Global Ports Forum

Airbus Attacks Boeing Cargo Dominance by Converting Jet

By Chris Jasper and Andrea Rothman
March 08, 2012 9:28 AM

Airbus SAS (EAD) research that predicted a surge in demand for cheaper mid-sized cargo jets presented the company with a conundrum: it had no model to match Boeing Co. (BA)’s offering in the class and faced a steep bill for producing one.
The solution, an alliance with Singapore Technologies Engineering Ltd. (STE) to convert redundant A330 passenger planes for cargo use, aims to boost Airbus’s efforts to win a bigger slice of a freighter market dominated by Boeing while limiting the European company’s exposure to the project’s development costs.
“This makes good sense,” said Yan Derocles, an analyst at Oddo Securities in Paris. “Given the size of its order backlog Airbus is in no position to do something like this on its own, so partnering with Singapore Technologies avoids cannibalizing its own resources. Plus a freighter conversion extends the life of the A330 passenger model and protects residual values.”
Airbus estimates a need for 2,731 cargo jets through 2030, according to the company’s first ever market forecast solely for that sector, published last month and obtained by Bloomberg. While the mid-size bracket served by its only dedicated freighter, the $211 million A330 200F, is the biggest with a predicted 49 percent of sales, the survey says two-thirds of demand in that division will be for less-costly converted jets.
The European company, the world’s biggest maker of civil aircraft, is seeking to narrow Boeing’s lead in an air-cargo market where its rival claims a 90 percent share of dedicated capacity, or that provided by new and converted freighters rather than in the holds of passenger planes. The revamped A330 would compete with converted versions of Boeing’s 767.
Different Markets
Airbus Chief Executive Officer Tom Enders, who opted to go ahead with the project last month following pressure from A330 operators including Qatar Airways Ltd., has said the converted plane — known as the A330P2F, or “passenger to freight” — won’t hurt sales of the new-build A330. Andreas Hermann, who heads the Toulouse-based company’s freighter unit, reckons the two models will appeal to very different buyers.
New-build planes tend to be used by carriers with high- intensity cargo operations and minimal downtime, Hermann said in a telephone interview, citing a 99.6 percent reliability figure for the A330F, whereas converted aircraft are generally preferred by airlines which require lower utilization and therefore aren’t prepared to pay top dollar for a mint model.
Extra Value
Higher oil prices have complicated the equation, with kerosene that once accounted for 25 percent of airline operating costs now making up about 50 percent. While that’s accelerating retirement of cargo stalwarts such as the Boeing 727 and Douglas DC-10, dating to the 1960s, the A330, which first flew in 1992, is modern enough for fuel thirst not to be an issue, he said.
“The A330P2F offers an opportunity to provide a modern- technology, fuel-efficient aircraft at a relatively low price, while airlines with well-developed networks and high utilization can afford a new-build A330-200F,” Hermann said.
The plan should also allow airlines to wring extra value out of the more than 830 A330s operating worldwide today, he said. Airbus today announced plans to raise A330 production to 11 planes a month from 9 as the passenger model benefits from slower-than-anticipated deliveries of Boeing’s 787.
The price of so-called feedstock for the conversion program will vary according to the condition of available planes and levels of demand, with a 15-year-old A330 likely to cost from $30 million to $40 million, the executive said.
Behind Boeing
According to the agreement with Singapore Technologies the Asian company’s ST Aero unit will take the lead in developing the new model, with EFW, an existing Airbus conversion business in Dresden, Germany, heading up the industrial phase.
Conversion work will be split between the two, with the majority being performed at in Germany, Hermann said.
The EFW facility, owned by Airbus parent European Aeronautic, Defence & Space Co., currently offers conversions of A300 and A310 planes, which though similar in size to the A330 are 40 and 30 years old respectively and more expensive to fly.
Airbus abandoned plans for a venture with Russia’s United Aircraft Corp. to convert A320-series narrow-body jets to carry goods last June, saying cargo demand had dropped and that used jets were being bought for passenger deployment. It also aimed to build a freighter version of the A380 superjumbo before a series of delays forced the project’s indefinite postponement.
Boeing offers a far wider range, producing new-build cargo versions of the 737, 767, 777 and the 747-8, its most recent model. The Chicago-based company also oversees passenger-to- freighter conversions in every category of plane, including defunct types such as the 757 and MD-80.
Qatar Negotiations
There are 1,274 Boeing freighters in service, including conversions, compared with 263 Airbus planes, according to data compiled by aviation consultancy Ascend. The U.S. company has 175 outstanding orders and its European rival has 52.
Airbus’s decision to go ahead with A330 project was colored by Qatar Air CEO Akbar Al Baker’s announcement last year that he planned to switch a batch of the planes to cargo use by 2016 and would buy converted 767s if the planemaker wouldn’t do the work.
The third-biggest Middle Eastern airline is now in talks with EFW about the specifics of the project, Al Baker said yesterday in an interview, adding that he’s pushing for the installation of a mechanism to allow pallets to be shifted around under power within the aircraft. While the technology is available, it would add weight and complexity, he said.
Emirates Doubts
Qatar Air, which is building up its cargo business after last year buying a 35 percent stake in Luxemburg-based Cargolux Airlines International SA, Europe’s No. 1 freight-only carrier, is interested in the conversion of as many as 20 A330s and would contribute an aircraft for certification purposes, the executive said in an interview in Berlin. The carrier is also looking at the potential for a converted version of Boeing’s 777-200ER.
“We will not buy new freighters,” he said. “The cost of ownership is so high that there’s no way we’d make any money.”
Emirates, the biggest international airline, takes the opposite view and is skeptical about the benefits of using revamped planes, cargo chief Ram Menen said in an interview in Seattle. The Dubai-based carrier is adding nine new 777 freighters through 2014 to double its cargo fleet and will consider placing an order for 747-8Fs once traffic picks up.
“I’m not too keen on those converted airplanes, especially when you have oil prices where they are right now,” he said. “They tend to be a bit more inefficient because they tend to be heavier, and their payload capabilities are a bit challenged.”
To contact the reporters on this story: Chris Jasper in London at cjasper@bloomberg.net; Andrea Rothman in Paris at aerothman@bloomberg.net
To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net

