IAG Cargo’s Gunning: excess capacity is the new normal

Excess capacity and yield pressure are the new normal that the air cargo industry must live with, according to IAG Cargo chief executive Steve Gunning.
Speaking to Air Cargo News shortly after the publication of its second-quarter results, Gunning outlined why the cargo business of British Airways, Iberia and Vueling decided to change strategy by ending its own long-haul freighter operation and focus on partnerships and its premium products.
“I think the new normal is that you will see excess capacity in the market and therefore price and yield will be under pressure in most markets,” he said.
“Our job is to react to that and manage our business accordingly, hence, driving premium product mix, being more asset light and moving away from owning freighters.
“Moving to programmes where you utilise other carriers’ networks and they utilise yours through our partner plus programme where we can commercially book onto each other’s metal, all of those things are trying to make us more asset light, more cost/volume variable and more attractive to do business with.”
He said that, in the past, carriers had differentiated from each other by operating lots of freighter capacity.
Today, differentiation is achieved through the quality of product portfolio and the breadth of network.
Gunning’s remarks come as airfreight rates continue to spiral downwards and capacity continues to be added.
Drewry’s East-West Air Freight Price Index last week slipped below $2.90 per kg for the first time since its inception.
IAG Cargo’s revenue results for the second quarter initially appear to contradict Gunning’s downbeat assessment of the overall market – it recorded a year-on-year increase of more than 8.8% for the period to €259m. However, the results were boosted by exchange rate gains.
IAG chief financial officer Rachel Izzard explained that if currency effects are stripped out of the figures, the increase of more than 8% would in fact slip to a decrease of 4%.
Meanwhile, second quarter traffic declined by 2.1% to 1.3bn cargo tonne km (CTK), volumes were down 1.4% to 214,000 tonnes, yield, at a constant exchange rate, was down by around 3% and load factor was down by around 2 points as capacity increased by 2.1%.
Izzard said the figures were “a good result considering the market conditions” which were helped by new routes added; Kuala Lumpur in May and Havana in June, as well as the partnership programme with Qatar.
Much of the discussion around the results centred on IAG Cargo’s push towards its premium products, where the airline group feels it can offset declines in the general market and move away from the low margin commoditised area of the industry.
“We are up at 106 constant climate stations now, certified and quality assured, we have one of the broadest  network offerings out there and we have a strong reputation for quality on that network,” said Izzard.
“If you just stay in general freight you will just sit there with a tough market, so you need to offer something with a better standard and breadth.
“This is part of our strategy and we will keep focus on it, relentlessly driving to restructure the business.”
One part major part of the strategy refresh was a move to expand partnerships and just last week it announced a new tie-up with Finnair on a Luton-Helsinki freighter operation.
Although, Gunning said there were no new partnerships to announce at the moment, IAG Cargo would continue to explore options.
“We are very pleased with the Finnair programme and looking forward to seeing how that helps both businesses.
“It’s another great example of connecting networks in an asset light sort of way so we will definitely be striving for more partnerships but the nature of them will vary on the circumstances.”