The Gulf region boasts some of the world's premier passenger airlines, with the likes of Emirates, Qatar Airways and Etihad Airways vying with each other to re-benchmark the concept of premium air travel. But while all this goes on at one level, below it - literally - there is another competition: in the cargo holds of the airlines' passenger fleets.
Freight is big business in the Gulf - just as the region's geographic location makes it an ideal natural hub for the passenger traffic flows between Asia and Europe and North America, the same principle applies even more strongly to cargo, with transit freight accounting for 80%-90% of overall traffic through the hubs.
The region's most recent arrival, Etihad Airways, has leveraged the strength of the international cargo market during its early years, with air freight contributing over 25% of total revenues.
The four-year-old Abu Dhabi carrier, along with its two main rivals in the region - Dubai's Emirates and Qatar Airways - all have dedicated cargo aircraft to supplement the enormous freight capacity offered by the bellyholds of their widebody passenger fleets. In addition, the competition from the Middle East's longer-established carriers such as Kuwait Airways, Gulf Air, Royal Jordanian and Saudi Arabian Airlines should not be overlooked.
Etihad was created four years ago by the Abu Dhabi government to serve as its dedicated flag carrier in the same way as Emirates does for its next door neighbour Dubai. The freight division, branded Crystal Cargo, launched services in February 2005 - a little over a year after the airline operated its first passenger flight. "When Etihad was formed, the decision was taken to have a freighter fleet well before we had absorbed the level of belly capacity that a mature airline would traditionally want to achieve before it added freighter capacity," says the division's executive vice-president Des Vertannes.
With the region experiencing such rapid growth, all the trends supported such ambitious plans to move into the all-freight business so quickly, he adds. "Cargo has been a hugely important element of Etihad's growth in the first three and half years. It has contributed well in excess of a quarter of the revenues until this year, and as the passenger fleet grows, cargo activities will continue to contribute around 20% of turnover," says Vertannes.
The airline declines to reveal the tonnage carried by its cargo division, but Flight International estimates that it carried around 160,000t last year. Vertannes expects the cargo arm to generate "close to $300 million in revenue this year", up 25% on last year, he says.
Etihad launched cargo operations with three Airbus A300-600Fs wet-leased from Air Atlanta - one of which has since been returned and replaced by a Boeing MD-11F. Orders are held for three A330-200Fs for delivery in 2011.
The all-cargo fleet carries around 18% of Etihad's total cargo, with the rest travelling in the bellies of the passenger fleet - or the "joint production aircraft", as Vertannes calls them. "The joint production is a very sizable part of our capacity. It is the cheapest form of cargo capacity provision and most of the revenue you pick up is incremental," says Vertannes.
Etihad has an all-widebody passenger aircraft fleet of A330-200s, A340-500/600s, Boeing 777-300ERs and a 767-300ER. A further 18 aircraft are on order, including four A380s. The passenger fleet has been rapidly expanding, providing what Vertannes describes as an "immense growth in belly cargo capacity", and will number around 30 by the end of the year. This growth has enabled the airline's cargo business to expand "in excess of 20%" annually, he says.
The MD-11F, on a one-year lease from World Airways, is operating from China to Abu Dhabi via India and on to Europe, says Vertannes. "We also aim to fly the aircraft to West Africa, subject to resolving some political issues."
Like all the Gulf carriers, Etihad depends heavily on transit cargo, with around 88% of its business routing through the hub. So only 12% of the volumes is actually destined for the United Arab Emirates. Vertannes concedes that most of this is going next door to Dubai: "Of our UAE-terminating cargo, around 75-77% is Dubai bound. We run bonded trucks between the airports of Abu Dhabi and Dubai."
Vertannes says that the most lucrative cargo destination for the airline is its home base Abu Dhabi, but Dubai "sucks in an awful lot of business". He adds: "We're trying to make sure that 75% [going to Dubai] begins to shrink as Abu Dhabi looks to develop its own infrastructure and we're hoping that future demand will enable Etihad to carry a lot more Abu Dhabi-terminating tonnes."
Vertannes says that the cargo business has suffered recently due to slowdowns in consumer spending worldwide and is wary about excess freight capacity. "Even key markets like China have been floundering in terms of diminishing yields," he says.