Airlines Ponder Careful What’s Wished for in A380 Glut
By Alex Webb
February 09, 2012 12:03 PM EST

A recovery in demand for cargo shipments is failing to lift prices as bigger passenger jets like the A380 superjumbo create a glut of belly space, crimping margins at Deutsche Lufthansa AG (LHA) and Delta Air Lines Inc. (DAL)
Air freight rose 0.2 percent in December, year-on-year, after shrinking most months since mid-2010, the International Air Transport Association said Feb. 1. Still, the load factor, a measure of cargo-hold utilization, was stuck at 48.1 percent.
“The more capacity is put into the market, the more profits will be under pressure,” said Karl Ulrich Garnadt, cargo chief at Lufthansa (LHA), the biggest freight carrier among passenger airlines. “All wide-body planes have an impact.”
The revival in cargo traffic, which generated sales of about $66 billion in 2011, was led by an order surge in the weeks before Christmas. Airlines need to turn the rebound into improved profitability amid slowing gains in passenger travel, which can lag cargo trends by months.
Shares of Cologne-based Lufthansa, Europe’s second-largest airline, have advanced 20 percent so far this year after falling 44 percent in 2011. Freight contributed operating profit of 310 million euros ($412 million) in 2010, 36 percent of the total.
Atlanta-based Delta is up 34 percent and FedEx Corp. (FDX) of Memphis, the No. 1 cargo carrier, has gained almost 13 percent, while United Parcel Service Inc. (UPS), largest package-delivery business, also headquartered in Atlanta, has added 4.2 percent.
Debt Crisis
Unlike passenger traffic, which tends to track consumer confidence and employment figures, cargo demand is driven by business sentiment as companies restock using the fastest mode of transport, according to IATA Chief Economist Brian Pearce.
Though traffic showed month-on-month growth in November and December, rebounding from a 4.7 percent drop in October, which usually marks the Christmas peak, it’s too early to say whether the surge presages a sustained recovery, he said by phone.
“The air-freight environment has stopped deteriorating, but it’s a mixed picture and I’d want to see a solution in Europe to be sure that we’re moving toward a better place,” Pearce said.
Europe, beset by the sovereign debt crisis, will suffer a “mild recession” in 2012, with the economy shrinking 0.5 percent, the International Monetary Fund said Jan. 24, cutting its global growth forecast to 3.3 percent from 4 percent.
Expansion should return in the second half and the prospect of a “true double-dip” is only 40 percent, according to Jean- Michel Six, an economist at Standard & Poor’s in London.
Air France Slump
IATA estimates that air-cargo sales will be little changed this year, though it says the market could shrink about 6 percent to $62 billion in the event of a renewed banking crisis.
January’s traffic figures were skewed as the early Chinese New Year led to a slump in demand as Asian companies took time off, making it tough to spot longer-term trends, carriers said.
Lufthansa, where December cargo traffic rose 2 percent, had a 12 percent decline last month, though the cargo unit halted flights in advance and the load factor slipped only 0.6 points.
Air France-KLM Group (AF), Europe’s biggest airline, posted a 10 percent drop, greater than the 6 percent capacity cut, so that the Paris-based company’s load factor fell 3 percentage points.
“The international situation isn’t brilliant,” said Jean- Claude Raynaud, a spokesman for the carrier’s cargo unit. “Visibility is low, and I don’t think any sensible person can say what the market will be like in three or four months.”
‘Optimistic’
International Consolidated Airlines Group SA (IAG), the regional No. 3, has less exposure to China and recorded a 0.9 percent advance in January cargo traffic, which grew at its British Airways unit while sliding 7.4 percent at Madrid-based Iberia.
At Lufthansa, Garnadt says he has been actively managing capacity while stopping short of sending planes to the desert for storage, as many carriers did during the last recession.
“We are cautiously optimistic for 2012,” he said by e- mail. “We expect a first half with weaker market development, but for the second half we see a positive development.”
Half of European air-freight shipments come from Germany, whose 2010 exports were worth three times those of the U.K., World Trade Organization data show, with Bonn-based Deutsche Post AG (DPW) the biggest carrier of air and sea cargo by volume.
Turning a profit from cargo handling has become tougher even after a reduction in dedicated freighter capacity as passenger-fleet decisions taken prior to the last slump and during the optimism of the 2010 rebound create oversupply.
Twin-Aisle Influx
Airbus has so far delivered 68 A380s since 2007, while 240 Boeing Co. 777 wide-bodies have entered service in the past three years. The Chicago-based company also brought its new 747 freighter to market in 2011, handing over nine of the planes.
Gulf carriers are adding capacity fastest, with Dubai-based Emirates building up a fleet of 90 A380s, Etihad Airways of Abu Dhabi ordering 96 long-haul planes and Qatar Airways Ltd. planning to operate as many as 190 planes by 2010.
“A lot of new aircraft are coming into service this year, so we expect that capacity will be outweighing demand,” said Henrik Lund, head of air freight at Switzerland’s Panalpina Welttransport Holding AG (PWTN), the fourth-largest freight-forwarding company. “Rates have stabilized in some of the traditional large trade lanes out of Asia, but it is still a very soft market.”
Overcapacity has also become a “challenge” for Delta, the No. 2 carrier by passenger traffic, as rivals deploy jets away from East Asian routes to counter a drop in shipments to the West, said Danita Waterfall-Brizzi, the company’s cargo sales director for Europe, the Middle East, Africa and India.
‘Buyer’s Market’
“There’s a lot of freighter capacity moving around,” she said. “Whereas it used to be residing mostly in Asia, with the changes in the market we see a lot more moving into India and Germany. The upshot is that the pricing rate gets brought down.”
That’s being accentuated as Mideast carriers increasingly target U.S. shipments, funneling capacity via Europe, she said.
Delta, which in 2011 derived almost 50 percent of its $1.2 billion profit from cargo, had a “strong” January, Waterfall- Brizzi said, and while there’s a “question mark” over the first few quarters of this year, the expectation is that “things then really come forward in the second half.”
With demand remaining below that seen in the middle of last year even after the recent recovery, IATA’s Pearce said it will still take months of growth to reach peak levels of early 2010.
“The capacity situation means that it’s still a buyer’s market,” the economist said. “And that means it’s a very difficult one to make money in.”
To contact the reporter on this story: Alex Webb in Frankfurt at awebb25@bloomberg.net
To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net

