on cargo is not a simple matter, nor something that happens overnight. Indeed, cargo is an activity precious few low cost carriers (LCCs) dare to dirty their hands on. The very idea runs smack in the face of the LCC business model, one premised around high utilisation via very short turn-around times and of course, low overheads.“Cargo matters,” the head of cargo for Malaysia-based AirAsia group, Sathis Manoharen says emphatically. “Cargo presents an unique opportunity for the low cost model, but not many low cost airlines want to get involved in this business, for the simple reason that turnaround times are pretty tight compared to legacy airlines.”

“We’re defying convention – we think the other way – as we always do in AirAsia,” Manoharen says, echoing the mantra of his boss.

But contrarian thinking appearsto work because remarkably, AirAsia with a station turnaround time acrossits South, Southeast and East Asianpassenger network of just 25 minutesfor its narrowbody fleet, manages tobulk load 2.5-3.5 tonnes of cargo aboardits A320-200 aircraft within 22 minutes.

For AirAsia X, the AirAsia group’s long-haul arm, the carrier can load between 16 and 18 tonnes of cargo aboard its A330-300 aircraft within 60 minutes, snuggly within the widebody aircraft’s 75 minute turnaround window. AirAsia X currently flies to Australia (Perth, Melbourne and the Gold Coast), China (Chengdu, Hangzhou and Tianjin), India (Mumbai), Taiwan (Taipei) and the UK (London, Stansted).

“A lot of people ask us how we do this, but we spent years developing the methodologies and processes of doing this,” he said noting it took “at least five or six years to get where we are today in terms of cargo, basically trying to overcome the hurdle of short turnaround times and also harmonising the passenger and cargo operations.”

“Over the years we believe we’ve perfected it and are doing well, especially in the markets where we’re strong, like the Asean markets,” Manoharen says adding that the learning curve is a “continual process”. An indicator of the carrier’s success can be seen in the minimal disruption cargo has caused to the passenger side of the business. “I’m proud to say that, while yes we have caused some delays for the airline, delays to the passenger side as a result of cargo operations are only one per cent per annum.

“That is a relatively good figure if you benchmark it against other airlines utilising belly capacity for cargo,” he adds. But the carrier is not about to lose sight of its business model, Manoharen insists, adding that AirAsia is not promoting itself as a cargo airline, but rather an LCC that can also offer serious and reliable cargo options.

He adds that while the one per cent delays are marginal, more significant delays “will not be tolerated because of the business model.” If cargo loading cannot be completed within the turnaround window, it will be stopped and the remainder will be accommodated on the next flight, he says.

“Due to our unrivalled frequencies, especially in the ASEAN region, we have well structured mitigation plans in place to manage connections and ensure cargo arrives in the quickest possible time,” he says, adding “as the saying goes, ‘the show must go on!’.”

Serious about cargo
AirAsia, which was ‘reincarnated’ in December 2001 when the failing government-run airline was purchased by former Time Warner executive Tony Fernandes, has been carrying cargo from nearly that point, but only established a dedicated cargo division in 2008.

The cargo team was built virtually from scratch with almost all the staff, Manoharen himself from a consulting background, from outside the air cargo industry. “We started from ground zero,” he says, describing the investment to start up the dedicated cargo division as being two-fold – tangible in the form of outsourcing for warehouse and ground resources; and intangible in terms of “positive thinking and the attitude that anything is possible when you put your mind to it.”

Clearly it’s more than just ‘positive thinking’ at work, with cargo volumes in 2009 up 80 per cent over a year earlier to 50,000 tonnes and cargo revenue per flight up 40 per cent yearon- year. The group is forecasting an impressive doubling of those volumes for 2010. These volumes also include the contributions of group subsidiaries, Thai AirAsia, Indonesia AirAsia and Vietjet AirAsia.

Of these volumes, 40 per cent is generated by AirAsia’s domestic network with the remainder from its international network, the bulk of which is intra- Asian. Manoharen notes that the best performing markets are East Malaysia, Hong Kong and from the China sectors especially Hangzhou, Tianjin, Chengdu, Shenzhen and Guangzhou, along with AirAsia’s Indian sectors, as well as, Taipei, Melbourne and the UK. Key commodities include perishables, machinery and automobile parts, electronics, and apparels.

