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Confident
KAL Cargo keen to keep top spot The two-phased 10-year development plan “Operational Excellence”, which Korean Air Cargo adopted in 1998, seems to be paying off. For 2002, the second largest cargo carrier in the world posted an operating profit of more than KW 310 billion compared to a loss in 2001. And this month it is receiving Air Transport World’s ”Cargo Airline of the Year Award”. Payload Asia Editor Nol van Fenema travelled to Seoul for an update. Although at press time Korean Air’s 2002 financial figures were only preliminary and available through a statement to the Korea Stock Exchange, they showed a major improvement over 2001, when the carrier faced a loss of KW 589 billion. That loss was mainly due to the 9/11 attacks in the US and a deteriorating airline industry.
“Last year was beyond our expectations,” says senior vice president for cargo sales and route management, Kyung-Ho Choi, or Ken Choi as he is better known in the industry Choi acknowledges that the 2002 results have been strongly influenced by the port strikes on the US West Coast, which lasted two months and not only created massive delays on the docks, but also an unprecedented run on aircraft capacity from Asia to the US. “We were able to add more capacity and take advantage of the situation,” says Choi, adding that “in less than three months we made about one third of our profit.” That was, of course, good news for Korean Air Cargo, but at the same time the strikes also affected one of its sister companies (in the Hanjin Group - editor), which is involved in sea freight and as a result of the strikes lost a lot of money. While the results for 2002 are preliminary, the outlook for 2003 is not so bright, according to Choi, but he says he is “kind of optimistic” despite the fact that the airline is probably facing a “difficult time ahead”. Somewhat contradicting
Choi’s assessment is an official statement from Korean Air
in which it stated last month that it expects full 2003 revenue
to rise 7 percent from 2002 to more than 6.6 trillion won (US$5.63
billion). Meanwhile, Choi says that one of his biggest headaches (apart from the rather sluggish westbound USA traffic) is the increased competition from rival cargo airline Polar Air Cargo, which last year started service to Incheon airport and has increased frequency to Korea’s largest airport to 17 freighter flights a week. Following Hong
Kong’s approval of Polar’s application at the end of last
year to fly four new weekly frequencies through Hong Kong to Incheon,
the Atlas Air subsidiary has meanwhile used the approval to boost
its Incheon service from three to five times weekly B747 freighter
services. Ultimately, Polar plans to serve Incheon 25 times a week
with its 110-tonne capacity freighters.
“This will be one of our big challenges this year,” says Choi, adding that he is particularly concerned about the possibility of Polar undercutting Korean’s rates. “We have always tried to keep the market rates at a reasonable level, but once a newcomer such as Polar starts offering substantial amounts of space in the Korean market, rates are likely to come down.” He says his
worries are mostly about keeping market share despite more competition
and more capacity, including Korean Air’s own expansion plans. The carrier recently announced it is scheduling additional passenger and freighter flights to China, Southeast Asia and Europe. According to Choi, one of Korean Air’s bright spots for this year will be the carrier’s ability to expand because of new traffic rights. “We have now additional traffic rights into Brussels, Belgium, Vietnam and India,” he says. Like many other rivals, Korean Air Cargo is intently eyeing the Chinese market. Choi says he is waiting for “decisions” by Chinese carriers, implying possible code shares, charter flights or joint services, which in the past have proven to be successful strategies of the Korean airline in introducing services to new destinations. “In India, we will first launch one or two charter B747 freighter flights this month, and once we feel that there is sufficient demand, we will introduce scheduled services,” Choi explains Indian points on the proposed point-to-point freighter services, include Mumbai, New Delhi and Madras, but Choi says that the airline is also considering extending these services into Europe (Amsterdam or Brussels), which considering the booming export volumes from India, would make a lot of sense. The new routes through India would also reinstate Korean’s former service along the southern route into Europe, which in the late nineties was terminated and re-routed through Tashkent. Choi says the carrier is currently in talks to get traffic rights for its freighter service from Europe through either the Middle East (Dubai) or India for the return leg. At the moment, Korean Air only operates a twice-weekly passenger service between Seoul and Dubai. Choi says that generally, Korean’s cargo operations are expected to grow five percent in 2003. “In the past ten years, we have only experienced minus growth three times, in 1992, 1997 and more recently in 2001,” he points out. Part of that growth is expected to come from the carrier’s innovative sea-air Sky-Bridge initiative, which ties Korean Air Cargo’s freight flows to and from China into the shipping and trucking operation of its parent company Hanjin, for a seamless inter-modal world-wide delivery in as little as five days. Choi says that traffic is very directional with the main cargo flows coming from China, but there is still a capacity shortage out of China, hence the launch last year of Sky-Bridge, which can cut up to 20-30 percent of usual air freight costs. Apart from block-space agreements with Hanjin subsidiaries, Hanjin Trucking and Hanjin Shipping, Korean Air has also block-space deals with Chinese shipping companies for the sea leg, which together link various Chinese seaports with the port of Incheon. Choi stresses that all cargo bookings for the Sky-Bridge link are handled through China-based international freight forwarders. From there the sea freight containers are trucked to the 623,000-sq.