Korean Air Predicts ‘Hard, Tough Year’ for Air-Freight Market
By Susanna Ray
February 06, 2012 10:46 PM EST

Korean Air Lines Co., the world’s second-largest international freight carrier, expects a cargo slump to continue as economic concerns stymie world trade.
“We’re looking for a hard, tough year,” Walter Cho, senior vice president of corporate strategy and planning, said yesterday in Seattle. He spoke after the carrier received two new Boeing Co. (BA) freighters — a 747-8 and a 777.
Global international cargo volumes fell for an eighth straight month in December, according to the International Air Transport Association, as Europe’s debt crisis and U.S. unemployment above 8 percent damps demand for Asian-made goods. The cargo slowdown probably contributed to Asia- Pacific carriers’ profit falling 69 percent last year, according to a forecast by the airline group.
Korean Air plans to use the 747-8, Boeing’s biggest freighter, on long-haul routes, such as to the U.S., Cho said. The carrier expects to receive one more this year. In total, the airline has ordered seven 747-8 freighters and five 777 cargo planes for delivery through 2018.
“I thought it was a good time to expand, because everybody else is shrinking,” Cho told reporters. “We’re looking at the long-term picture.”
The carrier is also due to receive its sixth Airbus SAS A380 passenger plane this year. The airline hasn’t seen any drop in bookings for flights on the superjumbo since cracks were discovered in the wings of other A380 operators’ planes, Cho said.
Korean Air, which has ordered Bombardier Inc.’s new CSeries jet, is also looking at new narrow-body planes, he said. The carrier will consider revamped versions of Airbus’s A320 and Boeing’s 737, which feature new engines.
747-8 Fuel Burn
Cho also said that he thought Boeing and engine-maker General Electric Co. would be able to resolve a fuel- performance shortfall with the 747-8 by the end of the year. A fuel-burn dispute with the GEnx engines was cited by maiden customer Cargolux International SA and Atlas Air Worldwide Holdings Inc. late last year in deferring or rejecting some planes on order.
“It’s not much,” Cho said of the performance shortfall. “It’s easily doable for GE.”
GE Aviation has said its performance improvement package will be ready in mid to late 2013. The 747-8 entered service in November after a two-year delay.
To contact the reporter on this story: Susanna Ray in Seattle at sray7@bloomberg.net
To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net.

