The top three international cargo carriers in 2015 were Emirates, Cathay Pacific, and Lufthansa. One might expect, given that all three have been at, or near, the top of the rankings for many years, that their approach to the business would be stable. Your business model has made you an industry leader, so why make fundamental changes?
And yet that is exactly what the big three have done. In the space of one week:
- Emirates notified customers that, effective 8 August, it will increase its rates for all cargo by US$0.10 per kilogram.
- Cathay Pacific notified customers that it will re-introduce a fuel surcharge, effective 1 September.
- Lufthansa Cargo, long known for its focus on premium traffic, introduced a new bare-bones economy product, td.Basic, effective 1 September.
The Lufthansa announcement was public, while Emirates and Cathay let their changes be known through letters to customers, now widely quoted in the media.
The three carriers are based in different parts of the world, and each faces unique challenges, but we see at least one common thread in the background of these shifts – overcapacity. There are many ways that overcapacity impacts the market, but one effect is that struggling carriers will lower prices in a desperate attempt to gain volume – “the plane is flying anyway, so even if we’re almost giving the space away, it’s better than nothing.”
Up to a point, the big carriers can compete on the basis of their better service, hoping that relatively little business will be siphoned off to competitors offering lower (perhaps unsustainably lower) rates. But only up to a point, and over the recent past, they too, have had to lower their rates. And now, with demand growing much more slowly than capacity, and the cost of fuel rising again, Emirates, Cathay, and Lufthansa have all had to take action.
Emirates has chosen to raise rates. In its widely quoted letter, the Dubai-based carrier said: “Emirates SkyCargo is forced to implement the mentioned increase due to the fact that the prevailing rates in the market make our operation unsustainable.” A fairly blunt assessment, and, on one level, a reasonable response – one way to deal with falling profit is to raise revenue. But, of course, the question is: Can Emirates impose a rate increase without losing volume? Perhaps on routes where it faces very little competition, but it is difficult to make a price increase stick on routes served by many competitors.
Cathay has also chosen the path of increasing revenue, though through the introduction of a fuel surcharge, rather than an increase in base rates. Fuel surcharges were the norm not long ago, and were generally accepted as a necessary evil. With the price of fuel rising again, reintroducing fuel surcharges makes sense, but, as in the case of an increase in base rates, there is a risk of losing volume if other carriers don’t follow suit.
Lufthansa has taken the opposite approach. Rather than raising rates (and praying that volume doesn’t evaporate), the carrier has opted to try to increase volume while keeping costs down. Lufthansa says the new td.Basic product will be available “at extremely attractive prices,” but adds: “this will be made possible by simpler background processes, booking via the cargo airline’s online channels only, and a somewhat longer duration.” How much longer? Three days longer on average than with the carrier’s standard td.Pro product. The benefit to the customer is the obvious one of lower transportation cost. The benefit to Lufthansa is that, without the need to deliver on a specific schedule, the carrier can use the td.basic cargo to boost load factor on whatever flights it sees fit.
Which, if any, of these responses will succeed remains to be seen.Like This Post