PETER CONWAY LONDON
The big three global alliances have produced few cargo synergies so far. Will they ever?
Cargo departments could be forgiven for feeling a little excluded amid all the clamour surrounding global alliances. While vast amounts of management time have been focussed on cementing the right strategic relationships for the passenger business, the cargo divisions often appear to have been left as an afterthought - occasionally finding themselves faced with an unsuitable marriage.
This is not because global alliances do not make sense for cargo - quite the reverse. Globalised production and marketing mean the trend in logistics is towards using a few global partners. All the major freight forwarders - the immediate customers of airlines on the cargo side - would like to work with one or two global airlines instead of dozens of not-so-global ones. Cargo departments have not been slow to realise the need for more global reach, either. A map of cargo allegiances shows a cobweb of arrangements between the major carriers, including joint freighters, block space agreements and general sales agent (gsa) deals.
The main struts of the major world groupings existed in passenger and cargo long before they were formalised. But, despite years of trying, the big three alliances have yielded few tangible cargo results. For forwarders and shippers, the cargo elements of the big three are to all intents and purposes invisible.
One practical reason for the lack of progress is that switching cargo from one aircraft to another is not nearly as easy as moving passengers between airlines. On the map, it might seem logical to fly cargo from London to Dallas and switch to American for a domestic US leg, but switching cargo from a British Airways transatlantic widebody to a domestic American Airlines narrowbody takes a good deal of reconfiguring. All major airlines, anyway have extensive trucking networks for cargo within North America and Europe, and it is easier and cheaper for BA to keep the cargo intact and truck it from Dallas.
The same problem applies with freighters. While some types match - a pallet configured for an Airbus A300 freighter fits fairly well into a Boeing 747F - others do not. Freighter to belly is even worse, so the feeder and connecting flights that are so important in passenger alliances often have few benefits for cargo.
Lack of commonality
There is also a more systematic problem within cargo. Airlines do not have any commonality of procedures on the cargo side, and certainly no common booking or information system such as Amadeus or Galileo. It is telling that Richard Brannon, managing director of cargo alliances for American Airlines, says that one of the advantages of the kind of GSA agreements it has with other carriers is that they enable American to get to know the possibilities available in the networks of other carriers. Without such inside information the only other way to work out such possibilities is to plough through reference books.
Perhaps the biggest barrier of all, however, is the different attitudes to cargo among the various airlines. Air cargo suffers from the unusual handicap that much of the capacity it uses is a by-product of the passenger business. Thus, for some carriers - particularly US carriers such as American Airlines and Delta Air Lines - cargo is just an incremental source of revenue, something to carry if there is room in the belly, with a pricing policy to match. At the other end of the scale is Lufthansa Cargo, a business in its own right, investing in its own freighters and buying belly space from its sister passenger airlines within the parent group. Lufthansa is therefore more complex in its approach to cargo, but it also has less flexibility in its pricing.
The three major airline groupings appear to be blindly combining such different approaches to cargo, and yet expect them to work together. The result is illustrated by the Star Alliance. According to the logic of the original six-carrier set-up, Lufthansa Cargo should have made Bangkok its Asian hub, using Thai flights to feed into its freighters there. It would use Varig to feed into its freighter flights to Sao Paulo, and operate transpacific services together with United Airlines. In fact, it does none of these.
Lufthansa Cargo long ago tried Bangkok as a hub, and abandoned it as too chaotic. It has its own, more successful, Asian hub at Sharjah in the United Arab Emirates, which it uses as a stop for its Asian 747Fs and as the base for Hinduja Cargo Airlines, an Indian cargo carrier in which it has a major stake. Lufthansa also used to have a cargo hub in Viracopos, the freighter airport for Sao Paulo, but, despite warm rhetoric from a succession of Varig cargo bosses, no co-operation has emerged. The reason is that Lufthansa is also a major rival to Varig for lucrative traffic to Europe, and neither intends to yield market share to the other.
On the Pacific, United might make a possible partner, with its McDonnell Douglas DC-10 freighters, but there is a better choice. Singapore Airlines (SIA), which has a close relationship with Lufthansa Cargo long predating the mooting of SIA as a potential Star Alliance member, has a similar cargo approach and reputation to that of Lufthansa Cargo.
In 1997, that relationship blossomed into the most extensive example of co-operation in the air cargo industry. Lufthansa Cargo agreed with SIA to terminate five of its Europe-Asia freighters at Sharjah each week, where they swap cargo with five Singapore freighters from the opposite direction. The arrangement saves on crewing and a range of other costs. As long ago as 1997, Lufthansa Cargo chairman Wilhelm Althen was favourably comparing this SIA cargo co-operation with anything that the Star passenger airlines were achieving. He insisted: "Lufthansa Cargo is an independent airline and we make our own alliances. What would be the point of being independent otherwise?"
Lufthansa has another happy cargo relationship within the Star umbrella in the shape of SAS. The German carrier admits it is focusing on the SAS-SIA triangle as the basis for its global alliance. To push matters forward, in March the three carriers issued a memorandum of understanding announcing a one-year study into joint marketing, network co-operation and even a merger of their cargo businesses. In fact, Lufthansa and SAS are merging their European sales and handling operations, aiming to finish the process by the end of the year. Together, according to Lufthansa Cargo's Dietrich Seidl, the three carriers will form a nucleus which other Star members can choose to join. The clear implication, however, is that Lufthansa Cargo will press ahead rather than wait for other Star partners to catch on.