Fernandes’ clarion call to maximise the use of the belly space has clearly come to fruition for the carrier with cargo activities now a key part of the group’s ancillary income. Indeed, the group’s first quarter 2010 results confirm this with cargo ranking as the second highest contributor amongst the ancillary revenue streams according to Manoharen.

This ancillary revenue helped the carrier post an eight per cent, yearon- year rise in 1Q net profit to RM224 million, on a 10 per cent rise in revenue of RM878 million. For the full-year 2009, ancillary revenues contributed RM415.2 million and while AirAsia does not provide a detailed breakdown, Manoharen says that in 2009 cargo revenue grew by 80 per cent year-on-year and cargo revenue per flight grew by almost 36 per cent. “We expect 2010 to be a much better year and in the 1Q we are already ahead of projections.”

Prior to the 1Q results, analysts had suggested that the carrier might not be able to replicate last year’s successes, as 2009’s severe economic downturn shifted traffic – both passenger and to a lesser extent, cargo – from pricier legacy carriers to the LCC market.

Manoharen is confident that the growing success of the cargo division is more than simply cyclical timing. “We believe that with our cargo services we are able to lower the costs in the supply chain process. The growing number of established freight forwarders who are now using our service is a pleasant surprise.

“Not long ago, established freight forwarders were shying away from us as they questioned our ability to provide a reliable service. Now we are thankful that we have managed to establish a good structure in our operations and service levels and we are seeing the positive results.”

He also points to the growing cargo interlining and sales agreements with other carriers. Since getting into cargo seriously two years ago, the group now has agreements with big name legacy carriers including: Gulf Air, Etihad and South African with discussions now underway with Virgin Atlantic. “We will expand our interlining agreements strategically as we expand our footprint into Europe in the first quarter of next year,” Manoharen says. The group also relies on a network of cargo GSAs to drive its volumes.

Overcoming the hurdles
There were a number of challenges to getting the cargo operations up and running on a more significant scale, including of course not just the perception, but the overt statements of so-called experts that a LCC could not do cargo.

Aside from dealing with the short turnaround times, harmonising passenger and cargo operations, the carrier also needed a cargo booking system. This was essentially a manual system until AirAsia launched its booking, tracking and tracing system from 1 January this year for the Malaysian domestic market, followed by its international routes on 1 June.

And this makes AirAsia, according to Manoharen, the first low cost carrier to have a web-based booking system for cargo. The open-based system also allows tracing of air waybills on cell phones with internet connectivity. And typical of the carrier, AirAsia didn’t go to one of the established industry providers of cargo booking software, but rather hired a small software company in India to do specialised programming for it.

“The more established companies have very fixed ideas and methodologies. The off-the-shelf products have features we don’t need so why pay for something we don’t need,” observes Manoharen.

Another area where the group broke with convention was in the area of surcharges. “We are of the view that having a fuel and security surcharge added to the core pricing structure of cargo is just confusing to the market and shippers. Most of the time these surcharges are dynamic in nature and shippers need to constantly have their finger on the pulse in terms of airline cargo pricing which could potentially be an administrative burden. Why have these surcharges when you can price your cargo with an inclusive single rate? Why complicate things when you can make it simple?”

“So we said we’ll go with a flat rate, no fuel or security surcharge and with that we’ve gained some attention in the market – whether its the right or wrong attention is yet to be seen, but we believe it’s helping us gain ground the in cargo market in both Asean and the UK,” Manoharen says.

And when it came to equipment, the group explored various options before deciding to opt for the ULD poolingsystem offered by Unitpool. “This has given us a sizeable cost advantage– not managing the administrativeburden of inventories, hiring resourcesfor maintenance, repair and storingactivities.”

The group also outsourced its warehousing and transshipment facilities at its Kuala Lumpur hub where it also has a perhishables handling facility which offers up to 48 hours free-of-charge cold room and chiller storage for its customers.

Competitive edge
Careful planning, contrarian thinking and perseverance aside, AirAsia also tapped a number of its inherent competitive advantages as a LCC carrier which helped contributed to its growing successes and in the process proven the naysayers wrong.

“Our key competitive edge is our unrivalled network and frequencies especially in the ASEAN region and our low cost structure,” according to Manoharen. The carrier currently flies nine times a day to Singapore, seven times a day to Bangkok and eight to Indonesia, for instance.

