Many passenger airlines are not getting the full potential out of their cargo businesses – particularly those that do not operate freighters. For these carriers cargo accounts for about 3% of total revenues, but ranges anywhere from next to nothing to as much as 10%. Some of this is due to hard factors like geographical footprint or type of capacity, but distribution network and the level of cargo expertise is also a key point of difference. Adding freighters can grow the cargo division’s contribution to company results but needs to be considered carefully as it can add a whole new level of risk.
Geographical footprint
Most non integrator cargo is carried in the bellies of passenger aircraft. And as such the addressable market for the cargo division is determined by the focus of the passenger network. Cargo generally doesn’t have a lot of voting power within the organisation. Non freighter operating carriers on average generate about 3% of their revenue with cargo, but there are big differences between carriers with some such as Sri Lankan, Vietnam Airways or Thai generated over 8% of their revenues from cargo.
Carriers that operated only narrowbody aircraft tend to generate only about 1% of total revenues from cargo, but again there are big differences. Carriers such as Air Arabia or a number of Indian carriers generate in excess of 2% of total revenues from cargo.
Freighters or partnerships can be used to expand geographical footprint beyond what is available through the passenger network and – more importantly – increase the overall contribution of the cargo business to the rest of the network.
Type of Capacity
Bellies are great – there is nothing like a free lunch. But belly only network put a natural cap on the opportunities available to the cargo division. On average, carriers that operate freighters generate about 11% of their revenue with cargo. Some carriers such as Korean, Cathay, China Airlines, Eva Air or Ethiopian generate more than a quarter of company revenues from cargo.
These carriers also move well over half of their traffic on cargo aircraft. A mix of freighters and passenger aircraft creates opportunities, but too much freighter capacity creates unnecessary risk. It’s best to go easy on the freighters.
As with passenger aircraft decision, the choice of platform is extremely important. As long as there is commonality with the passenger fleet there is not a lot that can go wrong with a small freighter fleet. With larger freighter fleets, there is no hiding high unit costs or other inefficiencies. For long haul operations, B777-200Fs are best and both the A350F and B777-8F will opportunities. B747s are great aircraft, but are best in the hands of carriers with extensive type experience (like Cargolux or National) or wet leased in. A330s and 767s have worked on long haul routes in the prevailing high yield environment but will not be competitive in the long run. We also think most large widebody conversion platforms cannot offer decent unit costs – the 777-200LRMF may be an exception.
Medium widebodies, narrowbodies and turboprops can and do also work in regional networks. Particularly where there are regular baseloads or where third-party revenue guarantees are available. In our experience the case for freighters in short to medium haul routes is driven by specific unique circumstances.
Distribution Network
Own sales is best, but not feasible everywhere. Where third party agents are used, they need proper oversight by people on your payroll. That applies to any third party services that an airline buys. Online distribution platforms are useful but won’t replace the need for having people in places and on the ground.
Some airlines with limited cargo revenue opportunities or limited appetite to spend time on the business may completely outsource their cargo business to total cargo management providers that are often part of the big global GSA groups. This can work well as a bridging or even permanent solution but also requires company oversight to make sure results are sufficiently good. And outsourcing everything will always put a cap on the potential size of the business.
Expertise
When it comes to cargo expertise it’s mainly the big all cargo operators like Cargolux, Atlas or National) or combination carriers with large cargo divisions (like Qatar, Turkish Airlines, Lufthansa Cargo or Air France KLM) that come to mind. Especially when it comes to handling special and ugly cargo, expertise is essential – both from a commercial, operational and safety perspective. This includes load engineering, cargo handling, or product specific knowledge around the movement of cargo such as live animals, semiconductor equipment, pharmaceuticals, dangerous goods or perishables.
Developing and nurturing relevant cargo specific experience is also important for smaller cargo businesses within larger companies. Fortunately, there is a lot of that to be found in smaller freight divisions but often limited to a few people – often people who have been around for a long time. That is a risk in itself – if these people leave, so does the expertise.