Canada’s rocky cargo landscape

Canada has weathered the global downturn markedly better than its neighbor to the south, but that has not insulated its air cargo market from turbulence. Jamie Porteous, executive vice president of sales and service at Cargojet, says the domestic market stabilized recently after a marked downturn in the latter half of 2011. “The domestic peak last year was almost non-existent, although customers had projected a peak,” he recalls.

In response to the adverse conditions, Cargojet rationalized its network to drive down costs. One B727F aircraft that came to the end of its lease term was returned to the lessor. This was not purely a reflection of Cargojet’s domestic business, which consists, to a large extent, of overnight line-haul flights for the integrators. The carrier’s nightly freighter to Toledo, Ohio, was scrapped when DB Schenker pulled the plug on its overnight airfreight service in North America.

International markets have been no better than Canada’s domestic arena, although there are a few bright spots. Lise-Marie Turpin, managing director of cargo at Air Canada, says South America has been kind to the Canadian cargo market. “We are just limited by our capacity. In the summer, we fly 767 aircraft instead of the 777,” Turpin says, adding that management is looking to bring a 777 back earlier in the fall because of cargo demand.
The North Atlantic, on the other hand, has been painful for carriers. The lack of activity on trade lanes between Europe and Canada, says Paul Nugent, senior director and general manager of cargo at Air Transat, is a key problem. “The strength of the Canadian dollar does not help with exports, and too much capacity is putting downward pressure on yields. Imports are stabilizing somewhat,” he says. Due to the uncertainty, Nugent reports that he’s seen some shippers move freight to ocean carriers.

Somewhat ironically, Canada’s maritime provinces on the Atlantic coast emerged as a hotbed for freighter activity in this challenging market. Within barely four months, two freighter services to Europe kicked off from the Maritimes. After Icelandair launched a weekly B757F run from Halifax over Reykjavik to Liege last December, Cargojet followed with a weekly 757F operation from Moncton to Cologne. This has since come down to one operation. After the Icelandair flight came to an end, Cargojet shifted its Canadian departure point to Halifax. The flight now goes to Brussels — a larger market for seafood exports from eastern Canada — and is ferried over to Cologne to pick up European exports to North America.

According to Cargojet’s Porteous, demand from Cologne has been strong, whereas loads were not as heavy as hoped for out of Moncton. “The problem is that seafood shippers are not prepared to commit 100 percent of their traffic to a freighter out of the Maritimes and give up their allocations on Air Canada [out of Montreal]. They have seen too may freighters come and go. On the other hand, we need a full load commitment,” he says. The Greater Moncton Airport Authority, which had been a major driver behind the establishment of the service, found it could no longer sustain its support at the original level.

Cargojet’s presence in eastern Canada has grown considerably in the wake of UPS’ expansion in the area, which made a significant investment in infrastructure, facilities and staff in Atlantic Canada. This enabled Cargojet to set up a regular overnight freighter operation to the region. “That was one gap we had in our domestic overnight network. We didn’t really have a connection from eastern Canada to western Canada,” Porteous says.
The return of one 727 freighter to the lessor aside, the carrier’s fleet has remained flat.

Down the road, management is looking to replace the 727s with 757 cargo aircraft, when more feedstock becomes available. “The 757 is a little larger, but we think it is the right aircraft,” Porteous says. Cargojet management is currently evaluating the B767-300, which would give the airline more range for international operations than the pair of 767-200Fs it is currently using.

With no 787s scheduled for delivery this year, Air Canada’s fleet is also largely unchanged. The airline’s top brass had signaled for some time that it saw a need to push into the low-cost carrier arena. Earlier this year, it indicated that this would likely play out in the international sector — most likely across the Pacific — but questions remain about how this would affect cargo.

“Nothing has been decided. We have been clear about the need to play in that market, but nothing has been decided on what business model we will choose and how cargo will be managed,” Turpin says. Like most large airlines, she adds, Air Canada has put much emphasis on selling its network. When market conditions deteriorate, there is more focus on interline traffic to develop cargo that goes beyond its own network.

