The financial news regarding the airlines is grim. Bankruptcy filings, drastic cost cutting, and financial instability, particularly in the U.S. domestic market, has reached a critical stage, with large passenger airlines seeing their profits swept away by low-cost competitors and escalating fuel prices. And while consumers worry about what will become of their frequent-flyer miles, shippers are wondering what impact bankruptcies or consolidations might have on their freight.

Shippers don't wish to see any airline go into bankruptcy because competition ensures adequate capacity and lower rates. But the fate of their domestic cargo business may not be of equal concern to U.S.-based carriers.

That's because most U.S. passenger airlines—US Airways, United, American, and others—derive only about five percent of their revenues from freight flown on domestic routes. One reason is that they mostly operate narrowbody aircraft that aren't capable of carrying large volumes of cargo.

That situation isn't likely to change soon. Passenger carriers are continuing to scale back their domestic services, and that's affecting the size of the aircraft being used on certain routes. "Many airlines are discontinuing some of their [Boeing] 737, [Airbus] A329, and [Boeing] 757 aircraft service and are calling on support from regional airline partners that can provide turbo jet and regional jet service," says Robert Dahl of CargoFacts, a Seattle-based consultancy.

Those decisions reflect conditions on the passenger side of the business, but developments in the domestic cargo market have further encouraged capacity reductions. After the terrorist attacks of 9/11, most domestic freight was diverted from air to ground service. Even now, much of that business remains on the ground.

Add to that the fact that the domestic airfreight market is dominated by integrated carriers such as UPS and FedEx, plus a few all-cargo operators like Kitty Hawk and BAX Global, and it's apparent why there's little incentive for U.S. passenger airlines to increase their investments in domestic air cargo.

The international side of the cargo business is a different story. International cargo is not only earning more attention in airlines' front offices, but the availability of services and capacity is growing.

International traffic is doing so well, in fact, that the International Air Transport Association (IATA) estimates that worldwide airfreight volume in 2004 was up 10 percent compared to 2003. "It looks like we will finish 2004 with the strongest traffic rebound that the industry has seen since the 1991 recovery from the effects of the Gulf War," says Giovanni Bisignani, IATA's director general and CEO.

While that growth is largely related to a recovery from the impact of the SARS scare on passenger traffic, the worldwide economic expansion is a contributing factor. Accordingly, IATA projects a 6-percent increase in freight growth through 2008, driven in large part by activity in the Asia-Pacific and Middle East regions.

Given that forecast, it's no wonder passenger carriers see freight as a golden opportunity to make more money on their international flights—and why more of them are making cargo an integral part of their growth strategies. "Carriers offering international service now take the consequences of freight into consideration in expanding their frequencies and/or adding routes," says Brian Clancy, principal at industry analysts MergeGlobal Inc. in Arlington, Va.

Cargo has become such a focus for expansion that some airlines are giving that side of the business a place at the boardroom table. United Cargo, the freight arm of United Airlines, for example, now holds its own seat at parent company UAL Corp.'s board meetings.

US Airways also is raising cargo's status and is utilizing Airbus A330-300 aircraft—capable of hauling approximately 45,000 pounds of cargo—for some international services. By comparison, the airline's smallest domestic airplanes only handle 2,000 pounds.

US Airways has been adding service to Europe for several years, and recently added five new Caribbean destinations. "We are also making a concerted entry into Central America," says Tony LeFebvre, managing director, US Airways Cargo. "As a result, we are forecasting an improvement in cargo for 2005 and do not think the business will shrink. In fact, it offers us a great revenue stream." Continued...

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