Speaking to press in Amsterdam recently, senior cargo executives representing the component airlines of the Franco-Dutch airline group said significant changes within the industry were behind this decision to scale back its freighter capacity. “We see at this moment a more belly-dominant trend rather than a freight-dominant trend,” said Erik Varwijk, executive VP of AF-KLM-MA Cargo.
“We see the number of freighters around the world decreasing and at this moment our view [for AF-KLM-MA] is that freighters will remain, we are committed to be a maindeck business, but the dynamics on the belly side are going to be stronger than on the freighter side. And that will have its consequences on the industry and certainly on us and basically requires playing the same game.
“As a consequence we intend to adjust our freighter footprint – at this moment we operate 14 freighters, but in the two years to come we intend to retire four of those aircraft,” he added. But getting out of the freighter business altogether is completely out of the question for a number of reasons, including the flexibility it gives. “It’s important in our relationship with major forwarders, we intend to be in all markets in all products which is why we believe of course the belly is very important, but you need to have freighters to be a serious player.”
The freighter fleet reduction will begin first at the group’s French hub at Paris’ CDG airport with two Air France B747- 400 freighters being retired. The move will leave just two B777Fs still operating under Air France livery and will take the percentage of belly/freighter cargo now at 80/20 respectively, from 50/50 a few years ago, to 90/10 by 2015.
Meanwhile over at the group’s Schiphol hub, maindeck reduction will see one B747-400ERF cut loose through an early termination option in its lease agreement and one MD11 which will be retired, leaving three B747-400Fs and five MD11Fs in operation. This will see the belly/freighter balance of KLM-MA shift to 70/30 respectively with the remaining freighters flying until at least 2020, Varwijk said.
KLM’s 17-strong, B747-400 Combi fleet – a historical legacy that sees KLM as the largest and one of the last operators of this unique aircraft type – will also be gradually phased out between 2016 and 2020 due to the age of the aircraft.
“It is still pretty far away and so we are still contemplating how to do that,” said Varwijk. “There are not any new Combies coming on the market so it makes us an extinct Combi operator. We always liked them for their versatility because it was possible to fly a mid-sized passenger aircraft long range and at the same time operate a mini freighter.” But with no inclination by either Boeing or Airbus to revisit this aircraft type, and new aircraft with ample belly space for cargo, Varwijk notes the “game is changing”.
Game changers
With remaining orders for B777-300 aircraft and orders for 50 new generation aircraft – 25 A350-900s and 25 B787-9s – this will be the defining growth story for the AF-KLM-MA group in the coming years as deliveries begin in 2018. “Every new aircraft that will join the fleet will have larger belly capacity, which that in itself, means efficient growth for cargo which at this moment is of course less dynamic than the passenger market.” These new orders will partly comprise replacements, but will also cater for growth on the passenger side and with that, also growth in belly capacity for the cargo division with a B777 having nearly 30 tonnes of cargo capacity and the new generation aircraft in the neighbourhood of 20 tonnes.
The other game changer of course has been the ongoing market downturn. “Since 2008 the market has very much been under pressure on a global basis, of course there are regional differences, but overall this has not been so buoyant as the first half of the ‘90s where really the sky was the limit. I think we’ve all had to deal with that in our industry in various ways,” he said.
Nowhere is this more clear than in AF-KLM-MA Cargo’s struggle to attain profitability as witnessed in its first half figures over the last two years. The first six months of 2013 have seen losses reduced to €100 million compared with a €174 million loss in the same period a year earlier, something Varwijk is quick to point out has little to do with any form of market improvement, but as a result of the group’s Transform 2015 cost control measures that have brought down unit costs by around four per cent. This included some fairly painful measures including workforce retrenchment which will see another 300 cargo personnel axed over the next year, in addition to the 200 already announced earlier.
The other unspoken challenge of course is competition, specifically the challenge being mounted by seemingly cash-flush Middle East carriers. While the executives present at the press briefing steered clear of the issue, it had reared its ugly head only weeks before when Air France unions wrote to the French government complaining of unfair competition.
