Air France-KLM (AFLYY) may leave the dedicated air freighter business after five decades, beset by losses in cargo that rose to nearly $300 million last year. Still, express cargo units are generally a high-margin, specialized business that many, many international airlines with large fleets find lucrative despite the economic cycles.
The airline’s board is weighing options and plans to decide on a strategy by September, according to a report in Bloomberg News that cites two people familiar with the plans. Air France-KLM, which also owns the Amsterdam-based Martinair cargo operation, has been paring its fleet of cargo aircraft and now has just 13 freighters. The company would likely continue to ship cargo in its passenger fleet.
If Air France-KLM does quit the freighter market, here are four likely reasons why:
1. Jet fuel is very expensive: Last year, FedEx (FDX) Chief Executive Fred Smith said the price of fuel has caused “a sea change in international trade and in international transportation.” That shift has meant that rail and marine freight haulers have picked up some of the business from their quicker, more expensive air rivals. And the big dogs of the freighter industry have historically been massive jets such as Boeing’s (BA) 747 and 727 as well as the aged MD-11 and DC-10 models from McDonnell Douglas. These models all sport three and four engines and burn lots of fuel. That’s why airlines now favor twin-engine jets—Boeing’s 777 and 767 and the Airbus A300 and A330 series—for use as freighters.
2. We are willing to wait: “When it absolutely, positively has to be there overnight”—as FedEx memorably put it in the late 1970s—is no longer the case for many companies. Exporters and other shippers the world over are opting to slow some of their goods to save costs. As UPS (UPS) phrased it last summer in an earnings report, customers want “lower-yielding shipping solutions” these days.
3. Persian Gulf rivals fly large: The explosive growth of Middle Eastern carriers such as Emirates, Qatar Airways, Etihad, and Gulf Air has long bedeviled European and U.S. rivals, which contend that these airlines are either state-owned or heavily subsidized and present unfair competition. That argument carries over to cargo, too: These airlines have eye-popping numbers of large, long-haul aircraft on order with lots of cargo space.
4. Chinese manufacturing is slowing. The 2008 financial crisis dealt a heavy blow to international trade and the shipment of goods. A larger trend, however, is that countries are no longer rushing to outsource manufacturing to China and other Asian nations where costs were lower a decade ago. The U.S. and Europe both aspire to broad domestic manufacturing revivals, which slows the flow of things to and from Asia. Here’s how the International Air Transport Association expressed that dynamic in an analysis earlier this month of air freight markets: “Current growth in trade is slower than expected at this point in the economic cycle, largely due to on-shoring trends which have equalized the relationship between world trade and domestic production growth. Moreover, while the U.S. and Europe gain economic momentum, China is entering a steeper downturn. These factors will likely keep future growth in air freight demand contained, but still stronger than performance in 2013.”