Bellies Getting Healthy

Bellies Getting Healthy

Copyright 2004, Traffic World, Inc.

Freight business provided a stronger contribution to the bottom line at American air carriers in the first quarter but the improvement wasn''t enough to offset continuing problems at the major airlines.

Net losses such as the $230 million on Northwest Airlines and $124 million at Continental Airlines in the first three months of the year were sharply better than the troubled airlines reported in the same quarter a year ago but were dispiriting evidence that the carriers still face deep restructuring.

The turmoil took another turn this month with the resignation of US Airways chief David Siegel as that carrier struggles to bring its costs into line with a new breed of smaller, more flexible competitors on the passenger side of the business.

The airlines said rising fuel prices had offset much of their cost-cutting, and with losses still in the triple digits for several of the airlines and one major, United Airlines, still in bankruptcy protection, the industry is bracing for more changes and possible consolidation.

Amid the red ink, cargo business turned up virtually across the board at the airlines in the first quarter and industrial freight traffic was especially strong while mail traffic has waned in the face of the U.S. Postal Service''s new look at the way it uses the airlines.

American Airlines showed the largest improvement in cargo, with a 10.4 percent gain over last year''s first quarter pushing revenue up to $148 million in the first three months of 2004. The cargo yield grew 4 percent as the airline said strong growth in its premium-priced Expeditefs express service had pushed up the profitability of the belly business.

"March was the best month in our history," said Mark Najarian, vice president of marketing at AA Cargo. "We were really able to capitalize on the capacity we added last year."

American''s net loss totaled $166 million, a big figure except that it compares with $1.04 billion the country''s largest passenger airline lost in the first quarter of 2003. American''s $42 million operating profit was its third straight quarter in the black on continuing operations.

Northwest Airlines, helped by the rapid growth in Asia where the airline focuses its freighter network, saw cargo revenue jumped 9.6 percent to $183 million. Healthy as that growth was, it put Northwest just short of the business it had in the same period three years ago, when the economic downturn first started to hit the airline industry.

That didn''t offset a $230 million net loss that compared with a $318 million loss the airline reported last year.

Continental''s loss was a 44 percent improvement over last year and a sharp 3.3 percent gain in yield for belly cargo business pushed cargo revenue up 5.8 percent. Freight was the big gainer with an 11 percent jump in revenue while mail business was off 20 percent.

Delta reported a $383 million net loss for the first three months of 2004, with cargo revenue for the quarter up 8 percent over last year to $122 million. That was still 13.4 percent behind Delta''s cargo revenue for the quarter three years ago, however.

American says its cargo gains have come from new attention to yield through its Expeditefs service, a premium-priced express service aimed at freight shippers. American launched the service a couple of years ago as the airline phased out standard services such as the two-day delivery that was a foundation of domestic general air cargo.

With its guarantee and "ramp-to-ramp" transfers to speed transit through hubs, American''s express service is one way airlines are trying to get more out from their belly business with a new focus on the yield of their cargo traffic.

"There was a learning curve for us and our customers and now this service is proving extremely valuable," said Najarian. He said shippers trying to bypass the dock strikes in Brazil and seafood shippers in Chile seeking new markets in Asia were among the growing list of international shippers willing pay premiums in markets of tight capacity.

"In the U.S., it''s a way for the nonintegrators to compete with the integrators for overnight business. We''re seeing shippers we hadn''t seen before because we didn''t have a product to sell to them," he said. "What we saw was a huge and growing express market and there and we didn''t have a product in that market."

American''s cargo business is also benefiting from decisions by United and Delta to scale back in South America, bolstering AA''s large position in that market. The low-cost passenger airlines that have pressed the majors on the upper deck aren''t hurting the belly business, he said, because they have little to offer the freight market.

Meanwhile, Air Canada faces continuing problems as it struggles through a restructuring under bankruptcy protection. The airline reported a US$505 million operating loss in 2003 and is dipping into cash reserves even though Air Canada says its revenue is tracking according to plan this year and costs have been cut 14 percent from last year.

Air Canada has said it wants to mount a freighter operation but the airline''s $384.4 million in cargo revenue was down 11 percent from 2002. More troubling was that cargo business fell 20 percent in the second half of 2003, largely because of slimming capacity.

"Our restructuring has become more challenging as a result of record high fuel prices, increased domestic capacity by our low cost competitors and the geopolitical issues faced by the airline industry as a whole," said Air Canada CEO Robert Milton.