Air Cargo: Challenges Ahead

China market confuses picture of the future


“This is the first-ever non-stop service between South America and the Middle East,” says Emirates Divisional Senior Vice President of Cargo Ram Menen.

The service will offer up to 18 tonnes of cargo capacity and give Emirates a foothold in all four BRIC (Brazil, Russia, India, and China) economies. In December, Emirates will also commence its second gateway in the United States with non-stop service between Dubai and Houston. Emirates will fly its new Boeing 777-200LR on the route, offering up to 18 tonnes of cargo capacity.

The good news for many carriers is that performance on the North Atlantic is strong. Carriers are experiencing substantial growth both eastbound and westbound across the Atlantic. “Our Atlantic volume year over year is up close to 16 percent with very little new capacity,” Shah exclaims.

The U.S. domestic freight market, however, presents a mixed bag of results. UA reports its business has picked up, although volumes are still slightly down system wide. United operates in a number of strong transcontinental markets such as Chicago and critical West Coast cities.

Southwest Airlines, which recently entered the domestic cargo business, is taking delivery of 37 new Boeing 737-700 aircraft in 2007. By year’s end its fleet will total 520 aircraft, a chief milestone for a small startup airline that began with three aircraft in 1971. This August, Southwest will begin re-service to San Francisco, its 64th city.

“Southwest Cargo customers depend on Southwest adding new markets, flight schedules, and aircraft capacity to complement and extend their logistic supply-chain reach and value-added services to their customer base,” reports Southwest Director of Cargo Marketing Dave Hinderland.

Oil Fueling Mode Mix

Yields may be a major issue, but of bigger concern is the high cost of oil and its impact on the airline industry as a whole. Simply put, every additional $1 per barrel of oil costs an airline roughly $50 million. For Fiscal Year 2006/2007, BA’s fuel bill totaled approximately $3.82 billion. “We expect this to grow further in the coming year,” BAWC’s Cobley says.

As in other modes, surcharges have helped to cover the costs. In June, for example, United Airlines began charging customers a surcharge of 55 cents a kilo, a nickel off its historic highs. But carriers find these charges very painful as do their customers who are weighing every nickel and dime of their logistics costs.

“For every nickel you go up, other modes of transportation, such as ocean, become more attractive,” Shah says. This is especially true for Pacific routes. Consequently, increasing amounts of products that traditionally go by air are now being transported by sea.

Another factor turning consigners to ocean freight is exchange rates associated with the weak U.S. dollar. For many products, cost competition is steep and reducing logistics costs is a major cost reduction strategy.

“This is not a temporary trend, but one that is expected to last for a while,” says Korean Air’s Battaglini.

Still, air cargo offers the perfect solution for time sensitive or specialist consignments. “This is why air cargo still gets the lions share of valuable secure consignments,” states Cobley. “On some occasions we combine the benefits of sea and air freight for our customers by collecting consignments from container ships and then transport them to their final destination by air. This type of business is growing out of the Middle East.”

Service Improvements

What keeps airlines aloft during these turbulent times are their ever evolving service offerings. While yields have generally been declining across the industry over the last year, BAWC’s overall yields for Fiscal Year 2006/2007 were up 4.6 percent. “This growth in yield can be primarily attributed to the success of our premium product offering, launched in 2006,” Cobley comments.

That product is the $30 million premium handling facility BAWC opened in September to handle Constant Climate, Prioritize, and airmail products. Along with new facilities and products, BAWC also made significant investments to its network. In January 2007, BAWC increased the number of its short-haul freighter services by 40 percent following a multi-million dollar investment to deliver 45 weekly wide-body services across 11 European destinations.

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