Global Airport Freight Traffic Fell 3.9% in October
By Manish Modi
December 06, 2011 11:12 PM
Following is a table showing global freight traffic at airports around the world from the Airports Council International (ACI) in Geneva.
ACI gathers figures from over 1600 member airports in 175 countries. The CHART compares ACI cargo (BLUE Line), and ACI passenger traffic (GRAY line).
===============================================================================
Oct. Sept. Aug. July June May YTD
2011 2011 2011 2011 2011 2011 2011
===============================================================================
———————— Freight YoY% ————————-
Total -3.9% -3.7% -2.2% -5.6% -1.9% -1.9% -0.4%
Africa 4.8% 16.9% -15.4% -8.2% -12.8% -9.2% 2.1%
Asia Pacific -4.8% -3.2% -4.5% -1.8% -3.4% -5.0% -1.3%
Europe -4.4% -2.5% -1.2% 0.4% -3.6% 0.3% 2.0%
Latin America 3.1% 0.2% -8.0% 3.3% 2.2% 14.8% 4.6%
Middle East 2.3% -1.5% -2.9% -0.4% 0.4% -0.6% -1.3%
North America -4.7% -6.3% 1.5% -12.5% 0.3% -2.3% -1.5%
International -3.8% -3.3% -3.5% -1.2% -2.9% -2.5% -0.2%
===============================================================================
Oct. Sept. Aug. July June May YTD
2011 2011 2011 2011 2011 2011 2011
===============================================================================
———————— Freight YoY% ————————-
Africa 3.7% 19.2% -16.6% -9.0% -14.5% -10.0% 2.9%
Asia Pacific -6.4% -4.0% -5.5% -2.7% -4.2% -6.8% -2.0%
Europe -4.6% -2.8% -1.8% 0.3% -3.6% 0.0% 2.1%
Latin America 4.4% 4.1% -5.7% 4.0% 4.7% 13.0% 6.7%
Middle East 2.3% -1.5% -3.0% 0.3% 0.3% -0.7% -1.2%
North America -1.0% -6.6% 0.2% -1.8% -0.7% -0.7% -0.5%
Domestic -4.0% -4.4% 0.6% -11.7% 0.1% -0.4% -1.0%
Africa 27.8% 13.7% -1.5% -15.5% 38.7% 5.3% -240.0%
Asia Pacific 0.4% -1.4% -1.3% 1.1% -1.0% 1.7% 0.9%
Europe 1.3% 4.4% 9.6% 3.9% -2.4% 6.2% 4.0%
Latin America 0.7% -7.5% -12.9% 2.3% -2.8% 17.8% 0.6%
North America -6.5% -6.2% 2.0% -15.8% 0.7% -3.3% -2.1%
——————— Metric Tons (000’s) ———————
Total 5226.3 4910.1 5187.3 5857.3 4890.5 4484.4 50326.8
Africa 48.8 45.6 37.2 41.9 61.9 41.9 437.5
Asia Pacific 1904.3 1876.6 1968.5 1958.3 1620.7 1561.0 18460.9
===============================================================================
Oct. Sept. Aug. July June May YTD
2011 2011 2011 2011 2011 2011 2011
===============================================================================
——————— Metric Tons (000’s) ———————
Europe 1107.9 1013.0 1043.8 1105.4 1021.2 1130.4 10537.5
Latin America 225.7 227.4 212.6 249.6 210.4 210.2 2054.9
Middle East 304.6 252.0 266.7 259.4 278.3 263.1 2835.8
North America 1635.0 1495.5 1658.5 2242.7 1698.1 1277.6 16000.1
International 3551.1 3274.0 3467.0 3557.9 3256.5 3200.5 33961.1
Africa 40.3 38.5 34.0 34.6 53.9 39.1 356.9
Asia Pacific 1427.4 1344.1 1477.0 1468.6 1226.4 1210.4 13935.4
Europe 1039.5 941.0 968.2 1049.9 976.2 1073.1 9885.7
Latin America 149.4 156.1 148.2 167.4 141.9 125.3 1365.9
Middle East 304.3 251.8 266.5 259.2 277.9 262.9 2833.5
North America 590.1 542.5 573.2 578.1 580.3 489.8 5583.6
Domestic 1597.1 1561.6 1649.9 2257.4 1572.9 1245.8 15559.6
Africa 3.3 2.7 2.8 1.8 2.9 2.0 28.3
Asia Pacific 462.4 518.8 476.8 489.7 394.3 350.6 4385.9
Europe 43.3 50.0 53.6 42.3 34.2 45.7 406.3
Latin America 76.3 71.3 64.5 81.5 68.4 83.8 689.0
===============================================================================
Oct. Sept. Aug. July June May YTD
2011 2011 2011 2011 2011 2011 2011
===============================================================================
——————— Metric Tons (000’s) ———————
North America 1011.8 918.8 1052.3 1642.1 1073.1 763.7 10050.0
===============================================================================
Note: Total figures take into account international plus domestic passengers
plus direct transit passengers counted once.
Results are based on participating airports which make up about 70% of
traffic worldwide.
Source: Airports Council International
To contact the reporter on this story: Manish Modi in New Delhi at mmodi6@bloomberg.net
To contact the editor responsible for this story: Manish Modi in New Delhi at mmodi6@bloomberg.net

Asia Generic Drugs Boom Swells Cargo Sales
By Alex Webb
December 05, 2011 7:01 PM EST

