The challenging global operating environment for air cargo carriers – one characterised by slowing demand, growing capacity and record high fuel prices – has left no carrier unscathed. "I hope this condition will not continue for a long time and at some point the air cargo market will be much more profitable," said Japan Airlines’ vice president, planning and marketing for cargo, Yuji Fujitaspeaking to Payload Asia in Tokyo.
"All we have to do now is survive under this severe condition – and we are quite confident we will survive – so I see a very bright future for JAL’s cargo business," he adds.
It’s tempting to simply dismiss the statement as mere obligatory corporate optimism. Even more so since it comes only days after the carrier, like several of its competitors in recent months, entered into a plea agreement with the US Department of Justice to plead guilty to antitrust violations and pay a fi ne of US$110 million (nearly Â¥11 billion).
But JAL Cargo’s survival is surely beyond doubt and will not be merely accidental, as well. A far reaching strategy to improve efficiencies, cut costs and maximise the strengths already inherent in its operations are setting the carrier on a new, albeit low-key route.
Just as the current industry downturn impacts each individual carrier uniquely, so are the varied responses. And while Japan Airlines Cargo (JAL Cargo) is no exception to the pressures of the current environment, it has chosen a markedly different strategy than most of its counterparts, for dealing with it.
A contrarian strategy
While many carriers continue to add capacity to their fleet with larger aircraft, move to tap new markets, or form new joint ventures, all in a bid to fill their cargo space and improve cargo and revenue load factors, JAL and its cargo division have adopted a slightly contrarian strategy.
Rather than up-size capacity – or even maintain the status quo while riding out this latest industry turbulence – JAL is actually shrinking its cargo and passenger fleet, not in terms of overall capacity or aircraft numbers, but in terms of aircraft size.
While over-all capacity will remain relatively stable, because of trade-off s on the passenger side, what will change is a downsizing of individual cargo aircraft size.
"Currently our cargo capacity is roughly 50-50 belly hold versus freighter capacity," according to Fujita. He added that the overall capacity for cargo will remain roughly the same even though the carrier is replacing many of its larger aircraft with smaller ones.
In terms of belly capacity the cargo division will pick up additional capacity as the passenger side of JAL replaces B747-200/400s with B777-300ERs, but at the same time will lose capacity as it replaces B767-300s with B737-800s.
The move is essentially being mirrored on the cargo side with both divisions being driven by the need to maximise load factors while reducing costs.
"We want to protect against fluctuations in the international scene by having more flexible operations," Fujita explains. "It’s harder to shift larger aircraft to other routes and still fi ll them up than it is with smaller, more fuel efficient aircraft," he added, pointing to the effectiveness of the 45 tonne payload B767 freighter for smaller markets and markets that have out-grown JAL’s bellyhold capacity.
Big freighters to stay
But the cargo division isn’t about to part company with large freighters altogether, instead keeping them for key routes where cargo volumes warrant the larger capacity like Hong Kong and Shanghai, or routes which require both the larger capacity and longer range, like the key Europe and transpacific trades. But in this era of exorbitant fuel costs, one very necessary step is to replace its ageing, fuel-hungry B747-200s. "We would very much like to expedite the phasing out of the B747 Classics," Fujita said, adding this will be accomplished by the end of the 2008 financial year, ending 31 March 2009.
The case for ditching the B747 Classics is clearly compelling. Fujita explains the 747-200s were used for both the Europe and the West Coast US, but because of the limited range, the transpacific flights are forced to re-fuel in Anchorage, Alaska. On the same route, a 747-400 is 15 per cent more efficient and because it can operate direct to the West Coast, it gains an extra 5 percentage points of efficiency, making it a full 20 per cent more efficient than a 747 Classic.
Currently JAL has 13 freighters in its fleet comprised of 10 B747 freighters of which three are Classics and seven are 747-400s (including fi ve B400-BCFs); and three are 767-300Fs.
"Utilising a combination of large and medium-sized aircraft, we will be able to expand our cargo operations while securing stable profitability by building an efficient operational base," he said.
Th is typically will translate to using the larger aircraft on direct routings while the medium-sized B767s will "enable us to flexibly respond to meet strong demand in China and Southeast Asia."
