Airlines venture abroad (page 2)

-- Logistics Management, 2/1/2005

Page 2 of 3

Similarly, United Airlines has cut its number of aircraft and downsized equipment on secondary domestic runs but is strengthening international routes, which will soon account for more than 40 percent of the airline's total capacity. Recently, United launched non-stop daily service from Shanghai to Chicago, giving Midwest shippers more access to that booming market.

While United shelved plans to operate its own freighters for the time being, its focus now is on quality improvements and offering upper-deck capacity to forwarders and other airlines via interline agreements.

Having survived bankruptcy, Air Canada restructured its business, with Air Canada Cargo becoming a wholly owned subsidiary. That's helped the airline become more flexible in addressing shippers' needs. For example, Air Canada Cargo reconfigured its fleet from Boeing 747 combination aircraft capable of hauling 50 tons to leased MD-11 equipment that offers 80-ton payloads. The Canadian carrier has added freighter service from Toronto to Frankfurt five times weekly. "The entry of our service into the Frankfurt market represents a huge success story for us," says Vice President Claude Morin. Air Canada also increased service between Toronto and Hong Kong utilizing Airbus 340-500 series aircraft. "This aircraft can fly up to 18 hours nonstop and offers a significant payload of up to 15 tons," Morin notes.

European partnerships

European airlines are finding they can increase capacity by forging partnerships with carriers that have a stronghold in other markets. In September, for example, Lufthansa Cargo began marketing US Airways' freight capacity on flights from Europe to the United States. The airlines also will consolidate freight operations at one European location to enhance synergies and cost efficiencies.

Freighter or Passenger Aircraft?

Should you ship via freighter or passenger aircraft? There are pros and cons to both of them.

Operating concerns such as the following may tip the balance in favor of all-cargo services:

Outsized cargo that’s not compatible with passenger aircraft configurations
Volumes in excess of passenger aircraft capacity
Special markets served only on a charter basis
Schedule demands that conflict with passenger flight schedules.

Passenger carriers say they offer more customized distribution services than do all-cargo carriers. Where passenger airlines particularly shine is in their flight schedules, says Bernd Maresch, Swiss WorldCargo general manager. "All-freight carriers will never get the frequencies like we have," he says. "Our cut-off and delivery times are quicker, since we can only take 10 to 20 tons on our aircraft. A freighter that takes 120 tons takes longer to be loaded."

All-cargo carriers serve fewer destinations than passenger airlines, says Mike Castro of airfreight wholesaler Consolidators International. The downside, he says, is that cargo isn't a top priority for passenger airlines. "Cargo flown on passenger flights may be detained due to inspection, or it may be taken off a flight to accommodate passenger baggage," Castro warns.

Lufthansa is no stranger to increasing international capacity through partnerships. The carrier currently has an alliance with Singapore Cargo, JAL Cargo, and SAS and has bilateral partnerships with Air China, Lan Chile, Air New Zealand, Cathay Pacific, and South African Airlines. Lufthansa also has strengthened its relationship with DHL. "We are flying DHL's intercontinental freight to the United States and Asia, and they are flying our freight within Europe," says Nils Haupt, Lufthansa Cargo general manager.

To gain a deeper foothold in the booming Asian market, Lufthansa Cargo co-founded a new airline in China called Jade Cargo International, together with Shenzhen Airlines and DEG, a project-investment firm. Although China has been awarding more traffic rights to foreign airlines, it's not easy to acquire those privileges. Lufthansa's investment, therefore, will stand it in good stead as Europe-Asia traffic volume takes off. "With traffic rights always being an issue, this [partnership] helps European companies obtain service to Asia," Haupt notes.

Swiss WorldCargo, which along with its parent airline had briefly shut down due to financial problems, has restructured and is also taking the partnership route to provide service in fast-growing markets. The carrier recently inked a wet-lease (aircraft plus crew) charter agreement with Turkey's MNG Airlines, allowing Swiss to offer capacity to Karachi, Pakistan, and Istanbul.

British Airways World Cargo (BAWC) has taken many widebody aircraft out of service within Europe, but the carrier has picked up the slack through a joint-venture agreement with DHL to utilize space on its B-757 aircraft. The London-based airline, meanwhile, is putting its money into expanding its freighter network. "Four freighters are wet-leased to provide a flexible and comprehensive service to customers," says Keith Packer, senior vice president, commercial. "This represents a doubling of our freighter capacity in the past five years." In Europe as in the United States, China is a magnet for airlines looking to expand internationally: Earlier this year, BAWC established the U.K.'s first direct freighter service to Shanghai.

Which Way for Rates?

With so many airlines adding international capacity, shippers are benefiting from more service options and greater competition between carriers.

More competition leads to lower rates, and that means lower yields for already struggling airlines. Meanwhile, fuel costs have been on the rise, further cutting into profits and yields. That's of particular concern to operators of freighter aircraft. MergeGlobal's Brian Clancy questions how they'll manage the collision between falling yields and rising costs. "Full freighters are an inherently more expensive form of capacity than the belly compartments of passenger aircraft," he says. In other words, freighter operators can't afford to go as low on rates as passenger carriers can. "There is a pricing reality that must be adhered to when considering lower-deck capacity on passenger flights versus capacity on freighters," says Sal Sanfilippo, Air New Zealand's North American cargo director. Continued...

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