When the patent on Pfizer Inc. (PFE)’s Lipitor expired last week, Ranbaxy Laboratories Ltd.’s generic version was the first to hit U.S. drugstores, some 7,000 miles away from the northern Indian factory where the production process started.
Providing transport for Asia’s burgeoning generic-drug industry is an investment priority for Deutsche Lufthansa AG and United Parcel Service Inc. (UPS) The pharmaceutical logistics segment will grow 12 percent this year to 47 billion euros ($63 billion) as more drugs are made in Asia and other developing markets, according to research firm Transport Intelligence Ltd.
“Just about every airline is looking at this space with interest right now,” Dan Gagnon, UPS’s European healthcare logistics director, said in an interview. “As more competition gets into this space, you need to come up with solutions that are more economical but provide the same level of service.”
UPS, which provides freight service for German drugmaker Merck KGaA, has invested in five new pharmaceuticals facilities in the past year and last week purchased drugs logistics company Pieffe Group in Italy. Lufthansa today will open a cold cargo facility in Frankfurt to add to a pharmaceutical hub in Hyderabad, India, which started operations in May.
Pharmaceutical logistics growth will average 7.6 percent in the coming years, reaching 63 billion euros by 2015, according to a report last week by Transport Intelligence analyst Cathy Roberson. Biotech and pharmaceutical products represent the highest value per airlifted pound for any cargo, she said.
Topping Electronics
The 12 percent growth predicted for pharmaceutical air freight over the next five years outstrips the 4 percent anticipated in electronics cargo, which has traditionally been the strongest sector for air freight demand, Roberson said.
“The growth will be driven by emerging markets,” in particular India, China and Brazil, Roberson said in the report. “Continued outsourcing to these locations, along with changes in government legislation, will drive increases in logistics spending.”
Lufthansa’s cargo unit is planning to dedicate six McDonnell Douglas MD-11s by 2015 to handle pharmaceuticals as the five Boeing Co. 777s the airline will start receiving at the end of 2013 free up capacity. “Far more” than 12 percent of Lufthansa’s annual growth in India is coming from drug transports, Karl Ulrich Garnadt, who heads the cargo unit, said.
Investing in India
UPS, aiming to exceed the market forecasts for pharmaceutical air cargo growth of up to 12 percent, and is currently tying up deals to improve its Asian facilities, Gagnon said. He expects an announcement in “about a month.”
“Infrastructure for us in India has been quite limited,” Gagnon said. “For our strategic initiatives, that is an area in which we will be investing.” UPS already has a cold cargo facility in Singapore.
India’s pharmaceutical exports are expected to grow 23 percent annually to 2015 as the quantity of generic drugs produced in the country increases, according to a joint study by the Organization of Pharmaceutical Producers of India and Deutsche Post AG released in September.
With more than 100 plants, India is home to more U.S. Food and Drug Administration-approved pharmaceutical manufacturing facilities than anywhere else outside the U.S. The FDA has had offices in New Delhi since 2008 and Mumbai since 2009 to enable better regulation of drugs produced in India.
Temperature Control
While not all drugs require a controlled temperature environment to maintain their efficacy, vaccines, some medical devices, diagnostic kits and so-called biological medicines — which are made from a living organism as opposed to chemical processes — often do.
Seventy percent of drugs expected to dominate the market over the next four years fall into this biological bracket, and will therefore require more stringent temperature control measures in their transport, said Savvas Neophytou, a London- based Panmure Gordon health care analyst.
CSafe LLC, based in Dayton, Ohio, leases its 200 temperature-controlled containers to UPS, Deutsche Post’s DHL unit and FedEx Corp. (FDX) The company plans to build another 100 containers in 2012, according to its president.
“Our product is really designed for that strict two to eight degrees centigrade,” Brian Kohr, CSafe’s chief, said in a telephone interview. “It could be going from a really hot ambient to a very cold ambient or vice versa and it has to maintain the temperature.”
‘Vast Untapped Market’
Also contributing to growth are drug companies’ efforts to consolidate their number of production sites, said Jack Scannell, a Sanford Bernstein analyst.
“The upshot of that is that you end up shipping as you have less local production,” Scannell, who is based in London, said by telephone. “There has been a long gradual process over the past ten years to try to rationalize pharmaceutical manufacturing.”
Health care companies’ predilection for carrying out many of their logistics needs in-house also presents a “vast untapped market” for external carriers, Transport Intelligence analyst Joel Ray said by telephone.
“For us the biggest opportunity and competition is in- sourced supply chains,” UPS’s Gagnon added. “Healthcare is behind when it comes to outsourcing, and if we break down the market, that’s where most of our opportunities come from.”
To contact the reporter on this story: Alex Webb in Frankfurt awebb25@bloomberg.net.
To contact the editor responsible for this story: Chad Thomas at cthomas16@bloomberg.net.

Costs key for AMR; fleet, routes need work: experts
Wed Nov 30, 2011 11:43pm GMT

By Kyle Peterson and John Crawley

(Reuters) – Bankruptcy will help American Airlines slash costs, but Chapter 11 is not a silver bullet for operational problems that dropped American from its top position among U.S. carriers to No. 3 in the last few years, experts say.

The AMR Corp (AMR.N) unit declared bankruptcy on Tuesday, citing a cost structure that put it at a disadvantage against rivals. The company has not set a target for cost savings, but says “everything is on the table” and that it will be more efficient post-bankruptcy.

