New Year, New Flight Plan: A year into COVID airfreight maintains a new course

What do you do with a successful business model focused on passenger aviation, with cargo along for the ride and nicely supporting revenues, when suddenly, cargo takes the front seat and passenger revenues are grounded? Many international combination carriers were forced to ask themselves that question a year ago, when it became clear that the COVID-19 pandemic was not confined to China and would instead directly impact the lives of billions around the world. Major freight forwarders, including DHL Global Forwarding and CEVA Logistics, declared force majeure as cargo capacity suddenly vanished from the market, and most of the world’s aircraft were suddenly grounded. “We are very much a passenger-driven airline, despite that there has always been a very strong strategy for cargo,” Fredrik Wildtgrube, vice president of Finnair Cargo, told Air Cargo World . “What we had to do was actually move all of our operation as an airline to be facing the cargo world. This was quite a big mind shift, and this was done on the go, while we were transforming our operations going from the whole network into a minimum network, and also having to deal with the changes in the organization, adjustments that we had to do because of COVID-19.” The quick pivots to adapt to an unexpected and unfamiliar environment showed the flexibility of aviation and logistics leaders, but most of the adaptations weren’t expected to be long term. While some operators are foundering — or becoming acquisition targets — as a result of the pandemic, others are finding that their 2020 course corrections are a launching point to soar to new heights when lockdowns finally lift and cargo capacity returns to the skies. Passenger freighters keep it moving One innovative strategy that emerged early in the pandemic was the use of passenger aircraft for cargo-only flights, which quickly became known as passenger freighters or “preighters.” Originally, many in the industry expected these to be short-lived solutions to accommodate demand for personal protective equipment (PPE) that surged in April and May 2020, but passenger-freighter operations have turned out to be surprisingly resilient. “The skepticism that came in the beginning [toward passenger-freighter operations] was quite reasonable,” said Finnair’s Wildtgrube. Finnair Cargo began operating several of its A350s in cargo-only service early in the pandemic, and also removed most of the passenger seats from two A330-300 aircraft in May to enable cargo loading on the main deck. “Fifty percent of the world’s air cargo has moved on passenger equipment. Now, since a lot of those passenger planes were grounded due to the pandemic, that caused a delta between the balance of demand and supply,” he added. For its part, Finnair Cargo kept its passenger freighters moving along the same routes its passenger operations flew previously, keeping the transition more efficient than it would have been had the carrier investigated new locations, Wildtgrube said. “The markets that we have been serving have been Finnair’s known stations, where we always have been flying, which has given us the opportunity for us to keep ourselves, as an organization, very lean and agile, because it’s our familiar locations,” Wildtgrube said. “That actually has been part of the reason why we have been so adaptive in increasing flights, even in a short window.” Keeping passenger-freighter operations consistent with pre-pandemic networks is not the only approach to optimizing a cargo-only network. American Airlines Cargo has looked to longer-term commitments from its forwarder partners to build out cargo-only segments of its network, Maulin Vakil, American’s director of cargo customer care, told Air Cargo World . One of the dynamics that has changed in the past few months has been “the value to secure capacity—ways in which forwarders can ensure long-term security around the next three months, or five or six months, that we can have space aside for them,” Vakil said. With the higher rates needed to justify passenger-freighter operations, airlines operating these as scheduled flights assume risks that passengers mitigate in normal years. With forwarder commitments supporting cargo-only segments, American can mitigate those risks, as do the freight forwarders that have secured needed capacity for the months ahead. “And they’re willing to commit upfront for that certainty,” Vakil added. The use of passenger freighters has also been particularly useful in markets underserved by freighters, such as Latin America. Carriers in the region were severely affected by the drop-off in passenger traffic and the negative economic impact of the pandemic, and two of the largest carriers — Colombia-based Avianca Holdings and Chile-based LATAM Airlines Group — filed for Chapter 11 bankruptcy in the U.S. in May 2020. Cargo operations have become increasingly important at the aviation group amid the difficulties, LATAM Cargo CEO Andres Bianchi told Air Cargo World . With little passenger demand to meet, “at one point around mid-2020, most of our widebody fleet was allocated to pax-freighter ops,” Bianchi said. “Because passenger demand and restrictions are constantly changing, decisions have to be made much more quickly,” Bianchi said. “Cargo is now much more involved and I’m in more of those meetings. Everyone is looking at the business through different eyes.” Soft or hard block space The ways combination carriers are adapting mark a change from the norm, as does the approach freight forwarders must take to secure capacity. Flexport has historically utilized significant space on passenger aircraft, using block space agreements (BSAs) as part of its strategy, Executive Vice President Neel Jones Shah recently told Air Cargo World . But the forwarder has had to adjust its strategy in light of the capacity changes. “The BSAs in 2021 are a little tougher than historical standards because there’s just a lot less capacity — I mean, the bellies aren’t out there right now, and there’s likely to not be a robust international schedule for the entire year,” Shah said. “Now we’re having to rely even more on freighter capacity.” American Airlines still has customers utilizing BSAs on its flights based on its historical service method, Vakil said, but added that BSAs now function as part of a spectrum of strategies that American’s forwarder partners utilize to secure space. “I’d say the spectrum runs from soft blocks to more of the hard blocks, which are the BSAs and then ultimately, the charters, which I think is the most