Listen: Combination carriers and their freighter divisions

India-based SpiceJet is moving forward with its plan to separate all its freighter and logistics activities away from the main airline company. Spicejet follows other airlines spinning out their dedicated cargo divisions, with Turkish Cargo set to be a standalone unit and the three Chinese carriers restructuring their cargo businesses. In this episode of Cargo Facts Connect, Cargo Facts Consulting Senior Consultant Jim Edgar joins Charles Kauffman and Jeff Lee to share his insight into how major combination carriers view their cargo divisions, and what additional outside investment may mean for freighter fleets worldwide. A transcript is available below. This transcript has been generated by software and is being presented as is. Some transcription errors may remain. Jeff Lee Hello and welcome to this episode of cago facts connect the podcast and video series of cargo facts, the newsletter of record for the air cargo and freight aircraft industries for over 40 years and Jeff Lee, Associate Editor of cargo facts and today we're joined by Charles Kauffman, Senior Editor of cargo facts and Jim edgar, Senior Consultant at cargo facts consulting. thank you to both for joining us today. This week, spicejet announced its plans to transfer its entire logistics business to spice Express, which until recently had been a wholly owned subsidiary of the low cost carrier. The proposed transfer resembles similar rules by other combination carriers, including Turkish Airlines, which is in the process of spinning out Turkish cargo as a standard of unit. In this episode, we'll look back at cargo standing within combination carrier business models, and we'll reflect on how these changing structures could affect investment in freighters. Now, Jim, over the course of your long career, you've dealt with many of the Asian combination carriers with significant freight of fleets. During these interactions with them, what did you make of the way they viewed cargo and a freighter division? Jim Edgar My experience, Jeff, is that, um, pre COVID, it was really a matter of a concern regarding emphasis and focus and leverage in priority for cargo. It's no secret that cargo can be very profitable. But by the same token, it does take resources. And it takes tension, because it is a distinctly different business. So I think, in general, because each carrier is different, each has different considerations. But in general, it's fair to say that, mostly what drove the the independence and the standalone approach, being considered at the larger Asian carriers with freighter fleets was to be able to really put a focus and even work the actual scale more closely. So they really had a handle on how cargoes performed, ran a little bit tighter, but really concentrated on it as a standalone business and profit center versus just another industry segment. So I think it's fair to say that was the pre COVID motivation for carriers considering standalone and breaking off from the corporate umbrella. Jeff Lee Right. And obviously, things have changed dramatically in the past year and a half. And, you know, how does all this affect what these airlines are thinking about what to do with their pilot units? Well, Jim Edgar it's fair to say that because of the the traffic and the demand and the profit, frankly, from cargo, that you'd be hard pressed to find a claim that hasn't reexamined their approach in detail. First, we see a lot of carriers that abandoned freighters 30 years ago, and now are getting back into the freighter business. And that doesn't even count the prayers. So I think it's indicative that anybody in the air transportation business now has cargo Air Cargo firmly in its sights and is trying to figure out how to optimize and maximize their cargo operations. So that particular motivation that drove standalone and hiving off the cargo operation from the rest of the airline probably isn't as big a factor because it's got everybody's attention now. Jeff Lee And in the past couple of years, we've seen several airlines carving out their cargo businesses into standalone divisions, and even having some of their own employees hold stakes in the business. Charles, we've seen this happen in mainland China recently, haven't we? Charles Kauffman Yeah, that is that is definitely the case with the big three Chinese carriers beginning back in 2017. They the government really took this major initiative to push for what they refer to as mixed ownership reforms for state owned enterprises, including China Eastern Airlines, Air China and China Southern Airlines. At least the cargo divisions of these three carriers. And so we saw China Eastern Airlines really take the lead. in pursuing these reforms beginning in 2017, the parent airlines and Eastern Airlines transferred full ownership of Eastern Air logistics they the cargo division into a separate subsidiary within the same group. And then since then we've seen the holding company lowered stake in eo in Eastern Air logistics leaving for private investors, which now hold, which had until actually a recent IPO that was just completed in June 2021. They they have stakes in the company and, and yes, with, with China Eastern as well, we saw core staff of the carpet division holding on to stakes in the company. So interesting model there. And we've since seen China Southern undertake similar steps with its with its logistics division. And Air China is in the process, but has not made as much momentum. But certainly with this, this new company, we see outside investment and really, you know, some interesting developments in terms of what these these new companies are doing. So it's no longer solely about transportation of cargo and sales. The sales and marketing process in China are an Easterner logistics case for we're seeing the company go out and trade and some of the companies adding other services to to its portfolio. Now that it is a standalone company, Jeff Lee Jim, what do you think might be the role and the importance of having sort of outside investment in the cargo business of these airlines. Jim Edgar But first of all, I think it provides some amount of resources that maybe the corporate would be reluctant to allocate, I think it also offers an opportunity for business relationships, expansion, broadening the network, with a stand alone, of course, in a depends on how its structured. But with a standalone, you have the opportunity not just for additional equipment, but you're not necessarily constrained by the the route network of the parent carrier. Oftentimes, carriers, standalone operations are then much more free to establish routes and segments and service where the demand actually exists. So there seems to be when I'm one of the downsides of being under a corporate umbrella, and there are significant upsides to it. But one of the downsides is that the cargo operation is