ANALYSIS: Bellyhold favoured over freighters in Europe

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European airlines are cutting back their freighter fleets as they aim to transport more cargo on passenger aircraft. But the growing focus on belly freight – while Middle Eastern counterparts are gaining ground in the freighter arena – does not automatically mean that the continent’s carrier are retreating from the cargo market.

British Airways will stop operating main-deck freighter flights in April, when its three Boeing 747-8Fs are prematurely returned to their owner. The aircraft were wet-leased from US ACMI specialist Atlas Air via its Global Supply Systems subsidiary through a five-year contract arranged in 2011. But BA terminated the deal in January, after parent IAG struck a pact with Oneworld partner Qatar Airways. From May, IAG Cargo will purchase capacity on Qatar’s freighters from Hong Kong via Doha to London.

Air France is also evaluating whether to stop main-deck freighter flights. The carrier has already decided to retire its three 747Fs and a single Combi aircraft as part of the planned phase-out of its seven remaining 747s by 2015, leaving cargo services confined to Air France’s two 777Fs and belly freight on the passenger fleet. However, “if we need to continue reducing our cargo fleet, we will do it”, said Air France-KLM chief executive Alexandre de Juniac during the group’s annual results briefing in February. The size of the freighter fleet is “one of the major questions” for the group’s cargo strategy, he says.

Aside from Air France’s two, Paris Charles de Gaulle-based 777Fs, the group plans to operate eight freighters from Amsterdam, de Juniac says. KLM currently operates four 747-400Fs, while its cargo subsidiary Martinair has six MD-11Fs. The airline is pursuing a different 747 strategy to its French sister carrier, with the four-engined type due to remain in service until 2022.

While the air freight market looks “less bad than it used to be”, de Juniac says that the group is nevertheless evaluating its freighter fleet size. “If the market continues to deteriorate, we will have to implement additional restructuring,” he says.

In Germany, Lufthansa Cargo aims to improve its freighter fleet efficiency with the introduction of new 777Fs. Before the first of five firmly ordered 777Fs was delivered in November 2013, the carrier was toying with the idea of using the twinjets as additional capacity to the then 18-strong MD-11F fleet. However, the three 777Fs delivered thus far have been used for replacement, with at least one of the trijets being scrapped. The fourth 777F is to join the fleet in June, with the number of MD-11Fs being cut to 14.

Lufthansa Cargo’s operating profit fell more than a quarter to €77 million ($106 million) in 2013 as revenue declined 9% to €2.44 billion year-on-year. Freight volume shrank 1% to 1.7 million tonnes – with load factors barely changing at just under 70% – while average yields fell overall nearly 8%. This year, however, tonnage is set to grow around 5%, while operating profit should be “significantly” higher than in 2013, the airline says.

Local competitor Air Cargo Germany ceased operations in April 2013. After its four 747-400SFs were returned to their lessors, discussions continued with potential investors to resurrect the insolvent carrier. But the last candidate withdrew from the talks in July of that year and the company – in which Russia’s Volga Dnepr had held a 49% stake since April 2012 – was subsequently liquidated.

Meanwhile, Luxembourg-based freight operator Cargolux has ordered another 747-8F, to be delivered in March 2015. The deal brings the carrier’s commitment for the type to 14 aircraft, which will replace older aircraft. Today, the airline’s fleet comprises nine 747-8Fs and 11 747-400Fs, Flightglobal’s Ascend Online database shows.

The additional order was disclosed after China’s Henan Civil Aviation and Investment company acquired Luxembourg’s 35% shareholding in Cargolux in January. As a result of HNCA’s investment, the airline will shift much of its operational focus to China and establish a second cargo hub – in addition to the main Luxembourg base – at Zhengzhou airport.

The partnership allows the airline “to be well positioned to profit from the trade movements generated by one of the world’s most dynamic and fastest-developing economies and a province with an accelerating domestic appetite for goods transported by air”, said Cargolux chairman Paul Helminger in December 2013.

