Signs of headwinds in the passenger business are raising questions about the cargo activities of the big three US passenger carriers. Collectively, they generated over US$2.5 billion in cargo revenue last year, but they are struggling with the freight business. As the passenger market is getting more challenging, some observers wonder about their commitment to invest in cargo.
US airline stocks have sunk in recent months as the carriers expect unit revenue to drop due to higher capacity and lower fares. In an effort to reverse this trend, Delta recently scaled back its planned capacity increase for the winter season and deferred delivery of four A350 aircraft by a year to 2019. Its trans-Pacific capacity is set to shrink by 15%.
Cargo results have been dismal. With revenues essentially flat (down 0.1% to US$937 million), United Airlines fared comparatively well in 2015. Delta suffered a 13% decline in revenues to US$813 million, while American tabled US$760 million in cargo revenues, down 13.1% from 2014.
Cargo revenues continued to fall in the first quarter (as much as 25% at Delta) , but this is hardly surprising, given the strong surge a year earlier thanks to the disruption at US West Coast ports, which forced shippers to divert cargo to airfreight. Even so, the overall trajectory gives little room for cheer. Tim Strauss, vice president, cargo at Hawaiian Airlines, pointed out that from the first quarter of 2012 to the first quarter of last year (which was buoyed by the port disruptions), the US carriers collectively saw a mere increase of US$2 million. Effectively, a lot of traffic went to ocean carriers or other airlines.
“We lost a lot of business over these years,” he said.
In terms of absolute cargo dollars, Hawaiian and Southwest were the only US passenger carriers that recorded gains during that period.
Bob Imbriani, executive vice president, international at forwarder Team Worldwide, sees a downward spiral in play. The large carriers are suffering decline because of insufficient commitment to and investment in the business (none of them operates freighters any more, he pointed out), and the decline in the market serves as a reason for cutting back investment further, he said.
“US carriers have always treated cargo as a stepchild,” he added.
Of the big three, Delta has come in for the strongest criticism after it decided to move cargo operations management back into the passenger division, leaving the cargo department reduced to sales and marketing, with no control over operations.
“They thought they could market cargo the way you market in the passenger business,” remarked Strauss. “Airlines want to treat it (cargo) as another division of the passenger business that acts the same way. It does not.”
One airline-executive-turned-industry-consultant blamed the frequent turnover in the big airlines’ cargo leadership and a management culture that is driven by earnings per share instead of customer satisfaction.
“These big airlines have become so faceless we seldom deal with them,” said Peter Lamy, president of American Worldwide Agencies. “I don’t even know who to call at Delta over a billing issue.”
Smaller carriers like Southwest are more used to chasing after customers and are better attuned to their needs, Strauss finds. The large megacarriers may be relying too heavily on the large multinational forwarders, he added.
“The big forwarders carry so much weight with the big airlines, they really dominate the pricing,” Strauss said.
He dismissed suggestions that any of the big carriers could come to the conclusion that cargo was too much of a distraction and could be outsourced for guaranteed income.
“Farming out the entire belly side never makes sense,” he stressed.
As for the question in how far the headwinds in the passenger business might hamper the cargo divisions’ quest for funding to invest in technology and better processes and service levels, he said that a lot hinges on the leadership of the cargo department and its ability to convince top management. Since he took over cargo at United, Jan Krems has taken some outsourced functions back in-house, he noted.
More such steps may be needed. “You have to invest in this industry even when the business is down,” Strauss said. He figures that the large carriers have leaned too hard on their handlers to trim costs to the point where service levels have been affected.
Stan Wraight, executive director of Strategic Aviation Solutions International, regards handlers as the key to successful cargo operations. The quest for premium services to stem the yield decline hinges on the performance of the handling agent. Without adequate remuneration, that is not going to go up, he stressed.
By Ian Putzger
Air Freight Correspondent | Toronto