With its own house in order through early and stringent capacity reductions and rejigging of its network, the world’s eighth largest cargo carrier by volume (5,670 million tonne-kilometres of cargo in 2011) is by all accounts, riding out the ongoing downturn with relative grace.

With its entry into the alliance – the only global cargo carrier alliance still standing – CI is anticipating the many benefits, from cost savings, to new markets, to greater cargo flows, that accrue from the 10-member partnership will help make for a rosier year ahead.

And like its counterparts across the industry, there has not been much good news for quite some time. The heady days of late 2010 and early 2011 now seem a distant memory and instead it has been months and months of declining volumes, growing capacity and rising fuel prices.

In actuality the situation has more subtle angles to it. As China Airlines vice president, cargo sales and marketing division, Wu Kou-Koung notes, it’s not so much a serious decline of volumes, but rather a slight decline in volumes compounded by continually growing capacity – a result of both newbuild freighters coming on-stream and a substantial influx of passenger widebody belly capacity.

Wu notes that the Middle East carriers and the Low Cost Carriers (LCCs) in particular, have been adding tremendous capacity growth on the belly and “can accept general cargo with very low rates which affects the whole cargo market.” The over-capacity situation in the sea freight market is also having an impact he adds, because it is drawing away cargo that would have gone by air.

“The traditional Transpacific and Asia-Europe routes have been relatively weak in recent months while intra-Asia has remained stable. In general, we don’t actually see significant volume reduction in traditional trade lanes, but the overcapacity worsens the imbalance.”

Pointing to the Asia-Europe trade, Wu highlighted how the weakened value of the euro resulted in European countries reducing their consumption. This of course had the effect of reducing westbound cargo traffic out from Asia that used to be the major source of revenue of CI’s Europe flights.

But the weak euro did have another effect as CI and other carriers witnessed – it created a reverse flow from Europe to Asia which helped address the longstanding cargo imbalances on that trade by filling up aircraft on the backhaul eastbound leg. “But even as it encourages exports from the EU,” noted Wu, “the low selling rate, is not however, able to compensate what we lose on the westbound leg.”

“We still strive to improve our yield in many aspects, and also try to rationalise our capacity usage on freighters and belly.

The fuel price remains to be the crucial factor to the profitability of freighter operation,” he added. And certainly all of these factors are not to be taken lightly when operating a large fleet of very large freighters – 21 B747-400 freighters to be precise – along with the belly capacity of China Airlines fleet of 51 passenger aircraft. Passenger bellies generate about 20 per cent of CI cargo volume.

Reigning in capacity

Much to CI’s credit, it was quick to assess the market demand early in the year and started to implement freighter capacity control. “The long haul capacities, especially those flights on weak-demand days were suspended,” said Wu. “It also drove CI to focus more on belly usage,” he added.

Importantly, this critical assessment of the market and subsequent stringent capacity control saw CI to move quickly to ground two B747-400 freighters in February this year and another subsequently in August.

This careful attention to capacity control has obviously paid off, with the carrier maintaining average freighter load factors above the 70 per cent mark throughout 2012. And crucially, maintaining these load factors was not done at the expense of yields. “Yield has been the focus of our revenue management, thus we still saw our yield increase in past few months, compared with same period last year,” said Wu.

With its freighter network typically focused on the transpacific, intra-Asia (including cross-straits flights to the Peoples Republic of China) and Asia- Europe, CI’s freighters cover 31 cities with 70 flights per week. This includes Amsterdam, Frankfurt, Luxembourg and Prague in Europe; 10 major US destinations; and 16 destinations in Asia from Japan, across SE Asia to Abu Dhabi. The carrier also calls at five cities in the PRC: Shanghai, Guangzhou, Nanjing, Chongqing and Xiamen.

In the Indian market CI previously had freighter services into New Delhi and Chennai (started in May this year) enroute to Europe, but suspended the services due to the high fuel costs, although it still offers belly capacity into the Delhi market through a three-times weekly passenger service.

Aside from grounding three of its freighters, CI has also adjusted its network. “Even though the economy in Japan has not picked up significantly, CI grasped the open-skies opportunity to explore the business out of Japan where we used to have lots of traffic rights restrictions and we see fair growth in the area,” noted Wu. Currently the carrier flies to Tokyo Narita and Osaka.

Another key market for CI has and continues to be the PRC through the so-called ‘cross-straits’ flights which first began as special charters in 2003, becoming regularly scheduled flights in 2009 as greater rapprochement took place between Taiwan and the PRC.

Currently CI operates over 100 passenger flights and nine freighter flights a week, with the cargo revenue generated from the China market accounting for nearly 15 per cent of total cargo revenues.

The problem with the China market and one that impacts all carriers serving that market, is that over-capacity is a perennial problem resulting in low rates as carriers scramble to keep load factors up. CI has the additional problem of limited traffic rights, both problems which it addresses by utilising the space by securing cargo in niche markets such as cargo from China to Indonesia.

