Gunning for glory without freighters

It was not totally unexpected, but the speed with which IAG Cargo disposed of any remaining vestiges of a freighter operation, was still a shock.

That a major combination carrier made up of British Airways and its Spanish partner Iberia could exit this side of the business so abruptly, without any hint toward a scaled downsizing, clearly demonstrated the dire straits and sheer non-economies of continuing any further.

IAG Cargo will terminate its contract to wet lease three B747-8Fs as of the end of April. It draws to a close a 12-year, rolling ACMI agreement with Atlas Air subsidiary Global Supply Systems. The contract between the two parties was slated to run for a further two years, and although IAG Cargo insists an exit clause was in place, it will still face a hefty compensation penalty.

GSS was created as a British company nominally to service the BA contract, in which Atlas retained a 49-percent stake. This allowed it to obtain a UK operator’s certificate and access British traffic rights. 

IAG Cargo, in its terse statement on the contract cancelation, held out no prospect of returning to freighter operations. This truly is the turning of the page in the industry. The mantra coming from IAG and airlines of its ilk these days is that the belly-holds of the huge intake of new passenger fleets, in the case of British Airways’ B787 and A350 aircraft, will more than make up for any main-deck capacity shortfall.

And IAG Cargo already appears to have turned the page in taking a new innovative approach to accessing future freighter capacity.

Right alongside its GSS exit notification, the carrier announced the start of what it terms a new long-term agreement with Qatar Airways to purchase block space on the Gulf carrier’s freighters as of the start of May.

This initially will take the form of five Qatar Airways B777F services a week between Hong Kong via the carrier’s Doha home hub to London Stansted, to where the GSS flights previously operated. IAG Cargo is expected to take up at least 80 percent of available capacity on these flights, equivalent it is thought to 400 tonnes a week.. Although Qatar Airways is now officially an IAG partner after joining the oneworld global alliance last October, it is understood that the agreement with IAG Cargo will remain outside of this remit.  

This is not IAG Cargo’s first foray into freighter partnerships. For some years now, the carrier has had an agreement in place with DHL enabling it to access the express operator’s fleet across Europe during otherwise daytime downtime. This has allowed IAG Cargo to feed cargo into its London hub, particularly as a means of enhancing its premium product range.

What the decision by IAG to terminate its GSS contract also now throws into question is the ACMI business model of accessing freighter capacity. Is that also to become a thing of the past with, again as in IAG’s case, airlines seeking synergies with other partner carriers?

With three redundant B747-8Fs being returned to Atlas Air, questions are being asked over the future of GSS. It is not in immediate danger of losing its UK operator’s certificate, but it needs to find new customers fast, if it is to survive in its present format.

It is thought that the company is looking to try and gain a foothold as a capacity provider in the European express market, which is itself turning to larger capacity aircraft.

Where did it all go wrong for IAG Cargo? Well, it didn’t, which is probably the sad part. Some analysts argue that the carrier over-reached itself with such an ambitious misadventure and should never have got tangled up with the freighter business.

But IAG Cargo now, and in its previous incarnation, was a respected purveyor of the art of yield management and believed it could work its freighters to good effect.

But market downturns, fuel hikes and low-cost competition (ironically from the likes of Qatar Airways) saw such advantage whittled away.

Steve Gunning, newly elevated to the role of CEO of IAG Cargo, made no secret of the fact that the carrier’s adopted freighters were never going to turn a profit, but nonetheless were a constituent part of the airline’s offering to its customer base.

But through 2013, it became obvious that it was becoming an evermore perilous pursuit. The carrier withdrew its Shanghai-London freighter service at short notice last October, citing low outbound yields, adding that it would place greater emphasis on its Hong Kong freighter routing.

But other parts of the freighter network were also becoming more disparate and extended in an effort to fill the main decks. The carrier’s freighter schedule showed flights emanating out of London Stansted, heading to Cologne, Germany, and then on to Madrid, before eventually departing Europe for Johannesburg. Such tortuous routings can hardly have helped the bottom line.

It also became clear that the carrier had capacity readily available for ad-hoc charter work, with one contract calling for it to operate three back-to-back B747-8F flights between Europe and the U.S. 

IAG certainly isn’t giving up on cargo. As much was stated, with the recent appointment of Gunning to the top table at IAG, with his accreditation as CEO of IAG Cargo earning him a seat on the IAG management committee.

It is a move that acknowledges the work Gunning has done in the last two years to steer the integration of the British Airways and Iberia cargo divisions into a single business.

It is also a job that will continue, albeit without freighters.