always subject to the final decision by people that maybe aren't as a tuned or knowledgeable on what's happening in the market. So when you have outside investors, that establishes a level of independence and flexibility and opportunity that may be keeping it in house wouldn't afford. Jeff Lee But then you would still be to some degree relying on on the belly network of the main passenger airline. Jim Edgar Yeah, and certainly there's synergies, obviously, being the passenger and you know, I remember very vividly Ram menen said that freighters freighters at Emirates, Skype for boat, were there to feed the bellies. So you know, it sort of a unexpected way of viewing it but really that's the case. But the the airline, the previous parent, the passenger operation then becomes a resource and in some sense, a customer for the cargo operation belong with a lot of other potentials in terms of capacity. So you know that there is a there is some synergy in working very closely with the passenger. And in the past, there's been routes and segments, passenger routes and segments that were financially sustained because of cargo, they could not operate that passenger segment where it not cargo, that's the case all over. So yeah, the more independent it gets and the more standalone it gets, the more that you potentially lose that. That kind of working together. So there's a lot of pluses and minuses and each carrier is very, very different and it really has to do with corporate culture and priorities and how they view cost allocation, there's a whole range of issues, it can become very complex, but very individualized in terms of what decision is ultimately made regarding standalone versus an integrated operation with passengers, Jeff Lee right, because we, I mean, some cargo units have been standalone for for a very long time. But on the other hand, we seem to be seeing other airlines that are kind of grappling with, with what to do with the cargo business, for example, I mean, Singapore Airlines, cargo used to be a separate division. And in I think, in 2017, they kind of re incorporated that into the main Singapore Airlines group. Jim Edgar And not to get too specific here. But recall that Mr. Goh, the head of entire Singapore group now used to be head of cargo. So he well understands the opportunities and potential for cargo. And it, I'm speculating, but it may be that that plays into bringing Singapore cargo back in house because misko really appreciates and is very, very knowledgeable in the business. And that's, that's a huge help for the overall corporate structure to have somebody in that position that really understands cargo and has actually done it. So that's kind of a situation but it's very interesting at the same time, Jeff Lee it is interesting. So, Charles, do you think we'll continue to see more of these carving out of the pocket businesses and you notice this hints at potential further growth of free to fleets around the world? Charles Kauffman Yeah, that's a great question. I think, as I mentioned, Air China is certainly is is pursuing mixed ownership reform. And so we'll see here a continued restructure of their cargo business moving forward in terms of how these changes impact their their freighter fleet operating within the broader group. We have seen both China Southern and and in China cargo airlines, the freighter arm of you know, what was what did belong to China Eastern, move forward, and with investment savings to new build triple seven freighters. So support carriers have added added a pair of triple sevens. And since since 2019, Air China Meanwhile, hasn't really made any significant investments into freighters. Jim, what are what are your thoughts I in in looking back at some of these evolving carrier business models over the years? How do I mean how do you see these decisions affecting fleet trajectories and the ability of a company to to justify investments in freighters? Jim Edgar Well, again, I think pre COVID, it was a matter of understanding cargo and cargo was I don't want to use a cliche, but I will a kind of a poor stepchild to the rest of the company too often. And those of us in the business understood that was a terrible misunderstanding and mistake since then that's not the case. So regarding fleet, I can't imagine that in this environment with all that's happened, that anybody will underestimate cargo again, I mean, it's just been too significant and too strategic to the overall. So relative to fleet though, it's interesting that there are carriers that whenever we would go into a sales campaign, we would, of course, emphasize the synergy of sort of a common fleet. But at some point, because of the fleet sizes, that doesn't become a an important financial consideration. So people like Lufthansa didn't have any Md 11 passengers ever in their fleet passenger aircraft, did very well with their freighters. Cathay Pacific never had any for seven days in their fleet done very well with a dash eight F. But I think there's a lot more appetite for financing. There's a lot more scrutiny on the exact more planning more analysis on what fleet types will really work. We have carriers that never would have thought about operating narrowbody freighters in the past that are doing that. Now, as part of you know, they're mostly a largely a wide body passenger fleet. So it's just fascinating to see this unfold before our eyes and the so many dynamics In play at the same time and things that we're here to for, never would have happened now are happening. So I think it's, it's definitely thinking out of the box. And for every carrier, it's a matter of how can we take advantage of this tremendous opportunity to become involved in the air cargo segment of the business. So it's just a whole new world for the last year and a half. And I think it's going to be exciting to track this and follow it and analyze it and think about and talk to people and all that goes on in our business as we move forward, because the previous models are no longer relevant. Jeff Lee Right. I mean, yeah, that's true. And as you as you were saying, We are watching major changes taking place before our eyes, and definitely a fascinating time to be covering this. And we will of course, continue to cover these developments as they happen. So thank you so much to you, Jim, for joining us today. And thank you to our audience for tuning into this episode of cargo facts Connect. For more multimedia content like this, check out cargofacts.com and search cargo facts connect on iTunes and Spotify. Join us again next time. Subscribe to Cargo Facts Connect on iTunes or Spotify , or download the episode on Transistor . Cargo Facts Symposium, taking place LIVE October 25-27 at the Wynn Las Vegas, is the essential event for stakeholders in the air cargo industry. Learn more and register at www.cargofactssymposium.com .

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