Moving forward

In adjusting to this current environment CI plans to further tap the Southeast Asian market, further developing its Japanese network and tapping the surging Middle East market. Wu explains: “By taking advantage of 5th Freedom traffic rights with Thailand and Malaysia, we will add additional flights from Taipei via Bangkok or Kuala Lumpur extended to Europe; also, we will develop Osaka as a second hub and explore the Japan–USA market.

Meanwhile, from 2012Q4, we will add stopovers from Europe via Abu Dhabi for the expanding Middle East market.” He added that with the recent changes to global cargo flows in recent years, in which the intra-Asia trade has exhibited strong growth while the Asia to North America and Europe has stagnated, the carrier will be placing more emphasis on the intra-Asia trade. “We will decrease the overall capacity on all lanes, while sustaining the intra-Asia market and utilse our strong passenger network in this region.”

The issue of its fleet composition is a key one for CI, as Wu notes that carrier is in the midst of reviewing its fleet planning for the next five to ten years. “We are looking into the industry and market trend over the next five to ten years and to set up the strategies to cope with. In principle, we will focus on being more demand driven and cost oriented. Passenger belly space will be one of the important subjects to us and our freighter fleet will also be reviewed,” he said.

On the current environment CI’s outlook is best described by what is fast becoming a cliché description in the air cargo sector – ‘cautiously optimistic’. “We see volume out of China, Hong Kong and Southeast Asia gradually recovering, while ex-USA/EUR is remaining stable. Owing to our strategy in Japan, we also see reasonable growth in that area.”

“We still expect some demand period before the end of this year,” he added but cautioned that the problem with this anticipated demand is that it will likely be only temporary and will be quickly absorbed by the huge amount of idle capacity in the market at the moment. And on a slightly more pessimistic note Wu added: “Most likely, this situation will last for a while, until carriers re-structure their capacity and the global economy rebounds in the coming year.”

Tapping the alliance

In the meantime, CI now has more options open to it courtesy of its membership in the SkyTeam Cargo alliance. This includes tapping markets it doesn’t directly serve, like the South American market where it has no direct services, but rather has been serving this growing market via interline partners for a number of years.

“We will keep expanding our business through this win-win strategy,” he said, adding that through the SkyTeam alliance there will be more opportunities to tap new markets. Indeed as part of the alliance, a partner-wide network of 864 destinations in 174 countries is now available with cargo service on more than 11,392 daily flights.

This will help “raise the total volume of air cargo transported to, or passing through Taiwan,” said Wu. And in addition to raising China Airlines’ profile in the global airfreight market, its SkyTeam membership also boosts Taiwan’s international visibility he said. “It will also enhance the development of Taoyuan Aerotropolis and help shape Taiwan into one of the most important air transport hubs in the region.”

CI will also leverage the branded product portfolio which is standardised across the alliance members. This required integration of CI’s existing product portfolio which was divided into general cargo, special goods and express cargo into the alliance’s four pillar product offering.

“By launching new branded products in the near future such as Equation, Equation Heavy, Variation Pharma, the pricing of these products will boost China Airlines’ cargo revenue and international competitiveness. And we foresee the growing cargo volume of these products due to the market potential of express cargo and temperature control products.”

Indeed, the specialised product, ‘Variation’ is one area that CI is particularly looking forward to tapping as it has long been an area of focus for the carrier. “CI is the professional in shipping special cargos,” says Wu. “We also have unique experience in shipping satellites, high-tech infrastructure, live animals, perishable, oversized cargo, etc.” Pharma in particular is getting a keen focus as CI gears up to roll-out the SkyTeam Cargo products.

E-freight is another area which CI will be continuing to focus on, having gained ‘Paperless Cargo Document’ system certification from IATA in 2009, making China Airlines the first airline in Taiwan to obtain such certification. As at the end of July 2012, China Airlines had cooperated with more than 20 major freight forwarders across 26 cargo stations, in 15 countries and completed more than 20,000 e-freight cargo shipments – the ninth highest volume in the world.

Team cargo

SkyTeam Cargo, launched in September 2000, includes members Aeroflot Cargo, Aeromexico Cargo, Air France Cargo, Alitalia Cargo, China Airlines Cargo, China Southern Cargo, Czech Airlines Cargo, Delta Cargo, KLM Cargo, and Korean Air Cargo. The airlines’ cargo divisions partnered to provide customers with access to a global route network, standardised operational processes, and ‘one roof’ warehouse handling services for seamless cargo coordination and delivery throughout the alliance’s global network. As an alliance the ten member airlines share resources, including shared terminals and shared ground handlers. Coordinated warehousing operations harmonise handling and processes and mean faster connections for customers. The alliance’s wide variety of aircraft types and container solutions, as well as common product lines and handling processes, make routing efficient and more cost effective. The SkyTeam Cargo members also sell a unified product portfolio: Equation for express shipments; Cohesion for customised shipping needs; Variation for specialised products like artwork, dangerous goods, live animals and pharma products for instance; and Dimension which is the standard shipping option.