IAG Cargo: Making the tough decisions

Steve Gunning

With air cargo growth still sluggish, with the passenger business continuing to grow, and freighter operations being cut back, one could forgive mainstream airlines for attaching rather less importance to the cargo business than they used to.
But is that in fact the case? One person well placed to answer that question is Steve Gunning, chief executive of IAG Cargo, who in January was appointed to the management committee of the IAG parent com-pany, which owns both British Air- ways and Iberia.
He insists that, far from cargo losing status within the wider air-line, his appointment shows that the opposite is true. “Cargo is now better understood than it has ever been before,” he says. “There is an appreciation that it makes a valuable contribution to the group, and we are able to get investment that we have previously struggled to secure.”
That may seem paradoxical after IAG Cargo saw a 11.8 per cent fall in revenue in 2013 (albeit largely due to exchange rate fluctuations) with a further 7.4 per cent fall in the first quarter of 2014. Also at a time when it has just ditched its three B747-8 freighters in favour of a block-space deal with Qatar Airways, a change that trimmed nine per cent from IAG Cargo’s available capacity.
But Gunning insists that both the parent airline and its customers un- derstand that the air cargo market as a whole is going through a difficult time and that adjustments have to be made. “The interpretation of the freighter decision is that the business needs to adapt to changing market conditions and we are making the right decisions. So our credibility has gone up,” he says.
The switch from leased B747-8 freighters to sharing five-weekly B777F flights from Hong Kong to Stansted with Qatar Airways took effect from 1 May. IAG is actually taking the majority of capacity in- bound – 80 tonnes a flight – though it is now relieved of the more difficult task of filling the aircraft out of the UK.
Gunning describes it as “preserving the crown jewels” of the former freighter network while cutting out loss-making sectors. Asked if it is not giving Qatar Airways a bigger foothold in the UK market, he re- plies: “If you look at them – and the other Middle Eastern carriers – I think that would have happened anyway.”
He insists that since the change was announced not a single cus-tomer has criticised it and the effect on the profitability of IAG Cargo has been positive. “It has enabled the rest of the sales team to focus on filling our belly capacity, and load factors there have risen two points in the last three months, or three points if you exclude freighter operations.”
He also sees the change as an in- evitable industry trend. “A lot of our competitors are trying to exit their freighter positions. The market has an oversupply of capacity and that will be the situation for years to come given that the passenger business is continuing to grow and air-lines are deploying next-generation aircraft with gen-erous belly space to cater for it. There has to be a re-balancing and the only way to do that is by re- ducing freighters.”
Backed by its parent group, IAG Cargo has been investing in other areas, however. One seven-figure investment has been in a new pharmaceuticals facility at Heath-row, which opened last October.
Gunning says that this has increased pharma traffic through the airport by over a third. “We all talk about differentiation, but this is the [typical] execution of that,” he says.
BA’s Constant Climate product – now adopted by IAG Cargo – was something of a pioneer in catering for pharmaceuticals traffic, but now has an increasing num-ber of competitors as other airlines target this more lucrative area.
Gunning is not fazed, saying that it is one thing to offer a pharmaceuticals product and another to really put it into effect. He points to the fact that IAG Cargo now has 95 stations worldwide which are certified to handle Constant Climate, and which he reckons is the largest such network of any airline.
“Three years ago, we also recrui-ted as head of this product, someone with a pharmaceuticals industry background, so we really understand what the custo-mers need. And our new B787s and A380s have bellies that can be set to precise temperatures.”
For all these reasons he sees continued strong growth in pharmaceuticals traffic and also in other premium products such as express. IAG Cargo has in fact been carrying out an in-depth review of the air cargo market in the past six months which came to just that conclusion.
Express in particular is ex- pected to show 5-6 per cent growth, against 3-4 per cent for general cargo, and Gun- ning says that, like other pre-mium products, it produces better margins and is more resilient in the downturn. “We are actually looking to create a new express facility at Heathrow because our current facility is hitting its limits. We have had to move out some other specialist products in order to cope.”
As to why express is showing such robust increases, Gunning says there are sev-eral factors. One is online retail sales. “The UK is the sixth largest online consu-mer market in the world, and that is generating a lot of the growth.”
While the integrators may seem to be the natural beneficiaries for such traffic Gun- ning points out that they are also looking to be more flexible in matching capacity with demand. “I think we’ll see some integrators using more commercial metal in the future, and that will pro-duce more business for us.”
If cutting freighter capacity and continuing to boost premium traffic are two planks in Gunning’s strategy for IAG Cargo, another is cost savings. The merger of the British Airways and Iberia cargo businesses, now all but complete, has been a big help here. The final piece of integration is the implementation of a new €1.5m revenue management system, something that is now un- derway.
Other than this, the two carriers’ cargo businesses are now fully merged – “one business, not two businesses joined at the hip” – as Gun- ning puts it, with the same management structure, sales force and distribution sys-tems.
“It has enabled us to ration-alise costs and leverage sup-pliers, so we have a much lower cost base, a stronger network and more scale,” Gunning says. “The company set out significant synergy savings [for the integration between British Airways and Iberia] and we have certainly done our share of that.”
Another part of cost reduction is e-freight, in which Gunning has a particular in- terest given his role as head of the IATA Cargo Committee for the past two years. At IAG, e-airwaybill penetration currently stands at 15 per cent, but the target is 35 per cent by the year’s end (2014), ahead of IATA’s goal, which is 22 per cent.
“I deliberately set a very ambitious target, but our people have made their plans and know which stations and forwarders they are going to focus on,” Gunning says, adding that in the industry as a whole he generally sees a greater determination to implement e-freight.
“The reality is that with the e-airwaybill all the sup-ply chain has to buy into it.
“I think that when e-freight first started it was seen as a carrier-led initiative, but now the whole industry is getting behind it and so we are see-ing numbers start to pick up.
“The challenge now is to emphasise not just the e-air-waybill, but the other documents too. That will be an increasing point of focus for us at IAG from now on.”

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