"The two big consumer markets of the European Union and the USA are tightening their belts, and no matter how much China and India produce, [cargo airlines] have an issue if people aren't buying. Only now are we beginning to see some green shoots emerging from the EU in markets like Germany and France."
Ram Menen, Emirates divisional senior vice-president cargo, concurs that the cargo market is beginning to pick up after a slow year. "Cargo by its nature is dependent on the world economy. The last quarter of 2006 and the first six months of this year were very slow," he says.
But despite short-term headaches, Menen is "confident that future growth of the air cargo is assured", and he should be - given that Emirates' cargo arm has 19 widebody freighters on order and it generated $1.5 billion in revenue last year. "Time has become a critical part of anything that we do today, so air has become a planned tool, rather than a default mode of transport like it was 20 years ago," he says.
And cost efficiency is the key driver of air freight, says Menen. "An electronic item now has a life of just three to five months. All R&D has got to be amortised over the first batch that has been produced."
Emirates introduced its first all-freight route in 1994 between Dubai and Amsterdam. This was intially operated as a joint venture using a KLM freighter and from 1998 became a dedicated Emirates SkyCargo freighter.
The Dubai airline carried 1.2 million tonnes of cargo during its 2005-6 financial year, around 14% up on the 1 million tonnes carried the previous year, as the rapid expansion of Emirates' all-widebody passenger fleet - which numbers around 100 aircraft - fuels its belly cargo volume growth. "We never plan anything less than double-digit growth at Emirates," says Menen.
Cargo makes up 21% of the group's total transport revenue, compared with around 11% when the airline started. "This ratio is unlikely to change as the passenger fleet continues to grow fast," Menen says.
Emirates' all-cargo fleet comprises 11 widebodies - eight wet-leased 747s and three A310-300Fs, while another 747-400ERF is due to enter service in February. "We have eight 777Fs on order for delivery from the end of next year and 10 747-8Fs coming from 2010," he says.
The new aircraft will supplement and replace some of the freighters now operated. Menen says that the move to new aircraft is driven by the fact that air cargo is "very time-critical so reliability is going an increasingly important factor in logistics activity".
Emirates placed the $3.3 billion deal for 10 747-8Fs, plus 10 options, at Farnborough last year, just months after dropping its order for two A380Fs. "One of the reasons we originally committed to the A380F was that we didn't see a successor to the 747 being developed," says Menen. And despite the airline's huge commitment to the passenger A380 - it has 55 on order - he does not expect the freight version to ever figure in the Emirates fleet. "I like the A380F for its volume, but little else. The 747 is a lot more flexible as it can be handled at virtually any airport," says Menen.
The fact that the A380 will figure in a big way on the passenger side will influence the airline's cargo capacity. "Right now 65% of our business comes from the bellyholds of the passenger fleet, but this is likely to fall to 45% as the A380 passenger aircraft has reduced belly cargo volume," says Menen. "We are in a transition from freighters being supplemental to our belly capacity to them being the larger contributor to our cargo volume."
Emirates breaks the cargo world into three segments: "North America - where the consumers are Europe and related areas, which is mostly services and design bureaux. And Asia is where the factories are." Menen says.
Dubai's central location is key to its success in both passenger and cargo markets, says Menen. "There are 5.8 billion people within 8h flying of the emirate - that's 5.8 billion potential customers. Even though only 2% of them use our services, it's a huge number. Two-thirds of the world's population is east of Dubai."
Menen believes Dubai is to India what Hong Kong is to China in terms as a market entry point: "The best way to access India is through Dubai, as the country is still struggling with infrastructure. Dubai and Singapore will play a huge role in its development." Over 25% of India's population is under 25 years old, says Menen. "This is the generation that going to be brand hungry, which is extremely good news for the air cargo business."
Just over 80% of the cargo going through Emirates' Dubai freight is transit, and Menen does not expect this ratio to change dramatically in the future. "This is mostly moving from east to west, although we're seeing India developing as a good import market for the west. We're also seeing Africa energising."
Africa is a market that Qatar Airways has in its sights for the development of its cargo business. "There is growth in the cargo market between the Middle East - mostly the UAE - and Africa," says John Batten, the airline's general manager cargo. "We're trying to develop the Middle East and Africa using our network to move product around, rather than taking it all the way through to Europe."