-ft. Korean Air Cargo facilities at Incheon where cargo is broken down and transferred to aircraft ULDs. Apart from Asian destinations, outbound air freight also goes to Europe and the US. “Traffic volume of the KAL Sky-Bridge service was 4,300 tonnes in 2002 and we will see tremendous growth in this mode of transportation,” says Choi, who predicts that the sea-air product will grow by 50 percent this year alone. The development
of this sea-air product has been stimulated by the proximity of
Incheon International Airport to the well-developed seaport of Incheon. Total cargo volumes, including Sky-Bridge and the carrier’s eight freighters weekly to Shanghai, Tianjin and Hong Kong, plus its belly-hold capacity on more than 70 passenger services to 12 cities in China, is expected to grow an average 20 percent this year. China is a very bright spot in our forecasts, admits Choi, but he adds, “that’s the case with most airlines operating into China.” Korean Air currently has a commercial agreement with China Eastern Airlines for scheduled freighter services to Shanghai, the Mainland’s leading business centre. In addition, the airline has “various programmes of co-operation with China’s other major airline groupings.” Choi explains that this co-operation is necessary because the three leading airline groupings, Air China, China Southern and China Eastern, each represent significant economical and political strongholds in the country. “We want to keep everybody happy,” he says, adding that, for now, Korean Air is focusing on the three main groupings and is not considering deals with the smaller players in China. As part of its ongoing “Operational Excellence” programme, Korean Air Cargo is continuing the implementation of the full range of products of the SkyTeam Cargo Alliance, of which Korean was one of the founding members in 2000. “All members have been working on the implementation of the common products since last year,” says Jason Cha, managing vice president strategy & alliance team of Korean Air Cargo, adding that all partners are expected to fully implement the four global cargo brands, Equation, Variation, Dimension and Cohesion in 2003. As one of the partners in the US-based cargo sales joint venture together with Air France and Delta Air Lines, Korean Air Cargo is also directly involved in several working groups within the Alliance covering subjects ranging from marketing and network to IT, quality and warehousing. Closer to home, Korean Air’s cargo expansion in the Asian region has so far been mainly through space and rate share agreements with other carriers, such as Malaysia Airlines, Vietnam Airlines and Garuda Indonesia. However, due to the growing trend among Southeast Asian nations to liberalise the airline industry and adopt “open skies” policies, Korean Air may be forced to generate future expansion on its own. Nevertheless, Choi stresses that he wants to continue the existing space and rate deals, which he says are beneficial for all parties involved. Surprisingly, with Korean Air’s decision to retire its fleet of Airbus A300-600 freighters, any future expansion or opening up of new routes will have to be carried out with the carrier’s fleet of 15 B747s (nine B747-400Fs, five B747-200Fs, plus one leased -400F from Atlas Air). The airline still has four MD-11Fs, but Choi says the leases for these aircraft will expire in 2004 and 2005 and will not be renewed. He explains
that the airline has extensively evaluated the “pros and cons”
of a new middle-sized freighter, but “we have made up our mind
to stick to the 747.” Even a 100-tonne capacity B747, which is just carrying 60 percent freight on a new developing route, will still cost less than having a fleet of smaller aircraft, Choi claims. He adds that even if smaller freighters were available on an ACMI lease basis, the carrier would still not be interested. “We’ll
stick to the 747,” he repeats. Underlining that choice is the previously unannounced order for three B747-400ER (Extended Range) freighters, which are due to join Korean’s freighter fleet in May and November of this year and in March 2004. Among the growing
band of competitors in the global market place, Korean Air Cargo
is facing increasing pressure from the world’s integrators,
admits Choi. For Korean Air
Cargo the IT investments alone amount to some US$20 million, he
says. As part of those efforts, the Korean Air Cargo facilities will be further expanded this year, bringing the annual throughput capacity to one million tonnes. Choi says that
the expansion will meet cargo demand until 2009. But with the growth
potential of the Chinese market and Incheon’s strategic location
between China and North America, that cargo demand may well exceed
the one million-tonne mark much earlier than 2009.
