Market Overview

Airline Cargo Divisions Finally Gain A Little R-E-S-P-E-C-T

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Airline Cargo Divisions Finally Gain A Little R-E-S-P-E-C-T

Air cargo is the cash cow for many passenger airlines during the coronavirus pandemic, an unusual result of decimated travel demand forcing passenger networks to shut down and carriers repurposing airplanes for cargo-only service. 

Other than cargo and loyalty programs, airline revenues are extremely weak as the industry racks up tens of billions of dollars in losses.

Air France-KLM (OTC: AFLYY), Grupo Aeromexico (OTC: GRPAQ), IAG Group/British Airways and Korean Air significantly exceeded last year's cargo revenues in the second quarter. Air Canada (OTC: ACDVF) cargo revenue surpassed passenger revenue for the first time ever. And at United Airlines Holdings, Inc. (NASDAQ: UAL) cargo sales jumped by more than a third and represented more than a quarter of the company's total revenue.

Prior to the crisis, cargo revenues represented about 12% of total airline revenues, a share that declined the past decade and is under 5% for mainline U.S. carriers. This year, the International Air Transport Association (IATA) estimates cargo revenue worldwide will reach a near-record and more than double to 26% of the industry's total revenue.

That performance has led to new found respect for cargo divisions in the corporate suite after historically being viewed as a byproduct of passenger operations. And they will continue to play an outsize role in operations while passenger business rebuilds. But don't expect airlines to buy all-cargo planes or rebalance their strategic mix, airfreight analysts and airline industry officials say. 

The real money still is in flying people.

"If cargo isn't on the radar screen of every CEO, it is going to be as they figure out how their airline looks post-crisis. We know the environment is going to be really different. But with all of that adversity can come opportunity," said Neel Jones Shah, global head of airfreight at Flexport, a third-party cross-border logistics provider. "Cargo is going to have a bigger seat at the table and be more involved in network planning decisions, particularly at belly-only carriers."

That will be particularly true in the next couple of years as airlines decide which grounded routes to restart, largely based on whether cargo can make them profitable, airfreight executives said.

International passenger demand is 88% below last year's levels and will be slow to improve compared to domestic travel, according to industry analysts. Meanwhile, worldwide airfreight volumes are expected to rebound to 95% of pre-COVID levels in 2021 as the global economy improves, the IATA estimates. 

At United Airlines, which is operating about 1,100 cargo-only flights per month, international cargo serves as a base on which it can add passengers in key markets when it makes financial sense, United Cargo President Jan Krems said in an interview.

"Instead of flying nothing at all and then starting to fly with 20 or 30 passengers" the airline can build off its cargo network. "In the past that would be the other way around," he said.

United has not removed seats from any planes to add space for more cargo, as some airlines have done, relying instead on its traditional cargo hold and sometimes securing boxes on passenger seats. Krems, a veteran air cargo executive, has had more of a voice during six years at United than many of his colleagues at other airlines.

Cargo will no longer play second fiddle in operational decisions, experts agree. Jones Shah, a former cargo chief at Delta Air Lines, Inc. (NYSE: DAL), said cargo volumes and revenue will determine which cities get service first as airlines reopen their passenger networks.

"It's going to be potentially the tail wagging the dog a little bit in terms of how operations are restarted and which routes get higher priority," he said. "Because at the end of the day, cargo is going to be a super important part of maintaining positive cash flow as operations start back."

That's already the case at Air Canada and Swiss International Air Lines. 

Air Canada is operating flights to Hong Kong despite low passenger demand because interest in cargo is strong in that market, CEO Calin Rovinescu said during the company's quarterly earnings call with analysts July 31. "You have a series of completely different drivers for establishing what we're trying to do now."

SWISS's reintroduction of long-haul passenger service to Boston, Johannesburg and Dubai is made possible by high demand for cargo transportation, spokesman Marco Lipp said. 

International airlines generally have placed greater emphasis on cargo because they focus on long-haul, cross-border business, whereas U.S. carriers tend to think of domestic travel as their main market. And cargo divisions at true combination carriers such as Lufthansa, Cathay Pacific and Korean have long occupied an important place in the organizational hierarchy because they operate freighter fleets too. 

Cargo revenues at United and other airlines sharply increased despite a large drop in volume because scarcity has pushed cargo rates much higher. Passenger aircraft normally provide more than 50% of global cargo capacity. Early in the pandemic when there was panic buying of personal protective equipment from China, spot rates were as much as five times higher than during typical shipping peaks. 

That pricing power will determine how long cargo divisions maintain clout, said Jesse Cohen, a Chicago-based air cargo consultant who previously held sales management positions at United Cargo and Etihad Airways. 

"I do think cargo will be consulted more on route potential. As long as the rates stay good and demand stays high, cargo contribution should be good and that should give cargo more influence," he said.

"If we get back to whatever normal is, and rates fall with a more normal up-and-down range for air cargo, I can see cargo's contribution slipping over time. Long term, it will revert to where fewer cargo flights will make the difference. But I do think in the next several years, airline cargo departments will be consulted more for what they can do and whether we should fly a route, how we should fly it, and what equipment to use."

Freighter prospects

The recent attention on cargo doesn't mean airlines are interested in acquiring freighters or converting older 767s or 777s into freighters. 

Krems said freighters pose too much risk.

"To have dedicated freighter capacity is very scary because our world is so opportunistic" and volatile, he told FreightWaves. 

United's fleet of widebody aircraft are essentially mini-freighters, Krems said. A Boeing 777-300, for example, can haul [66,000 to 76,000 pounds] of freight. And, he added, shippers that use temperature-controlled, expedited or other premium products, like the frequency of scheduled passenger flights over irregular, or weekly service, available from all-cargo carriers. 

United charters freighters from Atlas Air Worldwide Holdings, Inc. (NASDAQ: AAWW), Deutsche Lufthansa AG (OTC: DLAKY) and other airlines to meet short-term needs, "but to own your own freighters is very dangerous if markets are going down," Krems said.

The airfreight capacity crunch would be much worse without airlines dedicating some idle aircraft to cargo service.

"I'm glad the airlines stepped out of their comfort zone" and began offering temporary passenger freighters for charter and scheduled service, Jones Shah said.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch. / Contact: ekulisch@freightwaves.com

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