Around 90% of the cargo through Qatar Airways' Doha hub is transit. Its largest market is from the Indian subcontinent into the Middle East and Europe, followed by Asia into the Middle East, Africa and Europe. "Were also developing a business out of the USA with the introduction of Newark [via Geneva] and Washington DC passenger flights," says Batten.
Although Qatar Airways jealously protects specific numbers on the size of its cargo business, Batten acknowledges that "year on year we're averaging 35% growth". According to the Airline Business cargo ranking, Qatar Airways earned $254 million from cargo last year.
The airline launched all-cargo services in 2003 and has three dedicated A300-600 freighters to supplement the growing belly cargo capacity of its passenger fleet, the latter contributing over 70% of its overall cargo volumes. The airline's passenger fleet comprises more than 55 aircraft - mostly widebodies - and is set to grow to 110 aircraft by 2015.
"We will always be a passenger carrier and feeding that network with freighters," says Batten. He expects that the belly ratio to increase in the near term as the airline's all-freight fleet is staying relatively static while the passenger fleet grows at the rate of one aircraft a month. "The all-cargo ratio will fall to 22% or 23% until the two 777Fs we have on order arrive in summer 2009 then it will come back up to 30-32%."
Batten says that the arrival of the 777Fs will give the airline the option of undertaking more cargo-specific routes and operating further afield. Qatar Airways now serves 16 cities with dedicated cargo flights, having just launched its first Asian cargo service - to Johor Bahru in southern Malaysia. "This was a customer specific move and we're looking at increasing the frequency," says Batten.
The A300-600Fs have 40t payload and are ideal complements to the 100t-payload 777Fs, says Batten. "The A300s are planned to stay in the fleet for as long as they can be flown economically."
Batten says that while there are no plans to grow the A300F fleet further, expansion alternatives are being examined. Qatar Airways has 777F options which could be conceivably be exercised to significantly expand the fleet.
Like its two Gulf neighbours, Qatar Airways has firm orders for A380 passenger aircraft, with the first of four due for delivery in 2012. Because of the A380's reduced belly freight capability "we'll move around some of the cargo that goes on the A380 flights on to other routes", says Batten.
In parallel with the three Gulf airlines' passenger and cargo growth, their home ports are undertaking major short- and long-term infrastructure expansion, which can provide a few headaches in itself.
Abu Dhabi is undertaking a $7 billion airport development programme that is due to be completed in 2011. This will include a major cargo centre comprising two terminals capable of handling 1 million tonnes of cargo annually, half of which will be moved by Etihad.
In the meantime the airline must make do with the airport's existing facility, which is already exceeding its official capacity of 300,000t. An expansion will open in June next year that will push capacity to around 450,000t. "This facility has to last until 2011 and so we are looking at ways of easing the growth through the hub without damaging the expansion of the business," says Vertannes. "We'll try to avoid bringing traffic through Abu Dhabi that doesn't have to come through the hub, by flying the cargo point-to-point by taking advantage of fifth-freedom rights where it makes economic sense."
For Emirates, there is the promise of an all-new airport offering unlimited growth - Dubai World Central - but the timing of the move to the facility is yet to be finalised. The new airport will be ready for passenger services in the third quarter of next year, but Menen says that the final transitional plan for Emirates has not been announced: "I was hoping that the dedicated bonded air-side road between the current airport and World Central would allow us to move our freighter operation there. But there hasn't been any definitive date for when that will be a reality. I think it will be finalised this year."
Meanwhile, operations are due to begin within three years at the new Doha airport, but the existing airport is still being expanded to cope with Qatar Airways' phenomenal growth. "The cargo centre has just been expanded - we've added 47% more floor capacity, a semi-automated workflow management system, cold storage for 22 aircraft pallet positions and freezer capability for four aircraft pallet positions," says Batten.
Construction of Doha's new airport is under way in an area partly reclaimed from the sea adjacent to the existing airport. It will have a dedicated 30,000m2 cargo facility with eight freighter parking bays and will be capable of handling 750,000t of cargo annually, growing eventually to 1.5 million tonnes. This will be a fully integrated freight hub comprising a sea port and free zone.