The idea is that TNT will use Atlas Air’s “Partnership Program”, a service, which allows carriers to lease part freighter loads out of key hubs, to give it dedicated lift on long-haul routes. One service, from Liege to Johannesburg and back via various African stops, has been up and running for some months, with Emirates and other carriers as well as TNT taking space. Others were
talked about earlier in the year, with reports that Atlas planned
to position up to eight B747Fs at Liege. TNT was said to be planning
to use many of the new services: A magazine produced by the airport
in May said that “TNT is undergoing the metamorphosis from
being a European network specialist to global operator status”. But is it? While back in May the Atlas partnership was being much discussed, in recent months both TNT and the US aircraft lessor have been rather quieter on the subject. Some in the European air cargo industry say the reason is that carriers have not been keen to join in. “Carriers are confused by this change in Atlas’s strategy,” says one cargo manager. “They see this as a way for Atlas to cope with a slump in its traditional leasing market and are not convinced it will work.” Niky Terzakis, managing director of TNT Airways, the separate division within TNT owners TPG which operates the integrator’s air network in Europe, does not deny that progress in setting up the network has not been as fast as originally expected, but he has more innocent reasons for the delay.
“It is an ambitious plan, which is taking time to implement and the economy has not been in good shape in the past year, so progress has been a bit slower than expected,” he says. It is not that everyone has gone silent on the plan, he insists, just that “Atlas wants to make the announcement at the right time, when everything is in place”. In fact, Terzakis reveals, new routes have already joined the 2-3 times a week South African one. There are flights from Liege to Miami, New York and Chicago, and TNT is taking space on these. “So far
they are more like three times a week than the five times a week
we would prefer, but more frequencies and routes will follow soon,”
he says. At present, Atlas has around seven planes visiting Liege
on a regular basis, Terzakis adds, but with only about three visible
on the ground at any one time. But there are hints that it will be more than that. Reports earlier this year said that TNT was planning to hire 125 new pilots over the next two years, and Terzakis admits that while some would be for European expansion, others might be used by TNT Airways to operate some Atlas aircraft on a dry lease basis. “There are some routes where we are best positioned to operate the route, for example because of traffic rights,” he says. That does not mean that TNT would take all the space on those routes, however - they would still be Partnership Program flights shared with other operators. Terzakis does
not deny that it is something of a shift for TNT from using commercial
lift on long-haul routes to having its own dedicated routes, but
he draws a key distinction between this and the fully owned freighters
operated on long-haul routes by the other integrators.