Air Transat has a considerably smaller network than its larger competitor, but it has also taken great strides to develop its reach beyond the destinations on its schedule. Over the past year, it has concluded more than 20 interline agreements. According to Nugent, the exercise of obtaining a global network is now more or less complete. “We’ve got the markets where we want to be. Our goal is not to cover the world, but those areas that are complementary for us. We are strong in Central and South America, the Middle East and India. We are really pushing Eastern Europe now,” he says. Air Transat’s interline strategy has developed an unusual link to Russia via Punta Cana, Dominican Republic, which is served by Russian carrier Transaero.

Freight forwarders and airlines in Canada have their hands full with preparations for a tighter airfreight security regime. Starting December 31, all belly-hold cargo on passenger aircraft taking off from Canadian airports will have to be screened prior to departure.
Operators pointed out that they have little time to get ready for the new regime. “Clear directions came out only recently that by the end of the year, if you are not regulated, your freight needs to go through a screening procedure,” says Donna Letterio, CEO for Canada at DHL Global Forwarding and president of the Canadian International Freight Forwarders Association.

Air Canada’s Turpin stresses the importance of pushing screening up the supply chain, echoing the creation of the Certified Cargo Screening Facility program in the U.S. “If everything ends up on the airline docks for screening, we’ll face backlogs. We’ll need longer tender times if freight is not screened,” she warns. “There is still concern about the state of readiness in the industry, but we have seen good progress over the last month. I think we, as an industry, will be there.”

At least Air Canada and other carriers will not have to re-screen cargo transiting Canada en route between the U.S. and other parts of the world. Officials in Washington, D.C., and Ottawa recently agreed to extend formal recognition to each other’s cargo security programs. “This does not change much on pure trans-border freight, but it’s significant for international freight moving via Canada. It will help smooth the flow of goods,” Turpin says.

Operators are less enthusiastic about efforts to advance e-freight in Canada, notably Cathay Pacific’s current push to get forwarders to file their data electronically. At DHL, Letterio has said that the company is generally in support of e-freight and the e-airway bill. “But we take exception if we are the ones required to enter the information into Cathay’s website. They have not given us any other alternative,” Letterio comments.

Canadian forwarders have historically had to be creative in finding routings for their cargo, particularly for traffic requiring all-cargo aircraft, given the shortage of international freighter flights out of Canadian gateways. For all the needs for main-deck connections, Letterio does not automatically welcome the entrance of new freighter operators, though. “Competition is good, but at what cost? It does not help if a carrier jumps in, destroys the pricing in the market and then exits after a few months and the others battle to get the rates back to a sustainable level,” she says, adding that too many international carriers —both all-cargo operators and passenger airlines — have pulled out after brief stints in the Canadian market.

Even without a new entrant trying to price his way into the market, the current situation has put pressure on rates and yields. “We are chasing business. The market is very volatile. It is very hard to plan strategically,” Letterio says. “We have no significant expansion plan at the moment. We did expand in Montreal in warehousing and distribution. That was a dedicated facility for a customer in the aerospace sector.”

Jeff Cullen, CEO of forwarder Bellville Rodair International, says his firm has also concentrated, to a large extent, on particular market segments to grow its business. Among the more recent additions to the company’s portfolio has been the establishment of a branch in Calgary and the creation of a department that targets the mining industry.
Gerald Hess, executive vice president of project forwarder Albacor Shipping, reports that activity in the oil sands business in Alberta has been lively. “A lot of projects that were put on ice during the 2008 crisis have now geared up, and we are seeing a lot gearing up for 2013,” he says.

The mining and energy sectors have been buoyant. “There is lots of activity in the oil sands. We had a charter to Fort McMurray a month ago,” remarks Ron Buschmann, managing director of Aerodyne, a Calgary-based charter broker and GSA. He adds that international traffic for the oil and gas sector has also been going well. Aerodyne officials have seen an increase in business to the Caspian Sea, Venezuela and Brazil.

“We are also seeing bigger shipments,” Buschmann says. “I wonder if this is a sign of things to come.”

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