Gunning warns of continued excess cargo capacity

04 / 03 / 2015

IAG Cargo boss Steve Gunning has warned that excess global air cargo capacity is likely to remain for the “foreseeable future”, with lower oil prices discouraging “capacity discipline” as older freighters continue to fly.

Gunning said that excess capacity was a key driver for IAG Cargo’s decision last year to end a lease on three B747-8Fs, switching instead to a space purchase programme on Qatar Airways freighters.

Speaking against a backdrop of “strong results” in 2014 for IAG Cargo - the freight arm of British Airways and Iberia - Gunning said: “I think that excess capacity will still be there for the foreseeable future, for the next two or three years.

“The new generation aircraft coming in on the passenger side are very cargo-friendly, and have very large cargo holds. Our passenger aircraft also have temperature controlled holds, so they offer a very strong proposition.

“As a consequence, the only outlet valve as an industry to remove excess capacity is by reducing freighter capacity.”

IAG Cargo feels it has led the market in reducing freighter capacity, but Gunning said that the global air cargo industry now operates in a lower cost fuel environment: “It will be interesting to see if that in any way discourages capacity discipline, and whether aircraft that are no longer fuel efficient are kept flying for a bit longer.

“In some ways, I think that the low fuel environment represents a risk to the industry because capacity discipline could be lost.”

On a like for like basis, excluding the distorting effect of dropping its leased freighters, IAG Cargo saw full year 2014 revenues up 2.5 per cent to €992m, volumes rose nearly seven per cent to 5.4bn cargo tonne km (CTKs) against network capacity up by 2.3 per cent. 

Said Gunning: “One of the key drivers of the year's performance has been our premium products, driven by two in particular. The first is pharmaceuticals, up 54 per cent in the year, and our express product which is up about 8.5 points.”

In terms of business development, IAG Cargo is now a leading European carrier in terms of e-AWB penetration, up to 33.5 per cent, while its two home hubs - Madrid and Heathrow - are “well over” 40 per cent for e-AWB penetration.

Added Gunning: “We have also continued to grow Cargo Connector, which is a simple but very customer friendly concept of going around the airport campuses picking up small parcels and freight to bring back to the terminal.

“It has gone particularly well in the US and now has up to ten cities worldwide. We also kicked off late in 2014 a new proposition, EuroConnector, which uses the narrow-bodied European network more effectively by offering a time definite product.”

Another “star performer” in 2014 was IAG Cargo’s express product, Prioritise, which grew 8.5 per cent in volume terms, during the year.

Said Gunning: “One of the key challenges for delivering premium products is to invest in the ground infrastructure so you can handle it properly. We have invested in both the Heathrow and Madrid hubs.

“At Heathrow we increased our ability to handle loose express products by 50 per cent in the year, and we continue to invest in that segment. We see that area of the product portfolio where we can really differentiate ourselves from our competitors and other modes, such as seafreight.”

IAG Cargo is introducing an all-in rates structure, dropping the fuel surcharge element, similar to the decision announced by Emirates SkyCargo in January, and subsequently taken up by Qatar Airways. The new pricing structure will be implemented across all IAG Cargo markets by the start of this summer.

Says Gunning: “We decided to go to a single freight rate after a lot of deliberation, basically to simplify the business. We listened to our customers and made that decision.”

IAG Cargo did not trumpet in public the change to a single rate, and that was deliberate says Gunning.

“We did not make any announcements because we consider it a pricing decision between us and our customers, and once we made that decision we went and told them.”

It was not taken in response to the Emirates’ initiative: “This was a completely independent and isolated decision. We had been reflecting on what is the appropriate approach for three or four months and it had nothing to do with the Emirates or Qatar.

“The key thing we could see was simplification. Our customers were talking to us about how complex it was and they were looking for transparency. We listened to them, looked at the situation and - having worked it through in detail - we then took the decision.” 

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