Air France-KLM Cargo takes a beating in 2012

Almost since Air France and KLM merged their cargo operations, the combined carrier has struggled to deal with the new realities of the air freight business. As traffic has fallen, AF-KLM has reduced its freighter fleet, but not enough to match reduced demand, and load factor has steadily fallen as well. In response, Air France-KLM said a couple of years ago that decreasing traffic was not a problem, that it had given up chasing market share and would thenceforth concentrate on yield. That is, that its goal was profitability, not increased traffic.

Fast forward to the present: AF-KLM’s just-released 2012 financial and operating data show that far from achieving profitability, the carrier’s cargo business reported a 2012 operating loss of €220 million – substantially worse than the €60 million loss in 2011. Cargo revenue was down 2.7% to €3.06 billion, traffic declined 6.3% to 10.6 billion RTKs, and while cargo yield was up 3.0% on a reported basis it was down 0.9% when favorable exchange rate effects were removed.

In an attempt to keep capacity in line with falling demand, AF-KLM said it reduced its main-deck capacity by 8% in the second half of the year, but with belly capacity rising to meet increasing passenger demand, the carrier’s overall cargo capacity fell by only 3.5%. This, in turn, led to a 1.9 percentage point drop in cargo load factor for the year.

Is there a solution? Air France-KLM says it can cut its cargo operating loss by about €140 million in 2013 through three initiatives:

1. Rightsizing and reorganization of the freighter fleet will save €50 million. This will be achieved by
   1. reducing active main-deck capacity by 6%
   2. returning three parked freighters to the lessors
   3. ACMI-leasing one parked freighter (believed to be one of the KLM/Martinair 747-400ERFs) to Etihad Airways
   4. moving one parked freighter into a joint-venture with Kenya Airways

1. Simplifying the product portfolio and establishing a new commercial policy will save another €50 million. The carrier did not provide details regarding either the product portfolio or the new policy.

1. Cost reductions (via the “Transform 2015” plan) will save €40 million. Again, AF-KLM provided no details of how the plan would cut losses in the cargo division.

While the first initiative will obviously produce savings, the latter two sound like wishful thinking. This is not to say that there is no saving to be made through adjusting the product portfolio, or changing commercial policy, or through any number of cost-cutting measures. But absent any detail, it is hard to believe these measures will generate €90 million in savings in one year. We shall see.

On the subject of the freighter fleet, Air France-KLM currently operates fifteen units. Air France Cargo operates three 747-400ERFs and two 777Fs, while subsidiary carrier Martinair operates four 747-400ERFs and six MD-11Fs. In addition, AF-KLM has four freighters currently parked, plus two leased out. The parked units include two 747-400ERFs, one 747-400BCF, and one MD-11F. The leased units are two 747-400BCFs currently operated by Air Cargo Germany. As mentioned above, AF-KLM plans to ACMI-lease one freighter to Etihad and move one into a jv with Kenya Airways, return three parked freighters to the lessors, and reduce the active fleet by 6% (likely by parking an MD-11F).