In February 2009, the International Air Transport Alliance (IATA) revealed that freight volumes were a staggering 22.1% below 2008 levels. As the third consecutive month at more than 20% below the previous year, such statistics mark a defining low period for the air cargo industry, which began showing serious signs of decline as a result of the global financial downturn around the third and fourth quarter of 2008.
IATA’s director general and CEO Giovanni Bisignani has described the freight market as being in a ‘crisis’ while one industry insider even labelled it as a ‘historic downturn like the market has never seen before’. At the same time, current figures are widely considered to represent the rock bottom of the decline and it is hoped that from now on in, it is simply a case of the market recovering.
Even still, a huge challenge lies ahead for air cargo carriers, many of which have been forced to drastically reduce capacities over the last few months. Such is the state of the industry in Europe, that in January 2009, Alitalia Airlines was forced to ground its five MD-11 freighters and sell all its cargo assets. But what measures can be taken during this time of adversity and what does the future hold for the air cargo industry?
Cargolux’s cargo concerns
Luxembourg-based Cargolux Airlines International is Europe’s largest all-cargo carrier, which currently operates 16 B747-400 freighters and has more than 85 offices in over 50 countries. While the airfreight market remained below 22% in February, Cargolux experienced just a 3% drop compared to figures last year.
Cargolux’s head of marketing and special projects Sebastian Scholte says he believes this is due to several factors.
“The first two months of 2009 have been very difficult for us, but by being flexible and having a good reputation as a reliable partner for our forwarders, we have been able to outperform the market,” Scholte says.
“It is very difficult to predict how the market is going to develop in the coming months. We are prepared to take out more capacity if needed but in the meantime we will operate flights as long as they are cash positive.”
In the second half of last year, Cargolux extended its network to encompass Cairo in Egypt, Brazziville in the Republic of Congo and Tbilisi in Georgia. Such an exploration of niche markets was one of the ways Cargolux set about counterattacking the deteriorating global industry conditions. “Unlike many passenger-driven airlines, we are very quick and flexible to react to changing market conditions,” Scholte says.
The air cargo operator also benefited from the declining situation in Europe – particularly by expanding its operations in Italy. Introducing a new service from Milan Malpensa Airport to Chicago’s O’Hare International Airport and New York’s John F Kennedy International Airport, Cargolux also added a road feeder service from Luxemburg airport to Milan airport and back to better serve the exports and imports needs in Italy.
Yet, cutbacks were also made. The airfreight carrier was forced to close its office at San Francisco International Airport last year and its main hub in Luxemburg experienced a reduction in capacities. “Luxemburg has been affected by capacity reductions, but mainly because of reduced flights from competitors or even because some other airlines are no longer serving the airport. Obviously, Cargolux has also reduced capacity, but a lot less than our main competitors – overall we are operating at about 5% lower capacity than last year,” Scholte says.
In spite of the current climate, Cargolux’s expansion plans for the future remain unchanged. It is still committed to the delivery of 13 B747-8s – the next generation of Boeing freighters of which it is the launch customer. Furthermore, Cargolux has made preliminary plans develop its position in Milan.
“For us it is not only important to see how demand develops but also how it will affect capacity. The unprecedented huge declines in volumes have not been caught up by the necessary capacity reductions yet. However, we foresee that in the coming months demand will continue to decline at about 20% [compared to last year], but not more,” Scholte says.
“This summer will most likely still decline but at a lesser pace and around October time, we predict that growth will be about 0% as last year’s winter was already down a lot. I also foresee that capacity will continue to be cut and that towards the end of this year, capacity will be cut more than demand.”
Lufthansa’s freight fears
On the surface, Lufthansa Cargo, which serves over 300 destinations in 90 countries through a combination of its fleet of freighters and the belly capacities on Lufthansa passenger aircraft, appeared largely unaffected by the financial downturn last year. The German airfreight operator achieved it’s second-best-ever results during 2008, having seen operating profits rise by 20.9% to €164m.
According to Lufthansa Cargo’s director of communications Nils Haupt such results were still hampered by the market downturn.
“We actually had a difficult fourth quarter in 2008 so the results would have been even better had it not been for that late steep decline. The fall in tonnage, however, became evident as early as the third quarter of last year,” Haupt says.
“I think one of the reasons we achieved such successful results was down to the fact we were able to compensate heavily with the decreasing fuel costs towards the end of the year. We have also been successful in bringing down unit costs due to good capacity management.”
For the global air cargo industry, capacity management remains a key component for fighting decreasing freight volumes. Taking out capacities – i.e. keeping freighters grounded – is fast becoming a common measure for all air cargo operators. For companies such as Lufthansa Cargo which owns its entire fleet of MD11s, it is more feasible to remove freighters from scheduled operation without facing additional leasing costs.
Currently, Lufthansa Cargo has removed 20% of its capacity – with one aircraft grounded in Leipzig and a further two out of action at its main hub in Frankfurt. “If the industry wants to survive, it has to put out capacity. If it doesn’t then load factors will go down, costs will go up and the pressure on yields will become heavy. The more capacity you have in a decreasing market, the more rates will go down,” Haupt says.
Like the rest of the industry, Lufthansa Cargo has experienced an awkward first few months of 2009 – after seeing a combined 25.4% decrease in tonnage throughout January and February. Yet at the same time, it also strengthened its collaboration with Asian carrier Jade Cargo by taking over sales responsibilities for outbound capacities from Europe and Asia.
Also confirming Lufthansa Cargo’s focus on the Asian market is the summer launch of Aerologic – a joint venture between DHL Express and Lufthansa Cargo.
The new airfreight carrier will have a fleet of eight new Boeing 777 aircraft and will be based at Leipzig / Halle Airport, where it will serve Asian destinations such as Singapore, Bangkok, Dubai and Bombay.
Similar to Cargolux, Lufthansa Cargo has also been eyeing up the vacancy left by Alitalia Airlines in the Italian market. “Times of crisis offer opportunities,” Haupt says. “This is why in February we began two weekly services from Milan Malpensa Airport to New York and Chicago. We also started a new service from Frankfurt to Malta.”
“From our point of view, during this period of decline a cargo operator must be flexible and on the constant look out for market opportunities. The industry is suffering and you have to look at where some operators are leaving a market or showing weakness so that their weaknesses become your strength.”