Currently JAL still has one of the world’s largest passenger fleets of Boeing 747s – with over 60 in its fleet – a direct result of capacity situation at Tokyo’s airports over the last 20 years.
With a huge, financially capable domestic population spread over a reasonably large area, domestic air travel choked Tokyo’s airports meaning large capacity B747s for domestic use quickly became the only practical way around congestion and slot-restrictions.
These are continuously being phased out as new aircraft orders are gradually delivered. Currently, Japan’s largest carrier has 35 of Boeing’s 787 Dreamliners on order, 10 Embraer E170s, 25 737-800s and fi ve 767-300s on order.
No new freighters
As far as newbuild freighters are concerned, Fujita said there are no plans within the Cargo divison’s current three year plan for any new purchases. "Personally I’m quite interested in the B777F but so far in this medium-term plan we don’t have any plans to introduce a new aircraft type," he said.
"The B777 is a very nice aircraft and maybe in the future the 747-400s may be replaced by the 777-300. In that sense if we think about the maintenance, engineering training and stock of parts it’s better for the freighter fleet to be aligned with the passenger fleet because it is more efficient," he said.
Looking ahead there are likely two or three key versions of new freighters to select from – the B747-8F, B777F and A350F. "Maybe we can choose from one of those three new generation freighters,"he adds.
Tweaking the routes
Route expansion is also largely on hold over the next three years, with only minor tweaking of the current routes. In Europe, JAL Cargo hubs out of Frankfurt as well as operating to London and Paris.
London has three freighter flights a week and Paris four which are operated by code share partner Air France. Frankfurt has seven frequencies a week from Tokyo and three from Osaka which are operated as a code share with Lufthansa.
Services to the US were cut slightly earlier this year, with 21 flights per week reduced to 19, in part from the phasing out of 747-200s and also as a result of dropping San Francisco and Atlanta due to slack cargo volumes. JAL Cargo now calls at Los Angeles, New York and Chicago.
Within Asia, JAL Cargo runs an extensive network into mainland China, Hong Kong, Taiwan and throughout Southeast Asia.
Potential growth markets
As far as potential growth markets, Fujita points to Africa and Eastern Europe. "Of course for us the major customers are Japanese companies, and a number of Japanese companies have already gone into some parts of Eastern Europe and set up factories, particularly Turkey and that may be a growing market," he said.
But for now the cargo division will have to be content with its current freighter services to 37 destinations and those of the substantial 272-aircraft passenger fleet which flies to 240 destinations(including code shares).
Fujita notes that one of the brightest spots in the belly-hold market is India. Daily passenger flights between Tokyo and New Delhi are proving very popular, and the cargo side is also benefiting from what Fujita describes as a "booming" trade, in part driven by mobile phones and parts.
"We are quite enjoying the market in India, but at this moment we do not have any plans to operate a freighter into India."
The market is still not sufficiently big enough for dedicated freighter capacity he says, noting that a B767 would be the best size for such an operation, but because of the range it would require one stop in Southeast Asia – ideally either Bangkok or Singapore. "But we don’t have any fifth freedom rights to do that," he added.
With the issue of freedom rights being a contentious one within the industry, would the JAL Cargo boss like to see the bi-lateral system scrapped? "Some parts of it yes and some parts no," he says.
"Liberalising the system is generally good for the air cargo industry. But the system does help to regulate some capacity and third or fourth freedom rights are very good for market segmentation." "If everybody came into the same market it would not be so good – some sort of rules are required to help stabilise the industry’s growth – but not too tight," he adds.
Leveraging Narita and Haneda One key area which has both the passenger and cargo divisions of JAL excited is the impending expansion at Narita airport and the expansion and opening up to international flights at Tokyo’s Haneda airport, reserved for domestic and international charter flights only.
"Narita and Haneda, which serve the largest market in Japan, namely Tokyo, are extremely important to us in terms of both our passenger and freighter network," Fujita said.
By 2010 Narita’s second runway will be extended to 2,500 metres and Haneda’s fourth runway will be in operation. Because JAL feeds its Southeastasian and China cargo through Tokyo, "these developments are enormous business opportunities for us," he added.
