On the passenger side, All Nippon Airways (ANA) has always been known for its strength in the Japanese domestic market, and until recently much the same could have been said of its cargo business. Unusually for a mainstream carrier, its cargo revenue was split about 50-50 between the domestic andinternational.

Though the carrier obviously had some belly cargo on its long-haul 747- 400 passenger routes, it also regarded Nippon Cargo Airlines (NCA) – in which ANA had a 27.6 per cent stake– as its long-haul freighter arm.

All that started to change in August 2005, when ANA Group sold the stake in NCA to Nippon Yusen Kaisha (NYK Line), which was already NCA’s largestshareholder.

“We came to realise that the strategies we wished to pursue were diverging, hence the split,” says Akinori Nomoto, ANA board member and executive vice president cargo marketing and services.

“ANA wanted to grow its cargo business using medium-sized freighters and the belly holds of passenger aircraft, and move into the time-critical market, concentrating on Asia, which IATA and others such as Boeing forecast will be the fastest growing logistics market.”

NYK, by contrast, wanted to remain focused on long-haul, wide-body operations. “When this incompatibility became more apparent, it was decided to part ways,” Nomoto says.

The split took a while to work out, as ANA had been providing pilots, fl ight engineers and maintenance for NCA. However, Nomoto says these links had been fully severed by the early part of this year. But ANA did not wait for these arrangements to be fi nalised before implementing its new cargo strategy.

Cargo gets more attention
In February 2006, ANA unveiled a joint venture cargo airline along with Japan Post named ANA & JP Express, or AJV for short. ANA owns a 51.7 per cent stake in the regional airline whileJapan Post holds 33.3 per cent, forwarder Nippon Express 10 per cent, andshipping company Mitsui OSK Linesfi ve per cent.

The airline started services in August 2006, taking over the operation of the three production 767-300 freighters which had joined ANA’s fl eet in February 2002, December 2005, and January 2006 respectively. A fourth followed inOctober 2006.

ANA also ordered three 767-300 conversions in November 2005, with four options, launching Boeing’s conversion programme for the type. Two of the options were exercised in October 2006, bringing the active order to fi ve aircraft, which are being converted under contract to Boeing by Singapore Technologies Aerospace at its Paya Lebar base in Singapore, for delivery between June2008 and the end of fi scal 2009.

While it is waiting for the conversions, ANA is wet leasing two 767-200s from ABX Air – the former airline of forwarder BAX Global in the US. This was a ground breaking deal, as it was the fi rst time the Japanese Civil Aviation Bureau had allowed a Japanese airline to wet lease a freighter from a foreign carrier. Nomoto says that to get agreement for the deal, “ABX had to clear the same operating hurdles as ANA, including fl ight safety, as the fl ights operateunder the NH (ANA) code.”

The two ABX aircraft joined the fl eet in May and gave AJV a 72 per cent capacity boost and 90 per cent increase in fl ight frequency compared to the same period in the previous year. Nomoto hints that the deal could be continued even after the conversions start being delivered. “It is not a stop-gap per se and could be extended moving forward,” he says.

The 767s are currently fl ying from Narita, Osaka and Nagoya to Beijing, Tianjin, Qingdao, Xiamen, Pudong, Incheon, Taipei and Bangkok. ANA will initially be focusing on building all these routes up to daily fl ights beforeit adds new destinations.

An Asia express strategy
Once frequencies have been increased, Nomoto says the carrier can start to develop what he calls the “real product” of AJV, namely the small express package market. Currently 90 per cent of the volumes carried by the freighters is general cargo, with mail accounting for 1-2 per cent and small packages 4-5per cent.

Ultimately the idea is to create an integrator-like operation, using the domestic Japanese networks of both ANA and Japan Post to provide a next-day delivery service to China and other parts of Asia. The carrier wouldn’t be drawn on about all the other destinations that might be served, but Guangzhou and Vietnam are apparently on the radarscreen.

AJV is basing its strategy on the reach of its two main shareholders in the domestic Japanese market. “We are confi – dent that we can get packages to their destinations quicker than the competition, and be able to collect later, thanks to our extensive domestic network. We will also be able to carry medium-sized cargo, which the competition cannot,”Nomoto says.

The strategy is also driven by a realisation that the domestic general freight business, which has been a large portion of ANA’s cargo revenues until now, has little further scope to grow. In the quarter to June, domestic cargo revenue was fl at at 7.3 billion yen, while international revenue grew 20.4 per cent to 16.7 billion yen – or 70 per cent of the total – on the back of the new jointventure.

The American connection
This domestic stagnation is partly due to demographic trends – Japan’s population actually peaked last year and is now expected to decline. At the same time, as Nomoto puts it, “Japanese companies are increasingly moving their manufacturing bases offshore while keeping their technology at home”– that is, products are part made inJapan, fi nished in China and then givenfi nal approval in Japan before beingexported to the US.

“So international logistics is playing an increasingly important role for Japanese manufacturers”, Nomoto says, and AJV is designed to meet that demand. There is also an import side to the story: “The fl ow of goods between the US and Japan is expected to boom over the next fi ve years and we wish to make Japan into a hub to move goods from China to the US,” he says.

This latter point explains why AJV moved quickly to start services to the US, inaugurating a six times a week route from Nagoya to Chicago via Anchorage on 2 October 2006. Other US routes are also under consideration.

The use of a 767 freighter for such a long-haul sector raised eyebrows in the industry, but Nomoto says it was simply that it was the only freighter available. “Chicago was chosen because of its strategic position at the centre of the United States, and that it is one of our partner’s hubs,” he says. “And we used the 767 because that is all we have at the moment. We obviously would prefer to use a bigger freighter and be able tofl y direct.”

