Is Delta Air Lines' decision to dissolve its cargo division and eliminate the post of chief cargo officer just a change in its reporting structure, or a sign top management feels it isn't necessary to have a standalone cargo operation with a dedicated boss?
On or before Aug. 1, Atlanta-based Delta will fold cargo sales into its global sales division and bring cargo operations under its airport customer service functions. Tony Charaf, who has run the cargo division since August 2012, will retire Aug. 1 after 18 years with the airline. His position will disappear.
Instead, Ray Curtis, Delta's vice president of global cargo sales, will report to Steve Sear, senior vice president-global sales, Delta said in a statement. Scott Barkley, managing director-global cargo operations, will report to Bill Lentsch, senior vice president-airport customer service, Delta added.
In the statement, Delta said the move would strengthen its cargo business by giving it access to resources on the much-larger passenger side of the house. "With this new structure, Delta Cargo remains a highly valued part of our business, and these changes will provide each group with the resources they need to meet our cargo-related goals," Delta President Ed Bastian said in the statement.
Delta's existing cargo business, which has evolved out of its 2008 merger with the former Northwest Airlines, has struggled to gain revenue traction. Its $937 million in 2013 cargo revenue was down 5 percent from 2012 levels. First-quarter cargo revenue was off 9 percent from prior-year levels.
TODAY'S BELLY CARGO MARKET
As with most passenger airlines that work with third-parties like freight forwarders and cargo agents, Delta has been hampered by a subpar global economic recovery, escalating jet fuel prices, a shift by a growing number of international shippers to lower-priced sea freight, and a perception that the air industry's speed and reliability metrics don't justify a premium price for its services.
The rule of thumb for decades has been that, on average, it takes six to seven days for freight moving in the bellies of passenger airlines to reach their consignees. The culprit appears to be a continued overreliance on paper-based processes that slow communication and result in cargo languishing on the ground longer than it needs to be. The International Air Transport Association (IATA), which represents the world's airlines, has vowed to cut two days from the cycle by replacing paper with digital interfaces.
Still, belly cargo remains a compelling proposition for users who want the speed of airfreight but don't want to pay for pricier all-cargo services. That's because an aircraft generates most of its revenue and expense from passenger service, and cargo can piggyback at little or no allocable cost. That means reasonably low rates for the user and healthy profits for the airline. Roslyn Wilson, author of the annual "State of Logistics Report," whose silver anniversary edition is released today, estimates that airlines generate margins of around 65 percent on their belly cargo.
Belly capacity will account for about 70 percent of the overall cargo space to enter the global market over the next five years, according to U.K. consultancy Seabury. That is due largely to the higher costs of operating pure freighters, Seabury says. Wilson adds a somewhat ironic twist: Belly capacity will grow in part because passenger baggage fees will increasingly compel travellers to haul their luggage aboard rather than check it at the ticket counter.
U.S. airlines are unlikely to sit on their hands if cargo-related opportunities arise. Last week, American Airlines Cargo began marketing nonstop service between Dallas/Fort Worth (DFW) and Hong Kong, the world's busiest cargo facility. American will fly an extended range Boeing 777-300 aircraft on the route, a first for any U.S. airline in Asia. American also began offering cargo services on its Dallas-Shanghai route. In both markets, the airline is looking to target U.S. exporters and Asian importers on the outbound flights, and South American importers on the return legs that connect through DFW.
At the same time, United Cargo, a division of the merged United Airlines and Continental Airlines, began marketing services on flights between San Francisco and Chengdu, China, located in the country's southwest region and its fourth-largest city. Chengdu has emerged as a high-tech manufacturing hub, and half of the U.S. Fortune 500 firms have a presence there, United said. The three-times weekly service, using the Boeing 787 "Dreamliner" aircraft, is the first time a U.S. airline has served a city on the mainland other than Beijing and Shanghai.
For all its favorable economies of scale, belly freight will thrive only to the extent the global economic landscape is favorable. Here, the jury remains very much out. In a recent communiquÃ©, Cargo Network Services Corp., an IATA unit that represents U.S. interests, said U.S. and European consumers are growing more confident about economic prospects. Generally, businesses sensing a bullish consumer outlook will be willing to spend more money on air freight to get goods to market faster.
However, CNS noted that business confidence has recently flattened out and that global volumes have begun to decline. This suggests that growth could weaken in the months ahead, the group said.