Although he notes it’s difficult to say how much cheaper AirAsia is than legacy carriers because of the fact cargo pricing is a direct correlation to demand and capacity and there is also an element of ad-hoc pricing in the market, but “we are approximately 30-40 per cent cheaper and in some markets maybe more.”

The Kuala Lumpur-based LCC can achieve this because it has what it claims to be the world’s lowest operating cost at 2.7 US cents per ASK (average seat kilometre). It’s nearest rivals, according to Manoharen are Singapore Airlines and Cathay Pacific at about 6 and 7.3 cents per ASK, respectively. “So you can see it’s a huge gap that gives us a competitive advantage on cost.”

AirAsia also has among the world’s highest aircraft utilisation, with its aircraft utilised, on average, 17.5 hours a day. Another key advantage is that the AirAsia group serves both primary and secondary markets, “which we believe is a good synergy in terms of creating a cargo market,” says Manoharen.

Typically low cost carriers fly to secondary markets and AirAsia was quick to recognise that there were “ample and valuable opportunities in secondary markets where typically legacy carriers do not fly.” He cites the example of Indonesia with its population of nearly 227 million, the combined population of the top five cities excluding Jakarta (which alone is nearly 9 million), is equivalent to over half of Malaysia’s entire population of 27 million. “There is obviously some amount of opportunities to be tapped from cargo in these secondary cities,” he says with a grin.

The carrier is also set to begin flying into five new primary markets, including New Delhi from 4 August, Incheon, Haneda, Male (Maldives) and Yangon (Myanmar). So now that cargo has become more important, does that mean Manoharen’s team has more influence in the decision making process for establishing new passenger routes? “We’ve always viewed business opportunities holistically,” is his cryptic answer.

Fleet and network growth And further route expansion, both regionally and long haul are clearly in the cards with new aircraft orders taking its narrowbody A320 fleet from about 70 aircraft at the end of 2009 to 175 by end of 2015.

On the wide-body, long haul side, AirAsia X will see its fleet of six A330-300s and two A340-300s grow substantially with orders for 20 more A330-300s. The carrier also has orders for 10 of Airbus’ new A350-900, along with five options. These are expected to enter the fleet roughly around 2015 and will give the carrier about the same cargo capacity as the A330s, according to Manoharen.

Much of the future development of cargo will likely come from the AirAsia X side of the business of both the larger cargo capacity of the long-haul aircraft and the expanding network. A public listing is expected in the first quarter next year. Future expansion is planned in China, India, the Middle East and Europe with the Malaysian government reportedly awarding AirAsia X rights to 36 international destinations. The carrier is also planning to setup a ‘virtual hub’ in the Middle East to focus on cities in Europe, Africa and the Middle East.

Competition
With its growing success in the cargo market, AirAsia is bound to attract the attention of the big players in the market – both legacy combination carriers and all-cargo players – as well as other LCCs eager to imitate its success. Philippinebased LCC, Cebu Pacific took a near similar cargo path, tapping its extensive domestic network which also relies heavily on A320 aircraft, and a more limited, but growing regional network. And the latest to eye a piece of the cargo pie is UK-based easyJet, which operates on over 400 routes with 170 aircraft, in 27 countries across Europe. The carrier launched a six-month pilot project earlier this year to assess the feasibility of carrying cargo.

But while the legacy carriers have little to worry about in terms of scale, the emergence of low cost cargo carriers does represent yet another challenge to maintaining load factors and allimportant yields.

Manoharen dismisses the idea that its lower pricing is predatory and undermining the market – a charge that was leveled by some all-cargo players against combination carriers during the crisis of last year. For him, it’s very simple: “We’ve got a low cost structure and we just take advantage of that. We’re not here to lose money.”

The carrier will, first and foremost remain firmly rooted in the passenger realm. “We are not trying to sell ourselves as a cargo airline, because simply we are not, we are a passenger airline first and we won’t ever get confused with that model. But, at the same time we’re interested in going into cargo. We like to be different and we like to continue to be different.”

“We have a short-term objective of setting ourselves firmly in the cargo market and in the longer term to give some of the established carriers a run for their money.” This then begs the question – will we one day see freighters bearing the distinctive fire-engine red AirAsia livery? “Definitely not in the immediate future, but in the not-so-distant future anything is possible!” Manoharen sayswith a perceptible glean in his eye.