With the passenger side of the business gradually retiring its 747-400s and replacing them with 777s, a -400 conversion or an order for new 777 freighters would be the obvious way to meet this need. Nomoto confi rms that long-haul wide body freighters are under consideration, but says the type has not yetbeen decided upon.

A new Okinawa hub
A key part of the AJV strategy is setting up a hub on the Japanese island of Okinawa, whose location some 1,400 kilometres to the southwest of Tokyo and 800 kilometres southeast of Shanghai makes it much better placed than anywhere on the Japanese mainland to be an Asian hub. Nomoto says most Asian cities are within a four to fi ve hour fl ying time of Naha, the island’scapital.

“Packages will be gathered in the bellyholds of passenger aircraft from all over Japan to Naha, and then fl own out for same day delivery by freighter,” he says. The mainland Japan to Naha links will also be supplemented by daytime freighter fl ights.

Some barriers have to be overcome to create the hub, however, as Okinawa does not currently have any international cargo traffi c, and so has no Customs presence. Nomoto also admits it could be a problem to persuade offi cials to work at night.

But the plan has the support of both the Japanese government and the prefecture of Okinawa, with the latter promising to provide investment for the project and build the necessary cargo facilities.

Cargo springboard for growth
All of this activity is set to increase cargo’s importance to ANA Group. In the year to March 2007, cargo revenues were 105 billion yen (US$914.1 million), with international passenger revenue on 278 billion yen, and domestic passenger revenue on 726 billion yen.

ANA president and CEO Mineo Yamamoto said two years ago that he wanted to make cargo “one of the three main businesses, alongside international and domestic passenger services”. Nomoto explains that this means the carrier wants to bring both cargo and international passenger revenue up to 700 billion yen by 2015 – or in other words, to increase cargo revenue sevenfold by that date.

In the year to March, the carrier made modest progress towards this goal, with cargo revenues growing nearly 13 per cent. Not surprisingly, most of the growth came from the AJV joint venture.

ANA as a whole also saw net profi ts rise 22 per cent to 32.6 billion yen in the year to March, while operating profi t was up 3.8 per cent to 92.1 billion yen. However, operating profi ts dived 32 per cent in the quarter to June on higher fuel costs. Making any profi t at all contrasts ANA with its main rival Japan Airlines, however, which made a net loss of 16.2 billion yen in the year to March. It did manage an operating profi t of 22.9 billion yen, however. ANA is generally considered to have grasped the restructuring nettle much more fi rmly than its rival, hence the better results.

Belly cargo growing too Though AJV is the major source of cargo growth for ANA, there are also things happening on the belly cargo side, which fall outside of the ambit of AJV. Here cargo has been benefi ting from ANA’s fl eet renewal, and should ultimately see an expansion of international routes.

The carrier has been phasing out its 747-400s, selling six to Avion Aircraft Trading of Iceland for conversion into freighters last year and three to Oasis Hong Kong. The aircraft are being replaced on long-haul routes by 777- 300ERs: ANA had three of these in April, with nine more on order, including four more ordered in March. In all, it had 38 777s in April, while 23 747-400s still remain in its fl eet.

All of ANA’s fi ve passenger routes to the US have now been switched from 747-400s to 777-300ERs and some fl ights to London were also switched in May – currently the city has 777 service on alternate days – with the rest due to change by the end of the year. Frankfurt and Paris are due to be switched to 777-300ERs by March 2010, as will other international routes, though Nomoto says there is no timetable yet for the complete retirement of the -400s.

For cargo, the introduction of the 777-300ERs is a benefi t, increasing cargo capacity from 90 cubic metres to 96 cubic metres a fl ight, and thus allowing greater volumes and revenues. Nomoto also points out that with a 20 per cent reduction in fuel costs, the new aircraft increases profi tability for cargo.

Meanwhile, in May 2008 ANA is due to take delivery of the medium haul 787- 3 Dreamliner, making it the fi rst carrier in the world to put the new aircraft into service – though Boeing’s recent delay of the fi rst test fl ight from late August to December must cast some doubt over this schedule. It has 30 of these aircraft on order, and will be using them to China and South Korea.

In 2010, the carrier will also start to take delivery of 20 787-8s, which will be used to start new long-haul services. Similar in size to the 767, the 787-8 will nevertheless have a cargo capacity of 84 cubic metres versus 75 cubic metres for the 767-300ER, or 15 tonnes versus 13 tonnes, so once again cargo is expecting to increase revenues with the aircraft.

Further growth with Haneda expansion One other use of the 787-3s will be to replace 747-400s that are still in operation of some of ANA’s high demand domestic passenger routes. The use of such wide-body aircraft for domestic fl ights is due to the current shortage of slots at Haneda, but that situation should be eased in October 2010, when the airports long-planned fourth runway opens.

Work on the runway fi nally started in March, after delays due to negotiating a compensation package with local fi shermen. At 2,500 metres in length, it will allow for a 40 per cent increase in movements at the airport from 285,000 to 407,000 a year.

This will enable ANA to replace the 747-400s with more frequent 787-3s services though Nomoto says widebody 777s may still be used for some peak fl ights – and will allow for new international routes of up to 2,000 km to be started. Currently Haneda’s overseas routes are confi ned to short hops to Seoul Gimpo, and a few late night charters.

Haneda’s expansion will in turn enable some short-haul international fl ights to be moved from Narita, freeing up capacity at that airport for new long-haul routes. Last but not least, the new slots at Haneda, will allow AJV to operate more cargo fl ights from Haneda to Okinawa, and Nomoto says long-haul freighter fl ights could also be started from Narita.

That suggests that the plan for a long-haul freighter is a very active one, with an aircraft type likely to be chosen soon. The world has clearly not yet seen the full extent of ANA’s new cargo strategy. –Peter Conway