Cargo relationships with United, which started two years ahead of Star, offer a stark contrast to this. Much was promised, but little has happened. Lufthansa handles United in Frankfurt, but United is unable to reciprocate in Chicago because of lack of space. Earlier plans to link products more closely ran up against the information technology hurdle, United vice-president for cargo, Jim Hartigan, says. By the time United had overcome these and launched a long-promised express product to match Lufthansa's Flash, the German carrier had moved on to a three-tier time-definite product offering, which requires even more complex IT systems and operational modelling. This hardly sounds like synergy.
Slow progress in going global
KLM's even older arrangement with Northwest, whereby the two carriers supposedly market their North capacity jointly between North America, Europe and India, seems to have produced just as few ripples: although KLM insists it still exists, no one in the air cargo industry seems to see any evidence of it. KLM does represent Northwest in India, the Netherlands and Norway, but after years of supposed co-operation, it still maintains its own cargo sales network in the USA - despite Northwest taking over its US passenger sales.
Once again, this is not for lack of ambition. Jacques Ancher, who retired in September as executive vice-president of KLM Cargo, last year outlined plans for a global cargo alliance that would include Northwest, Martinair, Malaysian Airlines, Emirates and Nippon Cargo Airlines (NCA). But KLM was blocked by the European Commission from buying the remaining half of Martinair which it did not already own. Co-operation with Emirates, which once included joint freighters and plans for a KLM hub in Dubai, also appears to have been quietly shelved. And joint marketing of KLM and Malaysian Airlines freighter and combi capacity between their respective bases does not seem to have led to any closer ties between the two. NCA remains the best piece in the jigsaw simply because it was an accidental fit with KLM's later alliance partner Alitalia. NCA and KLM have flown joint freighters to Amsterdam for years, and the Japanese carrier also operates joint freighters to Milan with Alitalia. It even had cargo ties with Northwest at one point.
As with Lufthansa and SAS, the tie-up between Alitalia and KLM has the scope to be much closer, however. Earlier this year, when KLM announced its version of a three-tier time-definite service, Alitalia was at the same presentation announcing an identical product. KLM Cargo's headquarters at Amsterdam Schiphol has also been humming with Italian voices in recent months. The two carriers operate freighters, and have non-competing hubs that could do with a boost - Milan Malpensa and Schiphol. In July, the two outlined plans for a "single unified management structure for both passenger and cargo" and a 50:50 joint venture, effective from 1 November.
This relationship has led to the first casualty from the emerging world groupings, when Alitalia broke off what previously had been a successful gsa agreement with American Airlines. This involved American representing Alitalia Cargo in Latin America and some US states, while Alitalia sold American Cargo in Italy, North Africa and the Middle East. Although insisting that the break was mutual, Brannon at American talks about it with an air of regret. American has long had other such gsa agreements on the cargo side with Japan Airlines and Canadian.
The US carrier seems to be extending the idea with BA, although American only represents BA in Puerto Rico. There is also some mutual ground handling at lesser stations - BA handles American at Gatwick, Manchester and Glasgow, for example - but everything is on a pragmatic basis. "We work together where it can be of benefit to the other partner, and if it isn't, we don't," says Brannon.
Despite such a low-key approach, Brannon claims that American gets around 5% of its revenue from cargo interlined from other carriers. While that includes carriers that are not in oneworld, Brannon says that volumes from partners are growing faster than from deals with those outside the grouping. "When you build a relationship with a partner, you start to learn where they have capacity and where we have, and ideas come up you wouldn't have thought of before," he says. "An example is LanChile. Our biggest sector with them is Madrid to Frankfurt, because our flights to Frankfurt are full, and they fly Santiago-Madrid-Frankfurt and offload most of their cargo in Madrid." American also does a "fair amount" of cross feeding for BA.
If all this sounds a bit small-scale, there is one other area of alliances that might offer quicker progress - that of joint purchasing. Brian Clancy, president of US air cargo consultancy MergeGlobal, sees this as the major opportunity for cargo alliances. "Passenger alliances are revenue-driven, cargo alliances are cost-driven," he says. "There are real savings to be made in joint purchasing of handling or facilities, and I think this is what the alliances will be concentrating on for now."
Ray Jewell, manager of cargo marketing and sales for Cathay Pacific, says working parties on joint purchasing have emerged from the quarterly meetings of oneworld cargo managers. According to Hartigan at United, Star already does "a fair amount of joint purchasing or containers, printers, bags and labels". Star has also looked at joint facilities, but "this is not as easy as it sounds". Often, Hartigan says, it comes down to trying to plan joint facilities in the future. However, when pressed on whether Lufthansa or Varig will join United in the major new cargo facility it is building in Miami, Hartigan admits that there are no such plans.
Cargo 2000 hope
Is this all cargo alliances will ever amount to? Hartigan remains optimistic. "I think 2000 will be the year that cargo alliances really take off," he says. One sign of hope, he says, is Cargo 2000, a joint initiative of the top airlines and forwarders under the auspices of the International Air Transport Association, which, for the past three years, has been looking at how to harmonise processes and create a more seamless flow of cargo between forwarder and airline. Hartigan is chairman of the body and, in September, saw it pass a key milestone when it approved a Master Operating Plan (MOP), a blueprint for the standardisation of procedures between the main cargo carriers. Hartigan sees this as the basis for the explosion in cargo alliance activity. "Once the MOP is operational, then we can develop products on the back of it," he says.
Lee Hibbets, research director at Seattle-based consultancy, Air Cargo Management Group, agrees. "There is some dispute about Cargo 2000, with some people saying it has all happened before and not made a difference, but I think Cargo 2000 has really got some momentum behind it," he says. "And, if they can elevate their systems to the same level and operate in the same way, I really think it would be much easier to leap off into genuine co-operation."
Source: Airline Business