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Aviation Blog

Pandemic taught passenger airlines lesson about the value of freight – FreightWaves

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The director general of the International Air Transport Association acknowledged Monday that the organization has not always valued cargo throughout its history but said the pandemic taught airline executives that shipping goods can be profitable with more focused service.
“People probably haven’t fully appreciated the importance of cargo to the financial model of a lot of airlines,” Willie Walsh, the former chief executive of British Airways and International Airlines Group, said during a moderated exchange at the Cargo Network Services (CNS) conference in Miami.
“When it came to discussions at the board of governors, it was rare to have a debate about cargo, to be honest with you. It rarely made it onto the agenda,” said Walsh, who took the helm at IATA in April. “I’ve had two board meetings since I joined as director general and at both of them cargo was on the agenda, principally the carriage of energy storage devices [such as lithium batteries] and concerns about safety. That’s the first time that I can recall where we’ve had discussions at the board level where cargo has been central to the agenda.”
IATA, based in Geneva, had many priority issues to deal with and cargo didn’t come up for discussion. “So I think the criticism leveled at IATA is fair,” Walsh said. 
Air cargo has been a savior for communities around the world after the COVID outbreak by delivering personal protective equipment, COVID-19 vaccines and other goods at a time when most passenger flights, which carry about 50% of global airfreight, were grounded and economies were only partially functioning. Passenger airlines quickly threw about 2,500 aircraft into the breach for purely cargo operations, including more than 300 with their seats removed, which alleviated some of the capacity crunch for shippers. 
Cargo operations rapidly became an important source of revenue for cash-strapped airlines. Many carriers have smashed previous revenue highs for cargo in recent quarters and continue to enjoy very high yields because air cargo capacity is still about 15% below pre-crisis levels amid strong demand for cross-border trade.
Cargo represented 35% of airline revenue in 2020 compared to about 13% in a typical year — closer to 3% for major U.S. carriers — and IATA forecasts cargo will generate 30% of industry revenue in 2021 despite the return of more passenger business.
Demand, measured in cargo ton-kilometers, increased 8% for the first six months of 2021, the best performance in four years, when volumes grew 10.2%. The international load factor registered 64.2%, the highest level for June since IATA started tracking how much aircraft space is filled in 1990. 
As a group, airlines barely made a profit until the past decade, when operating margins reached 5.5%.
Walsh said airlines, going forward, will put more emphasis on cargo because it can make a difference in profitability.
Some airlines have cut back or eliminated passenger freighters as more aircraft are returned to regular passenger service. But their business model has reversed, with management examining the incremental cost of carrying passengers rather than the incremental cost of cargo when making decisions about how, and where, to fly. 
At Delta Air Lines (NYSE: DAL), for example, the cargo division plays a much greater role in determining which cities to serve, service frequency and the type of aircraft flown, Vice President of Cargo Robert Walpole said in an interview earlier this summer. 
“I’ve always had an appreciation for the contribution of cargo. I don’t think that’s true of all airline CEOs,” but that has changed during the pandemic, Walsh said. “The debate has given a whole new insight to airline network manager teams as to the importance of cargo to the business.”
The director general predicted that airlines’ focus on cargo will be sustained and even suggested a potential rekindling of interest in freighters after many carriers exited the all-cargo sector years ago because they couldn’t make sufficient returns. 
In fact, airlines like Air Canada (TSX: AC), WestJet, SmartLynx and Air Belgium have launched or are in the process of launching stand-alone divisions that operate all-cargo aircraft.
Favorable conditions support continued air cargo growth, namely extremely low inventory levels in North America.The value of inventory held per dollar sold has dropped by a third to $1.09. Freight economist Walter Kemmsies, managing partner of an eponymous consulting firm in Savannah, Georgia, noted in a presentation that retail sales accelerated during the pandemic to levels not predicted until 2026 while inventory levels are where they were in 2016. That 10-year gap makes it difficult for companies to rebuild inventories. Many are turning to airfreight to get products as soon as possible so they don’t lose sales — or valuable shelf space in stores to competitors, he said.
Showing the love
Walsh said his presence at the CNS event, which was streamed online, underscores the importance of cargo to IATA. And he reassured the audience of airline and logistics industry executives that cargo has an important seat at the decision-making table. 
Miami-based Cargo Network Services is an IATA subsidiary that represents the air cargo industry in the U.S. and provides payment processing, consulting and market data services to members 
Walsh noted that CNS President Frederic Leger, who works out of the Geneva office, is a cargo veteran. Leger is interim senior vice president for commercial products and services at IATA and took on the additional CNS role when Michael White accepted a voluntary buyout last fall as part of the organization’s restructuring to cut costs as airline revenues, and membership dues, plummeted. 
From 2007 to 2013, Leger was head of cargo business process and standards at IATA. But his presence in the Geneva headquarters means IATA doesn’t have a top-level official based in the U.S. now.
“You’ve got somebody in Fred who is a cargo person and he reports directly to me. That hasn’t been the case in the past,” Walsh said. “He’s a member of the executive management team at IATA. We’re together once a week at our management committee meeting, but he and I have a session every week where he takes me through all of the issues, and CNS and cargo is on that agenda. 
“Don’t interpret restructuring and reporting lines from the past as an indication of where I view cargo. Cargo is very important to us,” he said.
Walsh said IATA will review whether recent organizational changes are beneficial, including the location of the CNS chief, once the pandemic and airline finances settle down
“When you are forced into radical restructuring in a short time frame, you don’t always make the best decisions,” Walsh said of his predecessor, Alexandre de Juniac.
Click here for more FreightWaves/American Shipper stories by Eric Kulisch.
RECOMMENDED READING:
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Airlines to lose $48B despite banner year for air cargo
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