advanced form of capacity guarantee that you can provide,” said Vakil. Soft block space obtained on the spot market is a particularly risky approach to securing capacity during the pandemic. The most recent rate analysis from TAC Index for February points to large deviations in rates across various trade lanes, from week to week, or even between individual shipments. Such variation presents a highly volatile market for freight forwarders, leading to a “very risky environment” for 3PLs looking to secure space, according to TAC’s business development director, Robert Frei. Given capacity constraints, though, sometimes the spot market is unavoidable. When planning ahead is possible, however, it’s important to utilize the various other capacity arrangements that have come to dominate the market, which American’s Vakil believes are likely to remain the status quo for some time. “I think all three [soft blocks, BSAs and charter deals] will exist in the long term,” he said. Chartering a new course Many of the passenger-freighter and full-freighter flights operating today are being chartered by freight forwarders looking to avoid future situations in which they are unable to secure enough capacity for their customers. Apex Logistics, which is being acquired by Kuehne+Nagel in a deal that could reposition the latter as the world’s largest freight forwarder, has been “a heavy charter operator for about five years, where we’ve operated year-round scheduled charters,” Apex’s Mike Piza, senior vice president for corporate business development and customs brokerage, told Air Cargo World . Plans to increase the 3PL’s 2020 charter schedule were already in the works prior to the pandemic, but those plans were dramatically accelerated once the capacity outlook became clear. “In 2019 we ran just under 600 charters, and then in 2020 we just about doubled that to around 1,200 ... of that, 800 or so were freighter flights, and then we had a lot of converted passenger-freighter operations as well,” Piza said. He shrugged off the early skepticism surrounding passenger freighters, saying the aircraft are well-suited for certain types of shipments like vaccines and “a great use of the airplane when otherwise those aircraft would be grounded.” IAG Cargo is another combination carrier group that doesn’t operate freighter aircraft, and quickly realized that it needed to find a better use for its passenger aircraft than sitting in storage while passengers were grounded. “Before the pandemic, we didn’t have a charter team — it didn’t exist within IAG Cargo,” Head of Sales Darren Peek told Air Cargo World . IAG Cargo has since operated an array of passenger freighter charters across its British Airways, Iberia and Aer Lingus subsidiary carriers. “We very quickly tried to understand what we would need to do and how we could work with our colleagues in the sister airlines to make it happen when our customers were requesting such a charter.” IAG has since operated more than 1,000 cargo charters using its passenger freighters, in what Peek said has become a “well-established process.” “We just recently operated from Shanghai into Munich as a result of changes in the requirements for masks in Germany to a different grade level, with IAG Cargo playing its part in bringing in some of those masks. Likewise, we have charter operations out of Germany for the automotive business to North America, standing up multiple charters over just a one-week period,” Peek said. As head of sales, Peek said he is focused on current market needs and declined to give a forecast for how long such flights would continue, but indicated that IAG Cargo would be operating charters as long as the requests continue to come in and the price requirement supports the operation. On the freight forwarder side, heavy charters are likely to continue at least through 2021. While capacity remains short, Apex plans to continue with its heavy charter schedule this year, Piza said, although the precise network may be adjusted in 2021. Previous Apex charters largely connected China and Hong Kong with North America and Europe, with some recent expansions such as Hanoi and Ho Chi Minh to North America. “I think you’re going to see a further expansion of routes in terms of what we’re trying to mix into the charter network,” said Piza. Pushing toward the future Aside from maintaining the course until passenger belly space returns, airlines and freight forwarders are striving to keep the future in mind as they adapt to the present operating environment. Adjustments made to survive or thrive during an unusual operating environment must be sustainable in the long run, preventing both future force majeure situations and overexposure to costly assets once capacity returns to the market. In its most recent earnings statement, UPS — one of the more successful pandemic operators, thanks to its freighter aircraft focus on e-commerce growth — stressed the importance of improving revenue quality and productivity. This fits the management strategy of new CEO Carol Tome and her “better, not bigger” approach. The approach is well-suited for a crisis environment, but “is absolutely a long-term strategy for UPS,” UPS Airlines’ Mike Mangeot, director of strategic communications, told Air Cargo World . UPS has focused on growing core segments of its business, including healthcare, small and midsize business (SMB) offerings and international growth market sectors. The express carrier has moved its focus to areas that offer the most returns on its efforts: “focusing on what’s ‘wildly important,’ to borrow another element from Carol’s business philosophy,” Mangeot added. “Our services must create value for our customers, but also financial strength for UPS and our stakeholders. Fortunately for cargo teams, airfreight currently offers the greatest hope for financial strength in aviation and could do so for some time; the recovery of international passenger demand to 2019 levels is not expected now until around 2024. The eventual return of belly capacity will alleviate capacity issues, but the focus on cargo is unlikely to vanish with the capacity crunch. “It’s not just about how much belly capacity comes back; it’s also how it’s deployed,” said LATAM’s Bianchi. “Passenger growth will be more focused on traditional hubs that are also cargo-heavy airports, while secondary hub routes will be impacted the most. We want to go deeper in some of the markets that we already serve, and move some from secondary to primary.” “Our growth is based on long-term plans, not just contingency,” Bianchi said.

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