charters in the last five years. “And even FedEx is reducing its fleet. It is bringing in new B767s, but taking out more older aircraft. Big Asian carriers such as Singapore Airlines also have no plans to renew their cargo capacity. Where in this can you see the customers who will buy new all-cargo aircraft?”

By contrast, he points out, carriers who have got rid of freighters have generally done well. “Japan Airlines got out of freighters and they now have a bit less cargo revenue, but a lot more profit. They are now rep-lacing their B747-400s with B777.300ERs, which have a similar passenger capacity, but carry 30 pallet positions of cargo as opposed to 14 in the B747-400.”

It is this almost accidental rise in belly capacity as next-generation passenger aircraft are rolled out – accidental because it is ancillary to the main goal of airlines – which is improving the passenger experience – that is the real trend in air cargo, Shah reckons. 

“The B787s United is bringing in have twice the capacity of the B767s they replace, despite having the same number of passenger seats. That’s a massive amount of new capacity, and the new aircraft can also fly further. If you’re flying 2-3 times a week from Chicago to Tokyo with 30-35 tonnes a flight, that is the same as a weekly widebody freighter. Think about the profit and loss on that. 

“And there is a lot less risk. As a belly carrier, yields may be lower, but you have a much lower cost structure. Maybe you won’t get the same upside a freighter operator gets in a boom, but you are also protected from a very large downside.”

If all this is so, isn’t cargo destined to become an even more junior partner to the passenger business? This is where Shah thinks the leadership issue comes in. While he is contractually unable to talk about why he left Delta, he is clearly looking for another airline cargo management role as his non-competition period comes to an end. So what is his prescription for the industry?

Certainly, a more dynamic leadership that can argue the case for cargo both externally and internally. “On the passenger side, things are decades more evolved than in cargo.

“The airline [passenger] industry is front and centre on so many issues, they are part of so many conversations, for example on the regulatory front. There may be arguments over some topics, but they don’t need to convince other people of the importance of their industry.

“But on the cargo side we are still struggling to convince people that this industry has value. People don’t understand that certain sup-ply chains are driven by air cargo. So there is a constant fight for the air cargo industry to keep its head above water.”

Many airline CEOs also need educating about the importance of cargo, Shah reckons. “Cargo plays a big role in the success of a route, but unfortunately the majority of combination carrier CEOs just don’t get it. They just don’t understand the value cargo can bring to the overall enterprise. It requires a culture change, for cargo to have a seat at the table.

“You have to challenge the old ways of doing business. But the payback is tremendous, it really is.”

Will Shah find a carrier prepared to let him put his ideas into practice? Only time will tell. He says he is already putting out feelers and get-ting an interested response. 

He ends on an optimistic note – perhaps a good idea if you are pitching for a job. 

“The business will be even more rational with some of its freighters gone. A lot of second-tier operators will go away, but air cargo will still remain a vital part of the supply chain. So there will still be room for good operators who have a solid business case.”