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Transitional quarter for IAG Cargo

By Adina Solomon on August 5, 2014

IAG Cargo’s revenue fell 12 percent in Q2 of 2014 compared to the same period last year. CEO Steve Gunning says the airline expected this decrease.

“It’s been very much a transitional quarter for us,” Gunning tells Air Cargo World.

In May, IAG Cargo began using capacity on Qatar Airways-operated freighters – five B777F flights a week between Hong Kong and London. That meant IAG Cargo returned three B747-8 freighters it had leased from Global Supply Systems (GSS).

Gunning says a reduced freighter program for the airline meant reduced capacity and therefore diminished revenue.

“We recognized the market is in a challenging position and has been for some time with oversupply and capacity,” Rachel Izzard, finance director at IAG Cargo, says. “We proactively took the difficult decision to exit the long-haul freighter program and move to a much more flexible, targeted program with Qatar on the Hong Kong-Stansted route and then focus on belly-hold lift, which is growing and is in great position for our customers.”

Though Q2 volumes fell, Gunning says IAG Cargo is adjusting its quarterly figures on a “like-to-like basis” to reflect its lessened freighter program.

“When you do that, what you see is the agile underlying revenue is flat year on year, and given the fact that we’ve had a very difficult exchange rate movement, which has cost us about 11 million euros at the turnover level, actually means our underlying revenue’s up about 11 million euros,” Gunning says.

He says the airline’s load factor is up about 1.5 percentage points, and its yield is down about 1.9 percentage points.

“Most of that is not around price erosion, but a variance in sector length. We seem to be running a lot more freight on longer sectors,” Gunning says. “We’re very encouraged by these results that seem to endorse the brave decision we made to come out of the GSS program.”

The air cargo market remains challenging due to overcapacity from new aircraft with bigger cargo holds, he says. But he says demand bottomed out in the middle of 2013. Now, IAG Cargo sees an improvement in demand, particularly in some parts of Asia Pacific, though excess capacity puts a drag on yield performance.

“I think the challenge for the industry is going to be how do you get it into equilibrium,” Gunning says. “There has to be capacity discipline.”

He says many players in the airfreight industry could benefit from freighter collaborations, such as IAG Cargo’s.

“The industry needs to be thinking of innovative ways of improving network connectivity and network reach, but not necessarily by just introducing additional aircraft into the market,” he says.

Izzard doubts the future of full freighters.

“We believe apart from niche markets, full freighters with a fixed cost base [are] a very difficult position to run with,” she says.

Gunning says the Qatar program has done well. IAG Cargo now uses additional capacity from India to the Middle East, and from the Middle East to Madrid. While India, Asia and Latin America are sound for the airline, he says Mainland Europe, not including Spain, needs to pick up.

Tonnage for IAG Cargo’s Constant Climate product for pharmaceuticals increased by 63 percent year over year in Q2, Izzard says. Latin America and Africa have proven strong in perishables.

IAG Cargo plans to instate flying in the Iberia network to Montevideo, Uruguay, and Santo Domingo, Dominican Republic.

“Latin America is obviously a very strong customer proposition,” Izzard says.

The airline also works behind the scenes. It restructured its sales force in Latin America. And for the past 18 months, it has installed a single revenue management system.

“It’s an internal development, but it makes a huge difference to our ability to optimize the revenue and also will then be the sort of foundation for a better online proposition,” Gunning says.

Once IAG Cargo puts the system in place, it will have an online booking system that allows users to price a shipment. Also in the digital department, the e-air waybill now stands at 15 percent penetration for IAG.