In May, Terzakis was quoted as saying that TNT Airways had applied for rights to China, Hong Kong and India. He does not refute this, but says it is too early to comment on specific routes. Nor does he say more than that TNT is “interested” in Dubai, where Atlas is due to set up another Partnership hub. “But you could see new routes within six months,” he says. Any routes would be purely long-haul routes linking Europe to Asia, however. Jones and Terzakis are both firm that there are no plans for an intra-Asian network, and this is confirmed by Ken McCall, CEO for TNT in Asia, the Middle East and Africa. Part of the reason, McCall says, is the relatively small size of the express market in Asia, and the volatility of the region’s economy. “We have had two economic crises in the last three to four years, and the express market is still being created,” he says. TNT’s competitors, he suggests, are only able to operate networks because they fill up with heavy freight. “I estimate that if you added the whole Asian express market together you would fill one true express network. The only way we could have our own network is to fill up with hard freight, and we have no interest in that. We are an express company.” It was for this reason that TNT pulled the plug on the network Pacific East Asia Cargo used to operate for it out of the Philippines in the mid 1990s, according to McCall. “It was not the right structure or the right aircraft, and we did not get the right returns on our investment. You can’t make the customer pay 25-30 percent more just because you fly your own aircraft.” He claims that in any case, using commercial lift gives TNT a better service in many cases. “On high frequency routes, we might put the shipment on a flight at 10am or 3am rather than holding it over for an evening freighter flight,” he says. This works not only on intra-Asian routes, but also across the Pacific: “We can get to some US destinations from Asia sooner than our competitors,” McCall says. Back in Europe, TNT does very much have its own air network, and it continues to expand, global downturns notwithstanding. Cities like Berlin, Munich, Katowice and Bucharest have been added in the past year, bringing the number of destinations served to 55.
Jones claims that TNT offers the fastest by road connection times of any operator in Europe and that it is “by far the biggest road carrier” on the continent. Some 65 percent of is European express volumes move by truck in this way. So why the new
flights? “It is not that we are substituting trucking by air,”
says Terzakis. “Quite the contrary, in fact: we do everything
we can to avoid flying. But some business just demands flying. Road
can’t capture all the overnight business.” Another factor,
he admits, is that European roads are becoming increasingly congested,
and so less reliable for on-time delivery.
Long talked about, Terzakis confirms that the idea of using dedicated express cargo trains on this route is still very much a live one. “The airport already has a loading area for transferring cargo from trucks to trains. The initiative is being headed by the Walloon government and the Liege authorities, but we are keen to participate as a customer,” he says. The Walloon
government - Walloon being the French speaking part of Belgium in
which Liege is situated - has been an important influence for the
good on Liege. It was the Walloon authorities positive approach to aircraft noise that lured TNT’s European hub from Cologne in 1997 and which was behind Atlas choosing the airport as the European hub for its Partnership Program. “They are highly committed to having an airport open 24 hours without unacceptable restrictions,” agrees Terzakis. That does not give TNT Airways carte blanche at the airport, however. In return, it is expected to behave responsibly over the noise issue. One agreement was to phase out hush-kitted aircraft by December 2002. TNT met that deadline six months early when the last of its ten 727 freighters left Liege in June. Terzakis can’t conceal the fact that he misses the particular capabilities of the 727. TNT Airways does not use the same planes on the same routes each night, but adjusts them according to demand, and the 727 was in many ways ideal for this. “At 25 tonnes capacity, it was a good size - big enough and small enough to suit the combination of routes we need to operate,” he says. Having said that, noise was not the only reason for phasing out the 727s: high operating and maintenance costs also played a part. The best replacement for the 727 might have been the 757, but TNT found the conversion costs too high, and so has adopted a mix of other aircraft instead.
The 45 tonne capacity of the A300, of which it has six and leases a couple more, is one, but its bigger capacity has meant combining destinations on lighter routes. For that reason, TNT has looked around for other solutions instead of expanding the A300 fleet further. TNT’s three TU204-120Cs are a better replacement for the 727s, but are still not licensed yet for operation by European carriers. The integrator also has 17 BAe-146s and charters in 737s. Some 35 percent of the network is now operated by external charters, according to Terzakis. “We prefer short term arrangements, to keep capacity flexible,” he says. Interestingly given McCall’s resistance to hard freight as a filler for express flights in Asia, the European fleet is also used to provide feeder flights for KLM. There is no real contradiction, though: Terzakis says such flights are a daytime use for freighters that fully occupied with express cargo at night.
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