Cathay Cargo doing OK
Courtesy of Aviation Week:
Cathay Pacific’s new cargo terminal in Hong Kong is proving it can increase the efficiency of freight operations, both for Cathay and a growing number of other airline customers.
The HK$5.9 billion ($761.3 million) facility completed its first full year of operations in 2014. Although it is still well short of its potential capacity, this year will likely see significant volume gains, says Kelvin Ko, CEO of Cathay Pacific Services Ltd. (CPSL).
Last year the terminal handled 1.45 million metric tons of cargo, while its upper limit is estimated to be 2.6 million metric tons per year. This year Cathay expects to increase its own freight volumes, and new customer EVA Air will also boost the facility’s tonnage.
Taiwan-based EVA shifted its freight operation to the Cathay terminal in January, becoming its largest external cargo customer. The facility already serves AirAsia, Thai AirAsia and Royal Brunei, as well as Cathay and its subsidiary airlines Air Hong Kong and Dragonair. CPSL is seeking more customers, and is “constantly speaking to other airlines,” says Ko.
Cathay’s new terminal joined other large players in the freight handling market at Hong Kong International Airport, which is the world’s busiest cargo hub. Ko says the terminal was always expected to have surplus capacity in the short-term. “You build a cargo terminal for long-term [demand]—you can’t open it bit by bit,” he says. “So once it’s open, it’s a big step up.”
The terminal will naturally increase its efficiency as volumes increase, says Ko. However, it is already taking advantage of new technology and processes to improve processing times.
Aircraft-to-aircraft transfers comprise more than half the freight handled at the terminal. The time it takes to unload, break down, process and reload cargo has been reduced from the standard 8 hr. to 5, and can even be cut to 3 hr. by prior arrangement.
Reducing the transshipment time between long-haul flights and Cathay’s Asian network gives customers more business opportunities, and makes additional connecting city pairs viable, says the airline’s Cargo Director James Woodrow. “Anything that drives speed and connectivity is good for our business.”
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Investments In Freight Pay Off For Cathay Pacific
When Cathay Pacific opened a massive new cargo terminal and ordered three more Boeing 747-8 freighters in 2013, it seemed to be taking a major risk. At that time, the air freight industry was in the doldrums with no end in sight. But Cathay persevered with its expansion plans and bet that cargo demand would come roaring back.
Fast-forward to 2015, and Cathay’s bold moves have been justified. Cargo demand is growing again, and the new aircraft and Hong Kong cargo hub are helping the airline take advantage of improvement in key markets.
With a fleet of 22 freighter aircraft, Cathay is one of the largest cargo-carrying airlines in Asia. And the cargo division is crucial to the success of the company—“it tends to be that when cargo does well, the [overall] business does well,” says James Woodrow, Cathay’s director of cargo.
For many years, the opposite was true—the dire cargo market was dragging down the airline’s profits, and the same was happening to the other large Asian cargo carriers.
The slump hit in earnest in early 2011, and lasted for almost three years. Demand finally began to improve in March 2014, and “got stronger and stronger throughout the year,” says Woodrow. Falling fuel prices, seaport congestion on the U.S. West Coast, the launch of new high-tech consumer products, and automotive recalls have all helped maintain the momentum.
Beyond those factors, the growing “underlying strength” of the U.S. economy has spurred demand on transpacific routes, Woodrow says. This is a big deal for Cathay, as the transpacific is by far its largest cargo market, connecting Asia to North America via its Hong Kong hub.
Cathay has deployed its new fleet of 747-8Fs on the North American routes, and has steadily increased transpacific frequencies to the point where it has 37 weekly freighter flights. The carrier operated up to 41 weekly flights in its October-November peak last year, and Woodrow hopes to build up to 43-45 weekly freighter flights during this year’s peak.
Other markets are not as buoyant, however. Woodrow describes intra-Asia cargo demand as merely “OK.” While there is volume growth, it remains a highly competitive market for air freight.
Asia-Europe flows are the most challenging of Cathay’s three main cargo markets. Asian carriers—including Cathay—and Middle Eastern airlines have added a large volume of passenger aircraft belly capacity to this market, dampening freight yields.
