IAG Cargo seeks transatlantic liftoff
In mid-February, representatives from the European Union and United States agreed to hammer out a path toward an EU-U.S. free-trade agreement that could come as early as 2015.
The pact will harmonize product standards and trade rules, eliminating regulatory differences. Market access and new levels of cooperation will also be discussed in addition to the removal of tariffs. These tariffs are currently low, but the removal of such fees would increase trade, government officials said.
Though there are disagreements on both sides about the path forward, Dave Sheppard, global head of sales at IAG Cargo, sees a need for an agreement of some sort to boost declining transatlantic trade. For IAG, the Atlantic lane is the route that’s suffered most in the current market.
“We’re seeing demand both ways across the transatlantic a little stifled at the moment, and that’s certainly causing us a problem,” he said.
Most of the depression is coming from flights out of the United Kingdom, a trend that started four to five months ago. Mainland Europe’s activity, Sheppard said, has been steady, and rates to and from Europe to the United States have stayed relatively stable. The problem, then, is demand, not the rate environment.
Fortunately, demand is exactly the target of the free-trade agreement. Sheppard sees the agreement helping boost U.S. exports, which as a percentage of GDP is relatively low compared to other developed countries.
“U.S. exports traditionally have been very variable based on exchange rates, and that’s no different at this time,” he said. “The FTA would help bolster trade across the Atlantic.”
In 2012, tonnage at IAG Cargo declined 1.2 percent, but revenue increased by 19 million euros, a result Sheppard said made officials “fairly happy.” He pointed out that despite the tonnage decline, load factors ended the year on a relative high note compared to the rest of the market. This year’s numbers so far, however, are a different story.
IAG Cargo’s tonnage declined 7.9 percent in March, ending the month at 499 million tons. For the first three months of the year, tonnage was down by 8 percent on a 1.7-percent reduction in capacity. Breaking IAG into its component parts, Iberia experienced a 25.7-percent, year-over-year drop in cargo tonnage in March; British Airways felt a 3.3-percent decline over the same period.
“The first quarter of this year has been a little disappointing,” Sheppard said, blaming most of the poor performance on transatlantic cargo. Elsewhere, he noted, business was holding steady, with India, Africa and Latin America all showing solid activity. European cargo heading to the Far East is also performing well.
Sheppard started to see pressure in the transatlantic market during the fourth quarter of last year. Combined with first-quarter results, he’s unsure about a turnaround on the lane anytime soon. “There’s nothing in the consumer demand picture — either in Europe or in North America — that points greatly to an uptick in consumer demand,” he said. “We’re certainly quite keen to see an uptick in the transatlantic market... but we’re not particularly optimistic of that happening.”
Lower air cargo activity, though, may become the new normal, with shippers having seen, with a bit of supply-chain adjustment, it’s possible to route most cargo on the ocean instead of in the air. Sheppard said he’s in the camp that believes a long-term side effect of the 2009 downturn was this supply chain reorganization and, thus, the shrinking of air freight’s market share.
Sea freight has become more sophisticated and faster, he said, noting that 20 years ago, shippers trading bananas or flowers wouldn’t dream of loading their cargo on ships. For air freight to keep up, it must truly differentiate itself, and carriers like IAG need to continue to be innovative with their product offerings to keep shippers interested in air solutions.
Whatever happens with transatlantic trade, and even as shippers continually choose sea transport over air, IAG Cargo will push forward with its commitment to growth by acquisition, Sheppard said. Iberia Airways and British Airways have been operating under the IAG umbrella for more than two years, and he said the two carriers will continue to be marginally separate entities although they are under the same group. This strategy will allow IAG to continue to add carriers, standardizing its offerings and service levels while it lets the carriers keep their names.
“(We’re) trying to create a single portfolio of products across a single network where the customer gets a standardized service level,” he said. “The fact that it’s maybe a British Airways or Iberia tailfin that the freight is flying on is really neither here nor there.”
Currently, IAG stands as the seventh largest cargo carrier in the world, he said, and while growth is certainly in the big picture, the goal is not to climb to the top of the list. Instead of carrying the most freight, IAG officials want to spread wide-body cargo services to as many of the 120 major air freight destinations as possible.
To that end, IAG recently announced an additional increase in wide-body orders, picking up British Airways’ options for 18 Boeing 787s. The planes are anticipated to replace BA’s 747-400 aircraft starting in 2017. IAG officials also laid the groundwork for additional wide-body orders for Iberia, but haven’t committed to anything because of the carrier’s ongoing reorganization.
For Sheppard, it’s nice to have cargo represented in the group’s overall growth strategy, and he said while cargo may not have been as important as the passenger side of the business at the beginning, air freight across all IAG’s trade lanes is now a major factor when deciding where and when to fly or what companies to buy.