Say farewell to freighters

12 / 06 / 2012

THESE are miserable times for freighter operators, with cargo flows out of Asia weak and doubts over the European economy. By a cruel irony, this is just the moment when shiny new 747-8, 777 and A330 freighters have started rolling off the production lines.

When challenged about the wisdom of their investment, carriers that have spent money on these new, more fuel-efficient aircraft naturally point to the long-term benefits they will bring. The market may be weak now, they say, but in a year or two our investment will pay dividends.

But will it? What if, because shippers have changed their behaviour, we are entering a period of permanently low yields so that filling large freighters at a profit is no longer possible?

In the Air Cargo News interview in the 14 May issue, Bruno Sidler of CEVA Logistics saw the solution to this problem as more collaborative planning between shippers, for­­warders and airlines. But Neel Shah (above), senior vice-president and chief cargo officer for Delta, has a more brutal prescription.

He reckons that combination carriers – those with both freighter and passenger fleets – should simply get out of the intercontinental freighter business altogether. “I don’t think they can ever generate enough return to justify the investment,” he says. “Sure there are some niche operators – the likes of Cargolux and Atlas – who can make it work, as can the integrators. But for combination carriers, intercontinental freighters are completely untenable.”

‘Well, he would say that, wouldn’t he?’ you might think, given that it was Shah who got rid of Northwest Airlines’ once proud transpacific 747-200F fleet in the 2008/9 downturn, a move he describes to this day as “the best decision I ever made”. Long before that, as early as the mid-1980s, US carriers led the world in ditching their freighter fleets and focusing on belly capacity.

But Shah insists there is something more fundamental at work this time – that shippers have got smarter and, through the internet, now have far more access to information. “They are incredibly savvy about what is happening on the capacity side. When they see a change, they want an instant impact on the rate,” he says.
“It is [the same] in any industry. Through the internet, the proliferation of data is incredible. If you are buying a car or an electrical appliance, today you know the full economics. Every step of the supply chain is visible to everyone. Twenty years ago, people had no idea what margins a dealer was making on a car; now they know every detail, and it is the same in air freight.”

Shah also reckons companies in general are much smarter about log­­­­­­­istics than they were 20 years ago and this leads him to conclude that yields on cargo are never going to be enough to support long-haul freighters. “We are just not driving the margins we did in the past. I suspect [margins] for most freighter operators have worsened significantly.”

He says that the decision of many airlines to buy new freighters, while understandable a few years ago, was the wrong one. “Fuel costs went up and everyone felt they had to get into new, more fuel-efficient aircraft, but then the business changed. We are now in a place where markets change overnight and yields go up and down in seconds. It is really tough out there.”

Does that mean there is no room for freighter operators at all? Shah does make a couple of exceptions. The first is the specialist niche operator – carriers such as Cargolux. “They do nothing else but freighters, so they are geared up for it. They have flexible labour contracts, so they can change their routes from one moment to the next. They can fly to markets other carriers cannot, such as Africa.

“The integrators will also still thrive because they have small parcels – high-yield and also balanced traffic. But the heavy freight business can turn on a dime – yields can fall 50 per cent in a few months. To be a freighter operator you have to have the flexibility to respond to that, which by definition combination carriers do not.”

Shah’s other ex­­­cep­­­tion, perhaps sur­­­prisingly, is regional freighters, of which he is very keen on the A330F and 767F. “Both of these are fairly viable,” he says. “Their operating costs and cost of ownership are low enough that you can have less utilisation, and you can also fit them in with a passenger fleet since many carriers fly them on the passenger side.”

He sees such regional freighters as fitting in with the hub and spoke models of belly operators – for example flying flowers from Bogota (Colombia) into a US carrier’s main passenger hub. “Bogota doesn’t want to send 70 (metric) tonnes of flowers to the same place: it wants to send five tonnes to New York, five to Los Angeles (both US) and so on. In such a market an A330 or 767 makes sense. With a long-haul freighter you would be having to send 100 tonnes of flowers to Tokyo (Japan).”

Working within a belly carrier has given Shah some other useful perspectives on the cargo business. One lesson that freighter operators need to learn from the passenger side, he says, is capacity discipline.

“I think US carriers now understand this, but I don’t think a lot of international carriers do,” he says. Though he admits that Middle Eastern carriers have continued adding passenger capacity, he says US and European carriers have actually trimmed theirs slightly in the showdown. He attributes poor yields on
the transatlantic to Asian freighter operators opting for round-the-world flights rather than returning across the Pacific. “There is way too much capacity for the demand,” he says.

Lacking freighter capacity, Delta has been able to get good returns out of unlikely markets in the past year, one example being Asia-US. “Our transpacific teams have been very effective at filling bellies,” says Shah. “We have not got the pressure to fill 120 tonnes, and that gives us an advantage. We have 35 tonnes out of Shanghai (China) each day, and we can take the opportunities that fit in nicely with our fleet. We are actually ahead of plan on the transpacific, and I didn’t plan for a slowdown out of China.”

He certainly is not shedding any tears for the few lines of outsize business that as a pure belly carrier Delta can no longer access. “I am focused on being profitable. It would be irresponsible of me to bring in freighters, because there is no way I can generate the returns to justify them, and I don’t think any carrier can do that, particularly over the lifetime of these assets.”

By contrast, the belly cargo model provides airlines with a nicely balanced portfolio of risks and opportunities. “We have business class, economy, baggage, cargo. All contribute to making the flight worthwhile, and no one of them by itself can dramatically impact the success or failure of the flight. That is a nice place to be – diversified. That is what we are looking for.”

But isn’t this all just downturn talk? When the global economy bounces back, as presumably it one day must, won’t all those 747-8 freighter operators be in a sweet spot once more? Shah clearly does not think so.

“No, I think this is the new normal,” he says. “I think we will see a lot of volatility and instability in this business. The European carriers are struggling with their freigh­ter fleets again, just two years after they last had crisis talks. You can’t run a business like that.”