“I don’t think any of the cost cuts are going to solve the problem,” said Robert Mann, an airline consultant and former AMR fleet planner. “There’s an equally serious revenue problem, but that’s tougher to address.”

American has long complained its labor costs, in particular, are higher than those of competitors such as United Airlines (UAL.N) and Delta Air Lines Inc (DAL.N) that restructured in bankruptcy and later found merger partners. United bought Continental Airlines and Delta bought Northwest airlines.

But American also operates an aircraft fleet featuring out- of-date and inefficient aircraft the carrier still leases. AMR said in court documents it wants to shed unwanted leases for 24 aircraft.

“Those cost problems don’t address the top-line revenue problem, which is that American now has a tier-three network,” Mann said. “They are now third choice (for business travelers) behind United Continental and Delta-Northwest.”

ROUTES AND NETWORK

American will scrutinize its hubs, routes and alliances for signs of weakness. AMR Chief Executive Tom Horton said on Tuesday the airline may shed capacity “modestly,” but gave no hint of a major network overhaul.

Jamie Baker, an airline analyst at JP Morgan, said in a research note that capacity cuts are “more likely than not.”

“Airlines have consistently utilized Chapter 11 as a means of culling unproductive, unprofitable flying. As the only loss-producing airline of size, AMR should have little difficulty in identifying where to cut,” Baker said.

“We expect Chicago to emerge as one such candidate,” Baker added, noting Chicago’s O’Hare airport is a hub for both American and United Airlines.

“Notwithstanding initial management commentary, we expect no less than a 10 percent (capacity) reduction.”

Mann said American’s hub in Los Angeles may also be ripe for cutbacks on less profitable flying, but he said the carrier needs to beef up flying on Pacific and Atlantic routes that are valuable to business travelers.

An AMR spokesman declined to comment on whether any of its hubs were targets for service reductions.

The airline has a hub-and-spoke service strategy targeting “cornerstone” markets — major cities that are home to big businesses.

Former Continental Chief Executive Gordon Bethune told Reuters American’s hubs are solid in Chicago, Miami and Dallas.

“They keep their network,” Bethune said. “They have a great network. That’s not the problem. They have a cost structure that does not work in this environment. Some is the cost of people and some is fuel and the equipment they have.”

LABOR AND FLEET

By several estimates, AMR’s labor and fleet costs are raging out of control. The airline struggled with labor costs, despite concessions from unionized workers in 2003.

Those concessions enabled it to avoid Chapter 11 at the time, but they came up short of cuts made by rivals who also shed pension obligations in bankruptcy.

American has been mired for years in contract talks with key work groups, including its pilots. Contract talks with pilots hit a stalemate recently over wages, benefits and work rules. Talks with unionized flight attendants have also stalled.

One analyst, Basili Alukos with Morningstar said AMR can save between $1.2 billion to $1.5 billion in labor costs. If AMR can dump its defined benefit pension plan it can shed nearly $7 billion in debt, Alukos said.

AMR’s fleet expenses also are uncompetitive because the carrier owns or leases more than 200 outdated gas-guzzling MD-80s, many of which are not even in active service. The carrier has undertaken a major fleet modernization.

Speaking at an aerospace conference in New York on Wednesday, John Leahy, sales chief of plane-maker Airbus (EAD.PA), said he expects AMR to dump older, less-efficient aircraft more quickly as it restructures.

“I think you’ll see a faster renewal of their fleet,” Leahy said.

Jim Albaugh, the chief executive of Boeing Commercial Airplanes, said at the same conference that he expects American to restructure some aircraft leases.

Some experts believe, however, that AMR, which placed a giant split order for 460 single-aisle jets worth up to $40 billion with Boeing and Airbus this year, could retreat from a portion of the order with Boeing that is not yet firm.

WELL-TRAVELED PATH

United Airlines spent more than three years in bankruptcy during which it restructured leases, retired older aircraft and launched more international flying. It also terminated pension plans, slashed union contracts and cut thousands of jobs.

United, which cut its costs by $7 billion, preserved hubs in Chicago, San Francisco, Washington, and Denver, but it struggled for four years to find a merger partner while the other big bankrupt carriers between 2002-07 all strengthened their business with deals.

US Airways, which restructured in bankruptcy twice before merging with America West in 2005, also cut pensions and emerged with a leaner workforce. That carrier cut more than $2 billion in costs.

Delta shed debt in bankruptcy and cut about $1 billion in labor costs and added more than 60 international routes to escape low-fare competition in the United States.

