British Airways has often been accused of being “less serious” about cargo than its European rivals such as Air France-KLM and Lufthansa, mainly because it did not go in for large freighter fleets.

But in the past year the carrier has turned the tables somewhat. While its cargo traffic was down 7.2 per cent in 2009, according to the Association of European Airlines’ figures, that was half the fall at KLM (down 14.5 per cent), Lufthansa (down 18.4 per cent) and Air France (down 9.7 per cent).

The carrier’s cautious policy on freighters is also attracting imitators. The carrier has three B747-400Fs leased from Atlas, which used to look rather tiny compared to Air France’s dozen B747Fs and Lufthansa’s 19 MD-11Fs.

But in the past couple of years, the Air France fleet has been rapidly downsized, leaving it with just five freighters – two B777F and three B747-400ERFs – while KLM’s four B747-400ERFs have been leased to Martinair, to replace its parked B747-400 conversions. The idea that it is better for the cargo business not to operate large amounts of maindeck capacity seems to be catching on inEurope.

Steve Gunning, managing director of BAWC is not triumphalist on the subject, however. Certainly he thinks the policy of not putting too much maindeck capacity into the market was a sensible one, but he also reckons BAWC’s better performance than its rivals last year was due to less exposure to the Asian market.

“The downturn hit Asia harder and so the other carriers were more impacted by that. It was that rather than the fact that they had freighters which explains the difference in performance,” he says.

As a result, he points out, carriers such as Lufthansa have also bounced back more dramatically, with the German operator seeing a 20 per cent year-onyear increase in cargo traffic in February. BAWC managed a respectable nine per cent, however, and doubtless many cargo managers around the world would be happy to have more modest growth now if they could have avoided the worst ofthe dip last year.

Freighter decisions
As it happens, BAWC did have an opportunity to get rid of its B747F freighters late last year. Gunning reveals that a clause in its contract with Atlas would have allowed it to return the freighters this summer. He says that he did discuss the topic with British Airways CEO Willie Walsh, a man with a notorious focus on improving BA’s margin.

“We thought long and hard but still think that our current business model is the right one,” says Gunning. “Using three to four freighters to give us depth on a few trade lanes – particularly Hong Kong/China and India has worked well for us. I think these freighters make a real contribution.”

BAWC has been very steady in its scheduling of the B747Fs over recent years, sticking to six flights a week to Hong Kong and one to Shanghai. During the downturn, its only adjustment has been to reduce Hong Kong to five times a week, a change that still has not been reversed. Across the Atlantic, the carrier has two freighter calls a week at Atlanta and Chicago, and one at Houston.

The B747Fs also call at Chennai three times a week and Delhi four times a week on the way back from Hong Kong and Shanghai, and there is also one return flight from London to India calling at Frankfurt on the way home.

Tony Nothman, senior vice president Africa, Asia, Middle East and Pacific for BAWC says that India is one of the carrier’s better performing cargo markets at present, with the carrier’s US links proving especially valuable in recent months. “The improving US economy has meant the proportion of cargo from India to there is increasing,” he says. “From October to December it was 56 per cent of volumes, but now it is 72 per cent.”

Network adjustments
BAWC also has fifth freedom rights from China to India, and used to find this a very lucrative route, which justified stopping Europe-bound freighters in India. It still benefits from this traffic, but Nothman admits that there is much more competition on this sector these days.

Despite this, the freighter stops in Chennai were increased to three only late last year to reflect increasing demand in this area. By contrast, BAWC no longerflies freighters to Mumbai, as Nothman says its manufacturing base is declining.However, the carrier does have twopassenger flights a day to both Delhi andMumbai, as well as one a day to Bangaloreand five a week each to Chennai andHyderabad.

By contrast the carrier’s last remaining passenger route to Pakistan – to Islamabad – was withdrawn a year ago. BAWC now serves this market using A300 freighters operated by DHL from Karachi twice a week to Bahrain, and Sialkot once a week to Dubai. These feed into BA’s belly capacity out of these two airports.

Elsewhere in Asia, passenger routes were trimmed in the downturn, with Japanese routes falling from twice a day to once a day, and frequencies to Hong Kong and Singapore among others being cut. Much of this capacity has still not been restored. “For the past two to three months we have been watching industry statistics carefully, and we have continued to take passenger capacity out while our competitors have put it back in,” Gunning says.

The loss of capacity was less of a hardship than it might have been given the falls in cargo markets last year – Nothman reveals that the Japan to UK market fell 45 per cent at one point, though he says it is now building back up again.

The weak Japanese market meant that BAWC was also not too upset to lose its freighter cooperation with Japan Airlines – the two had shared freighter capacity to Heathrow for many years until JAL exited its freighter business. But freighter cooperation with Korean Air and EVA Air into the UK still continues.

The yield issue
In the peak season, BAWC did only 10 additional freighter charters out of Asia, while the market did about 300, something Gunning reckons shows the carrier’s restraint compared to the rest of the market. Does that mean BAWC sees a danger of overcapacity this year? “It is too early to say, but there is a huge risk of it,” he says. “Cargo is coming back, but if capacity floods back in too, we won’t see the yield recovery we need.”

As it is, BAWC has seen a 20 per cent rise in yields since August, but that still leaves it down year-on-year. “We were encouraged by the yields in the third and fourth quarter of 2009, but it would be wrong to conclude that they are back up to 2007 levels,” says Gunning. “There is still a way for the business to go to enjoy the profitability it used to.”

The issue of yields is a pertinent one, because there might well be some suspicion among freighter operators that large belly operators such as BAWC were able to insulate themselves from the downturn last year by offering crazy low prices (not that freighter operators were immune from that either).

