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.

Kyung-Ho Choi

“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).

And according to the same statement, operating profit in 2003 will increase to more than KW 370 billion (US$316 million up from the KW 310 billion in 2002.

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.

Cost-conscious Korean Air Cargo has decided to exclusively operate a B747 freighter fleet once the MD-11F is retired.

“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.

	Strategically located between China and the Americas, Incheon International Airport is rapidly becoming North Asia's main cargo hub.

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.

Korean Air Cargo's facilities at Incheon International Airport will be expanded this year, bringing throughput capacity to one million tonnes.

In the early stages of the airport design this was considered to be crucial for the hub status that the designers had in mind when they developed the plans for the airport on the man-made island near the seaport.

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.”

	Korean's four MD-11 freighter leases will come to an end in 2004 and 2005 and will not be renewed.

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.”

Korean Air's fleet of B777s offers substantial bellyhold capacity on regional routes

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.
Turning Incheon International Airport into one of the world’s largest freight airports by 2010 is among the top policy priorities of Korea’s president-elect Roh Moo-hyun.

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.

Korean Air Cargo is expected to fully implement SkyTeam Cargo's four global brands this year. .

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Copyright for texts and pictures: Payload Asia, Singapore. This report is brought to you in partnership with Payload Asia, the air cargo/express magazine for the Asia-Pacific and Middle East regions. To learn more about Payload Asia, please visit their website.