(Reporting by Kyle Peterson and John Crawley; editing by Andre Grenon)

Crisis Grinch Steals Christmas From Cargo Carriers
By Alex Webb and Sabine Pirone
November 28, 2011 5:53 AM EST

Cargo carriers worldwide face a grim festive season as declining consumer spending in Europe eradicates the usual peak in airborne deliveries of goods ranging from mobile phones to top-end sports shoes.
Freight traffic will also suffer “a softer start” to the New Year as economies slow, Karl Ulrich Garnadt, chief executive officer of Deutsche Lufthansa AG’s cargo unit, the biggest in the world among passenger airlines, said in an interview.
“It’s a long way short of last Christmas,” said David Lara, head of global air-freight procurement at Ceva Group Plc, which counts as clients eight of the top 10 retailers and suppliers including Apple Inc. and Nike Inc. “Normally in peak season carriers would be putting in extra capacity and operating charters to cope with demand, but that simply hasn’t happened.”
Cargo traffic, which generated sales of $66 billion last year, has declined every month since May. Air freight traffic fell 4.7 percent in October, as confidence in manufacturing industries declined and companies switched to slower modes of transport, the International Air Transport Association industry group said in a statement today.
The seasonal peak usually builds from October, with demand strongest on routes from Asian cities such as Shanghai and Hong Kong to western destinations including London, Amsterdam and Frankfurt and New York, Chicago and Los Angeles, according to Hoofddorp, Netherlands-based Ceva, which was formed in 2007 from a merger of TNT Logistics with Houston-based EGL Inc.
Laptops, Clothing
This year, demand began to drop off in the second quarter, with volumes remaining flat through the usual ramp-up as U.S. and European companies avoided over-stocking, Lara said.
Some 61 percent of Europeans will cut Christmas budgets because they’re worried about the economy, Deloitte LLP said in a report this month. Households there will spend an average 344 euros ($455) on gifts, 187 euros on food and drink and 27 euros on decorations, the U.K. Centre for Retail Research says.
“Western countries are importing and consuming less due to debt issues and so on,” said Jean-Claude Raynaud, a spokesman at the cargo unit of Air France-KLM Group (AF), Europe’s No. 1 airline. “People have a conservative philosophy that, since they don’t know what’s coming, they’ll be prudent and reduce orders, make economies. That hurts global trade, making problems for us.”
Capacity Glut
Planemaker Boeing Co. (BA) says data from 17 of the top 20 cargo carriers suggests October traffic fell 5.8 percent in what should have been the busiest month of the year for freight carriage. IATA will release full industry numbers this week.
Fashion items and electronic goods such as personal computers, notebooks and laptops have borne the brunt of the decline, Lara said, with retailers relying on unsold inventories to satisfy demand for Christmas gifts.
The situation has been made worse for airlines by increasing over-capacity resulting from decisions on fleet expansion taken during the optimism of the 2010 rebound.
Carriers have responded by redeploying aircraft on routes serving remaining growth markets such as Latin America and India, exporting items such as auto-components, according to Ceva, the largest transporter of parts for carmakers. The Mid- East and Africa are also among regions faring best, “or not so bad,” said Tom Crabtree, who oversees Boeing’s cargo forecasts.
At Lufthansa, where freight contributed operating profit of 310 million euros last year, or 36 percent of total earnings, shipments from China have “slowed significantly, whereas German exports are still impressively stable,” cargo chief Garnadt said in the interview in Frankfurt, the company’s main hub.
Late Rally?
About half of European air-freight consignments come from Germany, whose 2010 exports were worth three times those of the U.K. and five times Spain’s, World Trade Organization data show.
A possible respite for cargo carriers this festive season may come in the form of a last-minute order surge prompted by changing shopping trends.
United Parcel Service Inc. (UPS), the largest package-delivery company and the No. 2 cargo carrier after FedEx Corp. (FDX), said it’s hoping for a jump in shipments from consumers who buy late online, predicting that 120 million packages will be delivered in the week before Dec. 25, 6 percent more than last year.
“This is always a busy time, but this year we’re expecting even more in the period just before Christmas,” Marian Frings, a spokeswoman for UPS at the Atlanta-based company’s European hub at Cologne-Bonn airport in Germany, said by telephone.
Deutsche Post AG, the biggest carrier of air and sea cargo by volume, said a late rush may boost demand at its DHL unit as companies that allowed inventories to run down rush to restock. While that would present a welcome opportunity, it also makes planning “very difficult,” CEO Frank Appel said Nov. 9.
‘Looking Into Fog’
The outlook for the first half is equally unclear, carriers say, with Andreas Otto, Lufthansa’s board member for product and sales, last week predicting “growth around zero, maybe slightly in the minus,” with the carrier prepared to cut capacity by anywhere between 20 percent and 30 percent.
While Lufthansa said it will stop short of sending planes back to the desert for storage, as carriers did in the last recession, Hong Kong-based Cathay Pacific Airways Ltd. views parking older jets as “a possibility” as it looks at cutting frequencies on established long-haul routes, Cargo Director Nick Rhodes said last week in an e-mailed response to questions.
Air France-KLM’s Raynaud said uncertainty about the demand trend and appropriate capacity levels poses the biggest headache, especially with fuel prices
“The big problem is that we don’t really have any visibility,” he said. “We are looking into fog.”
To contact the reporters on this story: Alex Webb in Frankfurt at awebb25@bloomberg.net; Sabine Pirone in London at spirone@bloomberg.net
To contact the editors responsible for this story: Chad Thomas at cthomas16@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net

China Airlines Buoyed Most With Warming Taiwan-Mainland Relations: Freight
By Chinmei Sung
November 01, 2011 12:00 PM EDT