Revenues at the carrier in fact fell 25.1 per cent in the nine months to December, a figure that might be compared to the 31 per cent fall Lufthansa Cargo saw in its revenues in calendar 2009. Against this would have to be weighed the fact that BA’s cargo traffic fell less than Lufthansa’s and that BAWC’s revenue figures will have been flattered somewhat by the fall of the UK pound against the dollar and euro.

Whatever, Gunning insists that far from slashing rates to get business, BAWC focused on the opposite. “One of the lessons our sales force learned in the past year was to say no much more than we have done before,” he says. “We got to a point where we could not accept the rates in the market because we would not have had a viable business, even as a belly carrier. I would quite happily lose volumes to get yields up, and that is the message I have given to the sales force.”

Nothman adds that BAWC also uses sophisticated revenue management tools that many of its rivals do not. “We have invested in systems to manage yields and set hurdle rates, so that if a piece of cargo is not making the minimum contribution, we don’t accept the business,” he says. In all, Gunning expects to finish the financial year (at the end of March) with volumes only three per cent down year-onyear – a contrast to the 21.7 per cent fall for the nine months to December.

Premium traffic
Something that has certainly helped the yield picture has been premium traffic. BAWC made a big investment in this when it opened a special premium handling facility at Heathrow a few years ago, and Gunning says that in the 11 months to February, this traffic was up two per cent, compared to a four per cent fall in general cargo.

Gunning reckons the sector proved more recession-proof because shippers in this sector tend to have no alternative to air freight. Yield decline was also less in this sector of the business.

One particularly strong area was pharmaceuticals, where Nothman says BAWC picked up a lot of business in the last year. The carrier relaunched its “Constant Climate” coolchain product last year, and saw a doubling of traffic, albeit from a relatively low base.

The product is now available on 73 lanes and at a third of the stations served by BA. Two growing markets have been India and China, where growing domestic healthcare programmes have seen an increased demand for vaccines and other prescription drugs, a sector in which European pharmaceutical companies are still a market leader. There is also a growing trend for clinical trialsto be carried out in India, requiring the transport of drugs and samples betweenthere and Europe.

Another premium product seeing growth is mail. The carrier opened a separate mail facility at Heathrow late last year to cope with demand. “One of the attractions of mail is that it moves in AKEs and so can fit in belly spaces that otherwise would not carry cargo,” says Nothman.

BAWC’s advantage in the mail business is often in the connectivity it offers between European, Middle Eastern and Asian flights and North America. This was enhanced by the carrier’s move of its passenger operations into the new Terminal Five at Heathrow in March 2008, despite the well-publicised, but short-lived glitches that attended the terminal’s opening.

Gunning says the faster connections offered by having all the carrier’s aircraft in one place on the airport has been of particular benefit to US and Asian cargo customers, but he also cites softer factors such as improved punctuality as “huge positives” for the cargo business.

Asia-led recovery
Market by market, BAWC has like other carriers seen the recovery being led by Asia, and Gunning says it is starting to be felt out of North America. The latter region also held up slightly better in the downturn – an advantage for BAWC given its extensive transatlantic network – as did the Middle East, though the difference was not massive in either case.

The UK and the rest of Europe have been much slower to recover, with the UK market proving particularly tough. BAWC has been on a campaign here to increase its market share, which was low as 13 per cent a few years ago and has now recovered to 17-18 per cent. There is plentiful competition from other carriers in this market, however, leading to pressure on yields.

As for continental Europe, here BAWC deploys shorthaul A300 freighters that it charters from DHL Express to feed cargo into Heathrow. The idea is to enable it to tap into European markets that it cannot serve by truck – or at least, not as easily as its continental rivals can.

This network was not surprisingly trimmed by 30 per cent in the first half of 2009, with flights to Stockholm, Porto in Portugual, Barcelona and Leipzig in Germany being cut. But the A300Fs still serve Frankfurt, Paris, Prague, Madrid and Brussels, and Nothman says it remains an important tool, particularly for the US market.

The shorthaul freighters have proved particularly useful during BA’s recent cabin crew strikes, which were sparked by attempts by the carrier to reduce staffing levels. A three-day strike took place from 20-22 March and then a four-day one from 26 to 29 March, though BA was still able to operate many services.

Flights cancelled tended to be shorthaul narrowbodies to Europe, which are of minor significance to cargo, and the shorthaul freighters and trucking could cover for many of these. Gunning says longhaul flights were much less affected.

In fact, he says BAWC managed to fly 90 per cent of its normal services in the first strike, and 100 per cent in the second: “In fact the weekend of the first strike was one of the busiest we have had this financial year,” he boasts. Cargo even benefited from some longhaul positioning flights, where the aircraft flew empty to pick up passengers or crew overseas, but could still carry a full cargo load.

At the heart of the strike is a desire by Walsh to reduce costs at British Airways to bring it into line with both lower cost competitors in Europe, America and Asia. As part of this, cargo has also felt heavy pressure on costs, and even more so in the past year. “Frankly, we looked under any stone we could find to take costs out,” Gunning says. “The result is that we have reduced our unit costs by something like 15 per cent year-onyear.”

In particular, manpower has been cut by 11 per cent, and a whole range of handling and trucking contracts have been renegotiated. This included the re-tendering of all US and European handling contracts. In the US five of the six stations where the carrier selfhandled on the cargo side were also put out to third party contractors, with JFK still remaining to be done. “The downturn accelerated the pace of all these programmes, which would probably have taken much longer in a normal environment,” Gunning says.

The result is that BAWC’s cost base is now more volume-sensitive, which he says is a key learning of the downturn which will be carried on in the years ahead. The challenge will be to continue this level of cost cutting in the future, however. “We are struggling in the current year to find new areas to look at on the cost side,” Gunning admits. “But it is something that you can never stopdoing in the airline business today.”