Aiming to leverage the added capacity at Narita, JAL Cargo said it plans to maximise the expansion of its profitable routes out of the airport in order to wring out better aircraft utilisation. Most of the benefit the cargo side will come about as a result of additional passenger flights, because even if freighter slots are allocated the airport intends to maintain the night ban on flights from 23:00-05:59.
At Haneda Airport, or Tokyo International Airport as it’s properly known, the situation is a bit different. "The Haneda expansion off ers one of those once in a lifetime business opportunities," Fujita said.
Th is is because the airport, located much closer to metro-Tokyo than Narita International Airport, is set to be opened to both international passenger and freight traffic from Autumn 2010.
Total capacity will increase nearly 40 per cent he said, with the additional runway enabling over 400,000 annual flight movements compared to the current 295,000. Some 30,000 of these movements will be allocated for scheduled international flights on a short- to medium-haul basis up to 2,000km.
"Th is means a big advance in capacity between Japan and Asian countries, notably China and Korea. We have to take maximum advantage of this opportunity," Fujita said. "Th at is partly why we are concentrating on developing our fleet with more small and medium capacity aircraft," he added.
The only catch, however, is that the Japan Civil Aviation Bureau has announced that freighters will only be able to operate between the hours of 23:00 and 05:59 and can only use the 2,500 metre runway. "By utilising slots at both Narita and Haneda airports, airlines will be able to offer a 24 hour cargo service to and from the Tokyo metropolitan area, and will be able to get more out of their freighter fleet by accordingly adjusting existing routes and schedules. Th is is an extremely attractive opportunity for us," Fujita said.
Shaving costs
On the cost-side the carrier, like much of the industry, has been keenly focused on shaving costs.
The major thrust in this area focused on applying the Toyota Production System (TPS) to the group’s cargo operations at Narita Airport, where the carrier says it is now well on the way to saving millions of dollars annually and improving productivity.
Currently in place at seven of its stations globally, JAL Cargo is targeting a year-on-year increase in productivity levels of 12 per cent by end-financial year 2008 (March 2009).
Other cost-cutting measures include taking delivery of un-painted freighters which help reduce weight by nearly 150- 200kg per aircraft. In total, JAL Cargo has six unpainted freighters.
The carrier also took the innovative step of designing, in conjunction with the manufacturer, a new lightweight cargo container. Rather than being 100 per cent constructed from aluminium alloy as in the past, the new containers utilise Twintex – a new material made of glass and polypropylene fibers – for the side panels.
Th is reduces the weight of each container by 12 kg, which on a 747-400 amounts to a total savings of 780kg. About 10 per cent of the carrier’s containers have been replaced with the new version.
More turbulence expected
All of this will become increasingly crucial for the health of the carrier’s cargo business as the environment continues to give the industry a bumpy ride. While JAL Cargo saw nearly a 70 per cent load factor on average for the financial year 2007 (ending 31 March 2008), the original forecast of similar levels over the next three years was made prior to the US mortgage fallout.
"We expected the total demand out of Japan would be fl at for the forthcoming three years, out of Japan to boTheurope and the US. Within Asia there would be some increase in total demand out of Japan, to Asia and China of about 5-8 per cent," Fujita said.
But the environment has clearly changed and Fujita notes that demand is not likely to increase on either the transpacific or Europe trades, but neither is capacity growing in any signifi cant way.
China on the other hand, is seeing some growth in demand, but capacity is also growing. Fujita acknowledged that overcapacity is becoming a problem in China, a situation that is being exacerbated by slowing consumption patterns in the US. "My most pessimistic view is the slowing down of the demand out of China to the US. Also between Japan and China we were expecting to grow the market, but we have some competition with the maritime transportation.
"Because the distance is not so long, some of the shipments between Japan and China are moving into the maritime transportation," he said adding that this includes less time-sensitive commodities like textiles and machine parts.
While he agreed this could be part of a larger trend, driven largely by high fuel prices, it’s limited to shorter distances and hence not much of a threat for the Europe or transpacific trades.
For the calendar year 2007, JAL Cargo carried 4.7 billion freight ATKs for a weight load factor (combined with passenger figures) of 62 per cent, identical to a year earlier and slightly up from 2005 figures.