LAN Cargo: The shift to belly capacity

There was a brief moment in the late 1990s when LAN Chile (as it was then) looked like becoming a combination carrier with more revenue from cargo than passengers. Serving Latin America’s rugged geography, it built up a stable of twelve 767-300Fs – the largest non-integrator 767F fleet – and supplemented them with leased 747Fs and more recently its own 777Fs.

But now, as with so many other carriers around the world, the big story for the carrier is the rise of belly capacity. Freighters are still important, but the fleet is shrinking. At the start of 2014 the lease on one 767-300F was terminated, and a further three are on their way to an operator outside the region on a three year lease. For 2015, the carrier will deploy eight 767Fs and four 777Fs, a 20 per cent reduction on 2013.

The story is not one of a large freighter operator being undercut by a more vigorous passenger rival, however. In this case, LAN – or rather LATAM – is also the source of the belly growth. When the Chilean carrier merged with Brazilian upstart TAM in June 2012, it suddenly had at its disposal a whole swathe of new belly capacity.

“With TAM we had to change our whole mindset,” says Cristian Ureta, chief executive officer of LAN Cargo and TAM Cargo (the two carriers still operate under separate liveries and certificates, though with coordinated commercial planning). In particular, TAM brought with it much bigger belly capacity to Europe. The Brazilian carrier flies to London, Milan, Paris and Zurich, for example, while LAN serves only Madrid and Frankfurt. That meant that instead of only focusing on South America-North America flights, LAN freighters gained a new role of feeding cargo to and from TAM flights. One result was a new daily 767F route from Sao Paulo to Buenos Aires and Santiago.

TAM belly capacity also made a difference on one of the key trunk routes of the Latin American cargo business – Miami to Sao Paulo. TAM flights to the Florida hub, as well as to New York and Orlando, meant that fewer freighters were needed for this route. In general, Ureta describes the new belly cargo network as “maybe the most important strategic advantage our group has right now”.

This trend is likely to intensify in the next few years, as Latin America experiences the same strong passenger growth that has been evident elsewhere in the world. Like many airlines, LATAM is awaiting new deliveries of cargo-friendly next generation passenger widebodies. TAM is due to get the first of 27 A350-900s next year, while LAN will start to receive 787-9s. It has ten of these coming along with 11 787-8s, with nine 787-8s already in its fleet.

The tie-up with TAM was also important to cargo from another point of view, since the Brazilian carrier previously took a low key approach to international cargo sales, using GSAs outside Brazil. LAN Cargo, by contrast, has its own strong sales network throughout Latin America, Europe and the US, which is now used to fill all the group’s flights.

Despite the increase in belly capacity, freigh-ters remain a key part of the group’s cargo operations. Ureta is coy when asked about future freighter fleet cuts – “We have in our plan to be very flexible with our freighter fleet to take advantage of our belly capacity, but it will be very important for us to have freighter capacity in some markets.”

But he points to seasonal markets – such as asparagus from Peru, fish from Chile (year round, but with two pronounced peaks) and flowers from Colombia and Ecuador – where there will probably always be a need for all-cargo lift. The 777Fs are sometimes deployed on these routes, and are also busily employed flying to Amsterdam and Frankfurt as well as between the US and Brazil.

Plans a few years back to use the 777Fs to fly transpacific via Los Angeles to Asia have been shelved, however. “We have grown our Latin America to Asia business with our partners, connecting thro-ugh our gateways in the US and Europe,” Ureta says. “This is another very important issue for us, to take advantage of cargo beyond our network by working with other carriers.”

Otherwise, a big focus in the last year and a half has been reconfiguring the freighter network to work more closely with longhaul belly capacity. One example of this is a feeder freighter operated by MAS Air of Mexico (also part of the LATAM group) from Los Angeles, which feeds into TAM and LAN flights out of Mexico.

Meanwhile, $30m has been spent on upgrading hub facilities in Lima, Guarulhos (Sao Paulo), Manaus, Miami and Santiago to enable smoother connections bet-ween freighters and belly – for example to keep perishables cool in transit. Ureta says up to 1,000 tonnes of perishables a week now transit in Brazil, for example, while the use of creative routing combinations is increasingly common to meet the specific logistics needs of different customers across the continent.

All of these changes are taking place at a time when the South American market is going through a difficult patch. The economy in Brazil, the big magnet for southbound cargo whose high rates make up for weaker yields northbound, has slowed dramatically recently as demand from China for its commodities lessens.

Ureta admits this has been a challenge, and says Argentina and Chile have also been affected. But in a market where rates are under pressure, relying more on belly capacity is no bad thing. It is freighter-only operators that Ureta feels sorry for. “On the major routes you need to be a freighter-belly combination to survive for the future.”

One other market that the LATAM tie-up has brought under Ureta’s management is the Brazilian domestic one – a sector dominated by express packages. “It is an interesting market that is growing and developing, and which has huge potential for the future,” he says, comparing it to the US ten or twenty years ago.

TAM serves the market with its huge narrowbody passenger network, and also has two or three daily freighter flights, particularly on the key Sao Paulo-Manaus route. “The domestic Brazilian market is very important for us and we are doing a lot of investment there,” Ureta says. “We have changed the way we operate in Manaus, for example, and are spending $15m on a very modern new facility in Guarulhos, as well as improving facilities at Congonhas [the downtown Sao Paulo airport for domestic traffic].”

The Brazilian domestic market is also one in which electronic ways of working are highly advanced, and this is something that LAN, like other airlines, would like to replicate for international cargo through the e-freight project. But Ureta admits progress is not what it might be. “We are growing, but not as fast as we want. The problem is often the authorities, but we are working with them on this, with the help of IATA, and we think in the next few years there will be good progress.”

He sees at least a realisation among forwarders of the importance of the problem. “In the beginning we, as market leader, had to set the standard. But now we have seen a change in mindset and the more important customers understand that this is the best formula for the future.”