While acknowledging the speculation in the market of what the true profitability of some airlines in the world actually is, Varwijk would only say: “We work in AF-KLM on a fully allocated cost basis – that means we look in the end, at the profitability of the volumes we use. When we talk about freighters which are simple to calculate, or when we talk about the bellies – it’s not just the cargo cost, but also the allocated cost from the other parts of the company that make that product possible.
“We think that is the only way to have a sustainable business model – to look at your profitability for every flight that you have. So there is no internal cross subsidising of our cargo activities at all, but not every carrier works this way. That’s why I think profitability between cargo operators is difficult to compare because carriers work with different methodologies.
“In the end there is just not a level global playing field – I don’t like it, but that’s just the way it is. I think we just have to acknowledge the fact that the world is not always fair and that’s also true for the air cargo industry.”
New markets
But it’s not all doom and gloom as the group continues to tap new markets – Caracas, Venezuela and Cairo, Egypt were two recent additions – and leverage its Skyteam Cargo membership. While it’s difficult to predict what will happen with the Europe-Asia market and the growth of the intra-Asia market, Varwijk notes that while the groups’ two hubs are both in Europe, AF-KLM-MA has partners with hubs in Asia, Africa and the Americas that will enable it to tap these growing markets. He cites the example of the Safari Express which sees a B747-400F operating in partnership with Kenya Airways, Amsterdam-Dubai-Guangzhou-Nairobi- Lagos-Nairobi-Amsterdam, something that was only possible through its alliance partners.
And in terms of new routes, AF-KLMMA began a new weekly freighter service from the start of the winter season in end-October to Curitiba, Brazil along with Shanghai which has been only been served by belly capacity since the group pulled the freighter service in July 2012.
The group has reduced its exposure on Asian routes substantially over last couple of years, especially China, but also Japan, due to very different dynamics, partly related to markets, changing trade flows across the world and partly because of changing competitive dynamics, according to Varwijk. This included pulling the AF freighter service from both Shanghai and Hong Kong, leaving only Martinair maindeck capacity in Hong Kong.
The competitive angle is daunting, as Alain Malka, executive VP of Air France Cargo highlights, noting that of the top 20 carriers in the world there are nine Asian carriers, three gulf carriers and three major European – AF-KLM-MA, the Lufthansa Group and the IAG Group. “You have 15 major carriers going there with a lot of capacity, so you can see that Asia is a very, very difficult territory because there are a lot of flights, a lot of capacity so its perhaps not the place where it’s easy to earn a lot of money, because of the over-capacity.”
But as Varwijk asks: “Does that mean we’re moving out of Asia? No, we’re not moving out we’re totally committed to Asia, but we had a huge exposure to Asia and there’s been a huge change to those markets in the last five years, so we’ve made some pretty big cuts to freighter services, but at same time if the market rebounds we’ll be back.”
Indeed this is partially being realised with the reestablishment of full freighter services to Shanghai, but this as Malka concedes, is more a result of changing aircraft mix on the passenger side, with the city now being served with A380 equipment which affords precious little belly capacity. But he adds that demand is also picking up marginally, “we can feel a little growth,” he says.
Going forward
The group will continue with its dual hub strategy, fully utilise its vast belly network and will also continue to build up its product portfolio. “We intend to operate to the main cities of the world – this is simply part of the strategy,” Varwijk said noting that Bangkok is another good market from both CDG and Schiphol, and the intention is to increase passenger capacity on that route.
“Our global network remains poignant, but within that network our product position remains vital,” he said noting that 50 per cent of sales originate from products – pharma, live animals, secure products, etc.
Looking at the market Varwijk sounds a cautionary note, saying conditions continue to be “harsh”. “Everyone is hoping at this moment for an uptick in the last quarter of this year. It’s going to give us some strength because it’s partly the seasonality of the business.
The main question is whether this year’s seasonality is going to be better than last year’s seasonality. We don’t know.” There are some upsides he notes: European consumer confidence is slowly growing, and new electronic products are being launched, which create additional demand, although yields are still very low. “We just have to see.”
