Air Cargo Slowdown Puts Squeeze on Specialist Carriers
Dedicated air-freight operators are struggling to remain viable as a sluggish economy undermines their ability to compete with the cargo space on offer from carriers focused on the more buoyant passenger market.
Companies such as Cargolux Airlines International SA, Europe’s top freight-only carrier, are reviewing their business models, while Deutsche Lufthansa AG (LHA), which runs a cargo-only unit alongside its passenger routes, has idled planes.
The utilization of freighter aircraft has slumped below 42 percent as capacity far outstrips demand, the International Air Transport Association said yesterday. That’s forcing cargo specialists to target marginal markets where they don’t have to compete with hold space available from passenger operators.
“For the pure freight guys it is going to be tough,” Niko Herrmann, an aviation specialist at Oliver Wyman in Zurich, said in an interview. “Carriers may be forced to seek partnerships and consolidate to gain scale, or to exit the market.”
Recent examples of partnerships prompted by tougher markets include a linkup between AirBridgeCargo Airlines, the scheduled freight division of Russian heavy-lift specialist Volga-Dnepr Airlines, and Air Cargo Germany GmbH, Herrman said.
Forecasts from IATA, which represents 240 airlines, suggest there’s little chance of an earnings rebound in the $70 billion market any time soon, with cargo yields, a measure of prices, expected to drop 2 percent this year and 1.5 percent in 2013.
As the economic crisis drags into a fifth year, planes are flying with only 44 percent of cargo space taken up, including belly capacity on passenger jets, with the market essentially “stagnant,” IATA Chief Executive Officer Tony Tyler said.
Volumes of high-value goods, a staple of international air freight, have declined as people rein in spending, said Rafael Echevarne, economics director at Airports Council International.
While overall freight demand remains flat, air shipments have contracted by 1.2 percent this year, according to ACI. That’s been reflected at major hubs, with a 13.1 percent slump at Anchorage in Alaska, a base for FedEx Corp. (FDX) and United Parcel Service Inc. (UPS), the two biggest cargo carriers with volumes of 6.87 million tons and 4.64 million tons respectively last year.
Incheon airport, the main hub for Korean Air Lines Co. (003490), had a 1.9 percent fall. The carrier ranks fourth worldwide by cargo tonnage and second among companies that are also passenger operators, behind Cologne, Germany-based Lufthansa.
Even where demand for high-end products remains robust, manufacturers such as Apple Inc. (AAPL) are still switching to less costly surface transport for some shipments of items such as iPhones and iPads, making customers wait, Wyman’s Herrmann said.
Cargo-only operators have responded by targeting “whole new product flows” in markets such as Turkey, Africa and South America, Bill Flynn, CEO of Atlas Air Worldwide Holdings Inc. (AAWW), told investors last month. Purchase, New York-based Atlas is the world’s largest operator of Boeing Co. (BA) 747 freighters.
Herrmann said that while adding new markets and being “very smart” about optimizing route networks can aid independent carriers, pockets of growth tend to be quickly flooded with capacity, driving down prices and profitability.
That’s fostering mergers, he said, citing the 49 percent stake in Frankfurt Hahn-airport-based Air Cargo Germany taken by AirBridgeCargo this year. Following the deal ACG’s fleet of four 747 freighters grew to six with the transfer of two jets from its Russian investor, according to a statement issued Sept. 11.
Fresh opportunities are likely to become harder to find as IATA’s projection of 5.3 percent compound annual growth in travel encourages carriers to extend record aircraft orders.
Though spurred by passenger demand, models such as Airbus SAS’s (EAD) A350 and the Boeing 787, as well as older 777s and A330s, offer ample hold space that will deepen the cargo-capacity glut.
“These aircraft are cargo-friendly in terms of available belly-hold capacity per seat,” said Marco Bloemen, an aviation analyst at Seabury Group. “With the number expected, capacity augmentation will be significant for four years at least.”
Boeing’s assembly lines are churning out 777s at a record pace of 8.3 a month and are due to produce 10 787s over the same period. Airbus is likewise ramping up A330 output to 10 a month, also a record, and may go to 11 on the strength of China orders.
Dubai-based Emirates, the No. 1 operator of both the 777 and Airbus A380 superjumbo, may overtake Lufthansa as the world’s biggest cargo-carrying passenger airline next year on the strength of its passenger-plane orders alone.
Emirates will already offer 4.1 percent capacity than Lufthansa this year, excluding the latter’s Swiss unit, Andreas Otto, the German company’s head of cargo sales, said this month.
Flagging demand and a night-flight ban in Frankfurt led sales at the Lufthansa Cargo business to slump 9.7 percent in the first nine months, with operating profit tumbling 62 percent to 66 million euros ($86 million). The carrier has responded by grounding capacity equal to two of its Boeing MD-11 freighters.
Independents are also feeling the pinch. Luxembourg-based Cargolux has initiated a review that may include job cuts, and Qatar Airways Ltd. is seeking to sell a 35 percent holding following a spat with the duchy’s government over strategy.
Qatar Air, the second-biggest Gulf carrier, bought its stake only last year as part of a push to become a major freight operator by 2015. Cargolux, founded in 1970 and the first operator of Boeing’s 747-8 freighter, lost $18 million in 2011 and has been unprofitable in three of the past four years.
Even though air-cargo demand is expected to increase 1.4 percent next year, that will provide little boost to an industry that has suffered a 2 percent decline in 2012, IATA’s Tyler said. The market has lost about half a decade’s growth during the slump, with volumes back at 2007 levels, IATA figures show.
In 2013, Atlas’s Flynn sees a “slight contraction” versus 2012, with demand sluggish in the first half and improving in the second, though like IATA, he expects a strong revival in the longer term, buoyed by Asian growth. The question is whether today’s cargo specialists will be around the reap the benefits.
To contact the reporter on this story: Robert Wall in London at email@example.com