In addition, the significant weakening of the euro has made imports into Europe more expensive. One positive effect of the devaluation is that it should boost exports from countries such as Germany, balancing flows in a market traditionally skewed toward imports from Asia.
Cathay has also been working to build new markets. For example, it has recently expanded freighter operations in Mexico, and now has a five-times weekly service that stops in Mexico City and Guadalajara. Mexico City is largely an import market, while a lot of produce and high-tech exports come from Guadalajara.
The Mexico service is an extension of its Hong Kong-Los Angeles 747-8F route. It would be risky to put five direct freighter flights a week into a relatively new market, but a freighter may be dedicated to Mexico “once we’re confident that we’ve got steady volumes,” says Woodrow.
India is another market where Cathay has been building its presence. It recently launched freighter service to Kolkata, its sixth Indian destination. The carrier has increased its cargo network in India dramatically over the last three years, as the Hong Kong hub is geographically well-placed to connect India and China, the world’s two most populous nations.
Among Cathay’s greatest strengths are its cargo services to the major high-tech manufacturing centers in mainland China—with five freighter destinations—and Southeast Asia, which are connected to other regions via Hong Kong. Serving a broad spread of destinations from a strong hub “is the connectivity game that the Middle East carriers play, and we’re big enough that we can play it too,” says Woodrow.
Cathay will grow its overall cargo capacity by about 10% this year, with a similar increase in both its dedicated freighters and in the belly capacity of its passenger fleet, Woodrow says. It can do this because of the greater efficiency of the new 747-8Fs, and the rising number of passenger aircraft such as the 777-300ER that can also carry large cargo volumes.
The airline has 13 747-8Fs and will take delivery of its 14th next year—the last of its current order for the type. Cathay also has six 747-400ERFs, and five -400Fs of which three are operational with the remainder parked.
Boeing agreed in 2014 to buy back the six -400Fs that Cathay was operating at the time. One was returned last year, one will go this year, and the remaining four in 2016. The carrier will still finish the year with 22 operational freighters, since the one returned will have been a parked aircraft.
The freighter total is down significantly from the fleet in the “high twenties” it has previously operated, Woodrow says. But he notes that the carrier has steadily increased the size of its freighters, and also frequencies in key markets, such as transpacific.
Because the -8Fs are newer aircraft, Cathay can rely on high utilization rates. It achieves up to 16 block hours a day per aircraft with the -8Fs, much higher than Cathay’s older 747 freighter fleets. “We can keep pushing their utilization; these are expensive assets so we want to sweat them as much as we can,” says Woodrow. “And we can [also] try to work our ERFs a bit harder.”
Another potential option is retaining some of the -400Fs a bit longer. If Boeing has not found lease customers by the time they are due to be returned, Cathay could possibly continue to use them, Woodrow says. But any such decision would likely depend on demand strength and the price of fuel. For example, if oil is back to $100 a barrel in 2016, the carrier would be unlikely to pursue this alternative.
The continuing growth of the passenger fleet is a major source of new cargo capacity for Cathay. Whereas the carrier has reduced the number of freighters serving Europe in recent years, it has much more belly capacity in that market as the passenger fleet has added destinations and frequencies. This allows more direct connections to Hong Kong.
It also helps that the 777-300ERs in the passenger fleet have excellent cargo capacity. The airline now operates five daily 777 passenger flights to London, and if each carries 20 tons of cargo, that represents about the same capacity as a single daily 747 freighter. Similarly, Cathay has so many frequencies to Singapore with its A330s that it can carry 150 tons of cargo every day on that route as belly cargo, in addition to freighter services.
“You have to think of modern widebody [passenger] aircraft as mini-freighters,” Woodrow says. For example, a 777-300ER with a light passenger load recently carried 36 metric tons of cargo on a single flight from Manchester.
Cathay has no plans to order more freighters at the moment, says Woodrow. The carrier “continually looks” at its fleet plan, although it will “see what the underlying strength of this [cargo] recovery is” before contemplating more orders.
Because it has new belly space becoming available, and the option to increase aircraft utilization, Cathay still has the opportunity to raise cargo capacity over the next few years, Woodrow says. “We’ll keep evaluating [the fleet], but we’re not in a rush to get our checkbook out at the moment.”