Reports | Air Cargo is Critical (Part 2)

The future

Even with passenger aircraft being used temporarily as freighters, there still will be a severe cargo capacity shortage and air freight rates are likely to remain high for some time to come. “Passenger freighters” are inefficient, cannot accommodate palletized cargo, and are a temporary solution at best.  

The global airline industry is widely projected to shrink in the long term following the end of the COVID-19 crisis, as the economic crisis continues to exact a toll on passenger demand.  As passenger aircraft are permanently parked and smaller-gauge, less cargo-friendly aircraft such as the A321LR replace passenger widebodies on some intercontinental routes, air cargo capacity will remain tight worldwide.  A number of the retired passenger widebodies may ultimately be converted into full freighters with main deck cargo doors and reinforced floors, but it will be a long time before a new cargo demand/capacity equilibrium is reached and freight rates decline to the levels they were at before the crisis.

Cargo will continue to represent a much larger share of airline revenue for years to come. The more cargo revenue that passenger airlines can generate, the more they will be able to keep passenger fares at a reasonable level and attract back passenger traffic. 

Implications and recommendations for airlines and airports 

It is clear that going forward, airlines should prioritize cargo in their overall planning.

· Airlines should treat air cargo as a core business.  Cargo contribution should no longer be an afterthought in airline network and fleet planning, but rather a critical part of route decision making, alliance planning, aircraft selection and overall strategic plans and investment decisions.

In some cases, high yield cargo demand could – and should – take the lead in justifying some passenger aircraft deployment decisions.  Cargo revenue might also help justify reintroducing the largest widebodies into service – e.g. 777’s – when passenger volumes otherwise would be insufficient to justify more than mid-size widebodies.

 · In line with their increased strategic importance, air cargo organizations should be led by industry career professionals who understand best practices in cargo strategy, commercial and operations, to realize air cargo’s full potential.

 · Over the last 10-15 years, combination carriers have largely divested their freighters in favor of belly capacity as highly cargo-capable passenger widebodies such as the 777-300ER, 787 and A350 were introduced into service.  However, with belly capacity significantly constrained for the foreseeable future, it may be time for passenger airlines to consider reintroducing freighters to complement and support their passenger aircraft networks.

If reintroduced by manufacturers and conversion providers, Combi aircraft, which can carry palletized cargo on a portion of a passenger aircraft’s main deck, also should be considered as useful additions to airlines’ passenger fleets. 

 · Air cargo managements should be challenged to provide air cargo products that meet the new realities of consumer and industrial demand:  for quality, speed and transparency throughout.  Airlines should evaluate ways that they can expand their cargo service offering to maximize revenue generation, including specialized products and services tailored to specific end customer segments and commodity types.  Airlines should consider introducing add-on services, such as specialized handling, enhanced end-to-end tracking and tracing and last-mile delivery, that have heretofore typically been the province of forwarders. 

 · E-commerce demand has skyrocketed during the COVID-19 crisis, with year-over-year online sales growing 20% globally in the first quarter of 2020, compared to only 12% in Q1 2019.¹²  There is little doubt that e-commerce volumes will continue to grow rapidly well after the COVID-19 crisis ends, as consumers have become more comfortable with the online buying experience.   

To date, the primary air logistics beneficiaries of the e-commerce boom have been the integrated express carriers (e.g., FedEx, UPS, DHL) and e-commerce retailers’ own in-house air operations (e.g. Amazon Air).  Passenger airlines now have an important opportunity to penetrate this market.  To do so effectively, however, they will need to offer specialized processing services tailored to e-commerce, including enhanced tracking and tracing, rapid clearance, last-mile delivery, and -- above all else -- speed and reliability in delivery from end to end.  

· Cargo revenue is as much a function of value of the cargo, as volume.  Passenger airlines have an opportunity to attract the highest value commodities, which can generate significantly greater revenue, by focusing on the quality of the services offered.  Areas of focus should include: 

o State-of-the-art facilities, with enhanced automation and specialized handling capabilities for the highest value commodities (“verticals”).

o Enhanced information systems, permitting end-to-end tracking of cargo location, condition monitoring, advance provision of customs documentation, and other capabilities. 

o Strategic alliances with ground handling agents (GHAs) and airports that support airlines’ drive for efficiency and quality, to enable cost efficiencies and revenue enhancement for all. 

· It is possible that there will be a wave of airline consolidation, M&A and investment activity as a consequence of this crisis, as airlines and other investors in stronger capital positions acquire the distressed assets of weak and failed airlines.  Acquiring parties should carefully weigh the cargo revenue generating potential and synergies in their evaluation of potential investments, in addition to passenger revenue generation.  With major investments, a complete repositioning will most likely be required.

Airports also must recognize that cargo will represent a much more important revenue opportunity going forward.  Airports would be well served to align their approach to air cargo – strategy, air service marketing, selection of handling service providers, IT, and facility and infrastructure development -- with the needs and requirements of the airlines and the economic enterprises in their catchment areas.  

As a priority, airports should work to ensure that cargo is handled and processed with the highest level of quality, transparency, speed and efficiency that the markets demand, and tailored to the specific types of commodities that are produced or consumed within the airport’s catchment area.  Only through a synergistic approach between airports, airlines, GHAs and local authorities can airports assist airlines to return to a profitable and viable business case. 

Conclusion 

There is no doubt that the times are extremely challenging for the global airline industry, but cargo offers one key area of resiliency, now and in the future. Whereas passenger demand remains highly uncertain, cargo can serve as a potential bulwark to help passenger airlines relaunch and build back their services. However, airline and airport managements are well advised to treat cargo as the strategic asset that it is, to fully realize the revenue benefits that cargo has to offer.

About the author

Mark Diamond

Vice President, Strategic Aviation Solutions International – USA (SASI USA)