Middle Eastern freighter operators have meanwhile expanded their fleets. Since 2007, Etihad Cargo has grown from two Airbus A300s to nine widebodies (747s, 777s and A330s) in 2013. Qatar Airways’ freighter fleet similarly grew from three to eight aircraft, while Turkish Airlines has added six A330s to a pair of A310s it had in 2007. Emirates’ cargo fleet did not change much in terms of aircraft numbers. But the fleet composition changed from seven 747s and three A310s to 10 777s and two 747s in 2013.

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The four carriers’ combined widebody cargo fleet more than doubled from 17 to 37 aircraft between 2007 and 2013.

They are employing for their cargo divisions a business model that has worked in the passenger arena, says Rob Morris, head of consultancy with Flightglobal’s advisory service Ascend. The airlines’ geographical location halfway between Europe and Asia allows them to build extensive route networks throughout both regions as well as Africa, while all flights can be conveniently connected at a central hub. As they operate at lower costs than their rivals, the Gulf carriers have been able to win market share from the established carriers. The hub model “hurts people either end of the route”, says Morris.

BA’s decision to join forces with Qatar looks to be just the first co-operation deal. Tony Snell, IAG Cargo’s regional commercial manager for Africa and the Middle East, told Flightglobal in early February that the airline’s “appetite to work together” with Qatar on the Hong Kong-London route in the short term would be followed up by other “options” in the long term. While there was “more news to come” about the Qatar partnership, he did not rule out partnerships with other carriers.

Aside from young, agile competitors offering low prices in a market that has been volatile for years, it is the increased cargo capacity of modern passenger aircraft that is causing the decline of Europe’s freighter fleet. Boeing’s 777-300ER can carry around 25t of belly freight in addition to its regular passenger load, with a clear cost advantage over main-deck freighters. A European operator said in mid-2013 that while it needed to earn about €2.50 per kilo of cargo to break even on main-deck freighters, the same cargo could be carried as belly freight for a tenth of that price.

Especially on main trade routes with high passenger-flight frequencies and consequently large capacity, such as North Atlantic services, belly freight is thus more attractive than main-deck freighters. Lufthansa Cargo, for example, transports around half of its total cargo volume as belly freight on the parent’s passenger fleet.

Chris Seymour, Ascend’s head of market analysis, expects the number of main-deck freighters in Western Europe to sharply decline over the next two years. Eventually, he says, Cargolux and Lufthansa Cargo may end up as the region’s last two classic widebody freighter operators aside from courier-service specialists such as DHL or TNT. Such market consolidation would also mean, however, that the remaining freight carriers have to operate more efficiently, Seymour says.

IAG chief executive Willie Walsh insists that the decision to axe BA’s main-deck freighters is not a retreat from the cargo market, but instead a reflection of the changing air freight business – and a growth opportunity too. “Volume is absolutely no measure of success in the cargo market. We see competitors chasing volume that we know is unprofitable,” he said during IAG’s 2013 results briefing in February. “The advantage that we have is we do not have any freighters.”

Not only has the growth in IAG’s passenger operations eliminated the need for main-deck freighter flights, but using passenger aircraft for goods transport also offers more flexibility than in the past, he says: “Don’t be concerned if you see our cargo volumes decline, don't be concerned if you see our competitors increasing their cargo volumes. We are very focused on the value of our cargo business.”

Lufthansa, meanwhile, is heading in opposite direction with its fleet renewal plans. In addition to the five firmly ordered 777Fs, the carrier has another five options for the type, the first of which would need to be converted in September. The airline also wants to keep MD-11Fs in service “well beyond 2020”, chief executive Karl Ulrich Garnadt told Flightglobal a year ago. But while the MD-11Fs can be used as flexible capacity – as the aircraft have been paid off – utilisation of the 777Fs needs to be high to cover their capital investment costs.

This could be a challenge, especially as Lufthansa’s bellyhold capacity is also set to grow significantly with the passenger airline’s ordered 777-9X and A350 fleets. In September 2013, the carrier placed orders for up to 55 A350s and 64 777-9X twinjets, which are to be delivered from 2016 and 2020 respectively.

Lufthansa Cargo aims to return to growth through increased co-operation with other airlines and logistics specialists. The carrier wants to “use close bilateral co-operation to secure growth opportunities on important freight routes in the future and further increase the appeal of its global network”, it says. The first such partnership with an airline outside the parent group is to be sealed by mid-2014.