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The state we’re in

Airline profitability has been hugely damaged by overcapacity and fierce competition among forwarders. A clearer focus on yields could change that – so why is the spot market thriving and ‘contracts’ becoming increasingly flexible? Alexandra Lennane reports

Nothing ends a phone call to an airline faster than a mention of the word ‘rates’. Even when you explain – according to at least two antitrust lawyers – that journalists and airlines can use this dirty word together. ‘Yield management’ is another phrase that sends managers scuttling quickly back into their offices.


Which makes it something of a challenge to report on – and yet it is a debate that has to be had. As all those involved in the air cargo business attempt to build relationships along the supply chain, the recent run of low rates is causing something of a blame game, based on a lack of understanding between the parties. And that, of course, makes it far harder to forge relationships that will ultimately lead to the sustainability of the wider industry.


More than one source (although no carriers) has referred to the current, and long-lasting, low level of rates as ‘the new norm’, which is a terrifying prospect for the large numbers of carriers failing to turn much, if any, profit from cargo. So Airline Cargo Management wanted to establish why rates are low, and why it is difficult to raise them to sustainable levels. That, after all, is the point of the business. As Nick Rhodes, director of cargo at Cathay Pacific, dryly remarks: “At the risk of stating the obvious, if your revenues do not cover your costs, you don’t have much of a business model.”


Clearly, the number one issue at the moment is capacity and low demand. In most cases however, when so much capacity, especially in the summer, is driven by passenger demand, there is little that many carriers can do. Those carriers that do operate freighters have certainly been trying to cut back – Cathay Pacific reduced its schedules to North America and Europe, and parked three older 747BCFs. Lufthansa Cargo, Air France-KLM, Singapore Airlines and others have all cut freighter capacity – and of course several freighter players have left the market altogether, Jade and Grandstar Air Cargo, to name but two. Capacity is clearly a crucial topic in any discussion on rates – but once a carrier has cut back (or not), the next issue to deal with has to be yields. And this makes up the ultimate discussion between shippers, forwarders, carriers and their suppliers.


This is also where the blame game starts. While airlines would like to point the finger at forwarders, who in turn blame the shippers, it’s increasingly clear that airlines themselves have more than a significant part to play in ensuring their own profitability.


Some carriers are consistently good, say forwarders, and many have a serious focus on yield management. United, in partnership with JDA, is incorporating the necessary technology in its new UnitedCargo 360 platform. Lufthansa and Singapore Airlines are also among those who keep a tight yield management strategy. As one forwarder tells Airline Cargo Management: “Cathay Pacific has managed to keep its rates slightly higher than the market, and because it is consistently good, we use it.”


Clearly, it can be done.


“Cathay’s strategy during these difficult economic times is to reduce capacity (in line with demand) but to do all possible to maintain our yields,” explains Rhodes.


“Our yields are down slightly on 2011, but we are determined to keep them at a level where we at least cover the cost of our operation – and when I say the cost of our operation, I mean the direct operating costs (DOCs) on a route, plus the cost of the asset employed on the route, so we have to pay for our aircraft by operating at a margin above DOCs. Simply put – if the fuel price increases, we have to somehow increase the yield (either by way of freight rates or fuel surcharges) to cover the additional costs. There may be a lag effect in that it is hard to raise yields overnight, but there must come a point where we pass on the extra costs of the operation to the shippers. Any sensible business would do the same.”

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