UK air freight market A case for cautious optimism: June 2014
In terms of monetary value, air freight accounts for approximately 40 percent of UK imports and exports, and the vast majority of it (95 percent or so) flies in the belly-hold cargo space of passenger aircraft rather than on the maindeck of dedicated freighters. National flag-carrier IAG Cargo – comprising the freight operations of British Airways and Spanish flag-carrier Iberia – has access to a global network of flight connections and a massive passenger fleet on which to move that cargo. In fact, IAG Cargo flew an impressive 5.65 billion cargotonne-km (CTK) during 2013 and the airline currently boasts a network of 350 destinations around the world – so it is as well placed as any cargo operator to comment on the condition of the UK air freight market right now. That figure of 5.65 billion CTK for last year is eye-catching, but it was nevertheless down by 7 percent on the carrier’s 2012 volume and Andy Jaye, IAG Cargo’s regional commercial manager for the UK and Ireland, admits that the UK has remained a tough market to operate in 2014. “There is certainly more optimism this year than last,” he remarks, but notes: “We are cautiously optimistic; however, we aren’t losing sight of the challenges we face.” The biggest concern that Jaye points to, is the issue of over-capacity that exists in the global air freight market, a problem that certainly isn’t unique to the UK’s air freight sector but has had a significant impact on IAG. IAG Cargo’s response has in the main, involved developing and expanding its premium products, and especially those devoted to pharmaceutical and other temperature-sensitive shipments. Of course, while the UK is important as a cargo market in its own right – whether it be, for instance in terms of high-tech goods imported from the Far East, perishables from across the South Atlantic or Africa, or fashion commodities from Asia – IAG Cargo and numerous other carriers also handle a significant volume of freight merely transiting through their British stations. Thus, for example, IAG Cargo flies pharmaceuticals from India to the US through the UK, high-tech goods from the East on to its transatlantic routes and manufactured goods from Continental Europe to the US. Like IAG, another UK-based carrier, Virgin Atlantic, also makes use of its global network of passenger destinations to attract transit cargo. “Globally, we offer our customers a network spanning some 350 destinations based on our own operations and those of our partners,” points out John Lloyd, director of cargo at Virgin Atlantic. The UK may be the airline’s home market, but it also plays a vital role as an international transit point. For example, the timing of the airline’s schedules mean that customers in India can achieve same-day deliveries to major US cities such as New York and Los Angeles. Transit cargo is big business for Virgin Atlantic and it is something that its operations team has become very efficient at managing. “Our success has been built on earning our customers’ trust that we will deliver the service we promise,” Lloyd says. “For some carriers, London can be a bottleneck but that’s not the case for us. We prove to our customers around the world on a daily basis that we can connect their cargo quickly through London and that gives them another reliable choice to move their shipments to other major points around the world.” Some months ago IAG Cargo took the decision to move out of long-haul freighter operations – it has not been working with its long-time supplier of such capacity, ACMI (aircraft, crew, maintenance and insurance) provider Global Supply Systems, since the end of April this year. To what degree that move was taken as a result of the difficulties in the global air cargo market and to what extent it was due to other pressures on the carrier’s bottom line isn’t clear, but certainly IAG Cargo CEO Steve Gunning attributed the decision to “the growing cargo capacity available to us from our passenger fleet, as well as the outlook for the air freight industry overall.” IAG Cargo is of course retaining its short-haul freighter capacity and has signed a long-term commercial agreement with Qatar Airways that is now seeing IAG buy block space capacity on Qatar-operated freighters. The first such flight took off on May 1 this year. The Doha-based carrier is operating five B777F flights a week between Hong Kong and London on behalf of IAG Cargo. While IAG Cargo had a difficult 2013, 12 months that must have influenced the airline’s decision to withdraw from dedicated long-haul freighter operations, the UK’s other big air cargo carrier recently announced excellent results for the year. Virgin Atlantic Cargo carried 224,000 tonnes over the 12 months of 2013, 5 percent more than in 2012. It also achieved its highest-ever average cargo load factor, at 76 percent. And according to Lloyd, the air freight business in the UK right now is actually “healthier than it has been for some time. He notes, “The first two months of 2014 were slightly stronger and we are in a positive position against our targets so far.” For Lloyd, the UK market – taken as a whole – has met the impact of the global recession decisively and, although as a nation it has a high level of long-term debt to manage, some of the unpopular but prudent steps taken by the nation’s government have helped the economy to pickup at a faster rate than has been the case in many other countries. Among other positive developments in the UK air freight market, Qatar Airways launched its first scheduled service into the UK and Cargolux, ANA Airline Management and Magma also launched operations from London Stansted in 2014, and more world-class airlines are expected to join this list as the year progresses. At East Midlands, DHL also launched a new route direct route to Copenhagen. Furthermore, the International Monetary Fund (IMF) recently revised its growth forecast upwards for the UK economy in 2014 to 2.9 percent and expects this to continue at around 2.5 percent in 2015 and, Lloyd says, Virgin Atlantic Cargo is hoping to see that national economic growth reflected in improved air cargo traffic. Even as Manchester Airport Group (MAG) expects moderate growth in 2014, Conan Busby, Business Development Manager - Cargo and General Aviation, MAG exudes optimism about the future. “Cargo is a fundamental part of M.A.G’s business, and in 2014, we will continue to work to ensure that we provide the best possible service and infrastructure available in the UK. We understand and appreciate the strategic importance of cargo to UK plc as well as the importance of belly-hold capability for our long-haul carriers,” he said. Manchester Airport Group which owns and operates four airports with a combined annual tonnage of 650,000 tonnes per annum accounts for 26 percent market share of the UK cargo market and 70 percent market share of the pure freight cargo. IAG Cargo’s Jaye is cautious but optimistic, and Lloyd too is hoping for further improvements over the course of this year. But again, like Jaye, his big concern remains what he calls “the crazy amount of capacity that’s coming into the market” and the inevitable effect that this must have on yields. It seems that the UK’s air cargo market is as reliant on the global air freight industry as much as it is on economic conditions in Britain.