China Airlines Ltd. (2610) may gain the most of any air-cargo carrier from warming ties between China and Taiwan as the former foes dismantle barriers to their $150 billion in annual trade.
Taiwan’s biggest airline will add 18 flights to five Chinese cities by the end of this year, cementing its position as the operator of the most cross-straits flights since a six- decade ban on direct shipments was lifted in 2008. Ongoing trade talks probably will further boost the 558 planned weekly airline journeys over the 130-kilometer (80-mile) channel between the two sides, said Fubon Securities Co. analyst Ken Shih.
“Cross-straits cargo flights have gone from zero to rapid- growth, so it’s an area carriers can look to for expansion,” said Taipei-based Shih, who has an “add” recommendation on China Airlines stock. “The next round of flight-easing talks will focus on adding more stops, and that will easily double cargo revenue for airline carriers.”
Trade with China may help cushion Taiwan from any slowdown in demand from the U.S. and Europe for goods such as Acer Inc. and Asustek Computer Inc. notebooks, which are shipped by air. In addition, components made by companies such as Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker, are sent to China as parts for Apple Inc. iPhones or Dell Inc. computers.
Because new flights approved across the strait are split evenly between China and Taiwan, the island’s five carriers get a bigger slice of the pie relative to the mainland’s eight airlines. Slots within each country are handed out based on fleet size, giving China Airlines an edge over Taiwanese cargo rival EVA Airways Corp. (2618)
High End
“Products shipped by air are high-end, high-priced goods,” said Corinne Jian, an analyst at Macquarie Securities Ltd. in Taipei.
Electronic products made up 27.2 percent of Taiwan’s exports in the first nine months of this year and Hong Kong and China together accounted for 40.6 percent of those shipments, data from the island’s Ministry of Finance show.
President Ma Ying-jeou has made trade with China a key component of his policy of rapprochement with the mainland. An initial trade accord came into effect on Jan. 1 this year that lowered tariffs on 824 items. Ma has pledged to cut duties on 90 percent of commerce over the next decade.
The value of direct shipments between Taiwan and China rose 12 percent to $121 billion in the first nine months from the corresponding period a year earlier, Chinese government data shows.
To be sure, while air cargo makes up about 40 percent of China Airlines’ revenue, cross-strait traffic only accounts for about a 10th of that now, according to the company’s first-half financial report. And China demand can’t entirely offset an economic slowdown in developed economies, said analyst Jian.
Slowing Export Growth
The European debt crisis is already having an impact on demand for Chinese goods. Export growth slowed to 17.1 percent in September and sales expansion to Europe, China’s biggest market, slumped to 9.8 percent from 22 percent in August, the customs bureau said Oct. 13.
International air freight traffic by volume fell 3.5 percent in the first eight months of the year, data compiled by Bloomberg show. Concerns that the global economic recovery is faltering and high fuel costs have hit airline stocks. China Airlines is down about 40 percent this year against a 28 percent drop in the 30-member Bloomberg World Airlines Index.
“Cargo traffic, particularly air cargo because it’s expensive, is very sensitive to global economic conditions,” said Jian. She changed her rating on China Airlines to “buy” from “sell” on Sept. 22, citing a better-than-expected recovery in passenger traffic and an 11 percent drop in fuel costs in the past six months.
Across the Strait
Higher margins on cross-strait routes, additional flight quotas and a recovery in cargo may help drive a recovery in China Airlines’ profit, she said. Direct flights are expected to contribute as much as 45 percent of Ebitda this financial year, from as much as 30 percent in 2010, she said. Ebitda is a measure of profit excluding non-operating expenses such as tax and interest.
“Our cross-straits cargo flights are doing pretty well and our passenger flights also have pretty good loading rates,” said Roger Han, senior vice president for finance at the Taipei- based China Airlines. “We expect increases in our cross-strait cargo business next year,” though he described the traffic as a “niche business.”
Taiwan, which has been ruled separately since Chiang Kai- shek’s Kuomintang forces fled there after losing to Mao Zedong’s Communists at the end of the civil war in 1949, is betting that air trade with China will continue to grow.
Airport Renovations
Taoyuan Airport, Taiwan’s biggest airport, is investing about NT$300 billion ($10 billion) to meet increased demand for cargo and passenger flights, according to the Council for Economic Planning and Development.
The island also plans a NT$3.9 billion airport in central Taiwan, and is investing NT$1.8 billion to double cargo capacity at Kaohsiung airport in southern Taiwan by 2012, according to the economic planning agency.
Taiwan’s airlines have unique potential to benefit from thawing in ties between the two sides, said Chen Hui-Yi, a Taipei-based analyst at Polaris Securities Co. who recommends investors be “overweight” in China Airlines’ stock.
In addition to passenger aircraft that carry freight in the holds, there are 56 direct cross-strait cargo-only flights weekly. China Airlines and EVA Airways each have 14 as the only operators in Taiwan, while Air China Cargo Co. and China Southern Airlines are among five mainland carriers sharing the other 28 flights.
“As China’s economy gradually shifts to consumption-led growth from a manufacturing-driven model, demand for more cargo traffic will rise for sure,” said Fubon’s Shih.
To contact the reporter on this story: Chinmei Sung in Taipei at csung4@bloomberg.net.
To contact the editor responsible for this story: Peter Hirschberg in Hong Kong at phirschberg@bloomberg.net;