News / Challenge Group looking for 'a US anchor' as it bets on freighters

Photo: Challenge Group

Just over a year ago, The Loadstar took the liberty of comparing Challenge Group with Volga-Dnepr Group, as its natural heir to the all-freighter services throne.

To some extent, that remains true. But in others, it is not.

If you asked the market about Volga-Dnepr, you tended to get a very mixed response – mostly based on how people felt about its strident boss, the unique Alexei Isaikin. Volga-Dnepr was constantly ‘about-turning’: there were hirings and firings; arguments; lawsuits; and a lack of certainty about the carriers, both in the long and short term. Would Isaikin approve? What would he do next?

This is where Challenge and Volga-Dnepr diverge: ask the market about Challenge, and it’s a different story.

“The people you meet from Challenge know everything. They are very successful, is my impression. If you look back to the early days, they’ve done airlines, forwarding – there are amazing people that come out of Challenge,” said one senior air freight forwarder.

Another airfreight executive praised Challenge’s strategy, noting its thoroughness.

And more than one airport touting for Challenge’s business noted that the group had tough negotiators, giving few – if any – concessions; perhaps in part, the reason it hasn’t quite selected its North American airport hub as yet.

But Challenge’s CEO is quick to come back on the claims of being a “tough negotiator” – it’s not about cutting costs, says Yossi Shokroun.

“I don’t know if we are tough negotiators. I don’t think that this is our policy, by the way. I think we are tough in the way that we ask for quality.

“It’s not necessarily about reducing price, we are not price-driven. We believe in partnerships rather than suppliers and customers. Partners look ahead and see a long, long way into the future. And as long as we have those alliances, it will be more sustainable for everyone.”

Yossi Shoukroun, CEO, Challenge Group

And those alliances – and quality partnerships – are crucial for a business like Challenge, which focuses on specialised products such as live animals, temperature-controlled, valuable cargo and ecommerce. It is looking for homogenous, quality services throughout its network – and handlers in particular need to match the standards Challenge offers in its hubs.

Its search continues for a new US hub. Currently operating to airports including JFK, Atlanta and Houston, it is seeking new destinations across the country.

“We think that, in the US, what we are looking for is to have a kind of a North American hub, to copy and paste our business model in Europe onto the US. Not instead of current destinations, but on top of. And for this we are looking for a logistics partner.

“We didn’t arrive alone in Liege, we had a big exporter, and based on this we built our additional business model. So this is what we are looking for in the US.

“Basically the idea is to have something in the centre of North America. There are a few options still on the table, such as Pittsburgh and Rockford, but we are open to any other airport.

“But I’m looking for an anchor customer, and partners that will be willing to commit and to join us. And, based on this, to develop other solutions and build trust.”

Challenge hopes to find a cargo-focused airport, rather than a main passenger hub, which “will be congested, and the cargo put aside, as usual,” says Mr Shoukroun.

But will finding an “anchor customer” be tricky in this market?

“I think the customers are prudent for the moment. They are trying to see what will happen, but I believe that in 2024 we will start to see some clarity. Customers will understand that if they want to get certainty, they need to decide what supply chain model they want to adopt.”

Mr Shoukroun believes the passenger market could suffer over the next two years, perhaps triggering airports to eye cargo more favourably again, and customers to look for freighters rather than belly capacity.

“I don’t think passenger activity will work out – it was very good for passengers since Covid, there was an explosion of travel. But while ticket prices went up, it hasn’t been enough to cover the extra costs – fuel, labour, handling, overflying, all those kinds of things. Next year won’t have the same demand as 2023, for sure. And as of 2025, we will have to add tax on emissions and offsets, as well as other environmental restrictions.”

Essentially, Challenge – and its spreading empire, which includes a leasing and maintenance arm, as well as logistics and handling solutions – is betting on freighters for the near-term, and long-term, future of air cargo. And it has put its money where its mouth is. Challenge has three AOCs, in Belgium, Israel and Malta.

“It gives us flexibility on traffic rights,” explains Mr Shoukroun. “On our Belgium AOC, we have, I think, five slots to China, but more with Israel and Malta, so we are not relying on governments to negotiate on our behalf. And those three AOCs are operating two different types of airplanes, one to meet the long hauls and the other one to meet the mid- and the small destinations.”

He adds that three AOCs are enough, for now. But Challenge does want more aircraft. Its Malta operation took delivery of a 767-300 converted freighter in August, and the group expects another three 767s arrive, one this year and two more in the first half of 2024. It also has four 747-400Fs, and will add four 777Fs to the fleet.

“We have different fleets for different markets and different sizes. The 767s are for shorter-haul and ecommerce and smaller cargo. We have four 777s in the pipeline to convert from the beginning of 2025. We will start to phase out some of the 747s that will be too old, not reliable anymore or meeting customer needs.”

The first 767 will operate between Tel Aviv and Hong Kong, and the second “will probably be for Tel Aviv and Europe”, he says, adding: “Maybe the third as well, but we are planning to see what is needed out of Liege. We have also started to fly to Zaragoza and Istanbul, so those are the medium-haul destinations to be covered next year.”

But Challenge also likes working with other airlines, such as Magma, Astral, EuroCargo and Network Aviation.

“And I think Latam has now joined Liege. Liege is becoming a kind of European hub for cargo operators, and we have interline agreements and so are creating synergies. It’s a shared economy business model. We are trying to use each other, feed each other, for a win-win situation. We are not competing, but completing. Liege is the platform where we can exchange.”

This is another difference from Volga-Dnepr Group, which didn’t seem to have the same collaborative approach. (Remember, for instance, when it said it wouldn’t work with brokers any more?)

Perhaps more similar to Volga-Dnepr, though, is the strong relationships with its customers and shippers, and multi-pronged services.

“We have regular customers that rely on our service,” explains Mr Shoukroun. “We are not just a carrier, we fly the cargo, we handle the cargo and we distribute the cargo. So there are a lot of things we are doing on behalf of the customer. This gives a kind of certainty. We are integrated for complex cargo.”

He admitted that profitability has gone down this year, both because of additional costs and reduced demand. But Challenge has retained its customers, with about 50% doing “regular activity”.

“Now when I’m speaking about ‘regular activity’, it’s not commitments, it’s not blocked space. It’s the same customers repeating. Let’s take the horse activity; those are repeat customers that automatically come to us because they are familiar with our product, with our rate, with our service, and it has been the same for years. Pharmaceutical is the same. We have the forwarder in front of us and we have the end customer in front of us. So both of them rely on our services on certain lanes, and they don’t have a hard blocked space agreement, it’s a kind of a gentlemen’s agreement. This is what I call partnership.”

So do these longer-term relations protect Challenge from the vagaries of the market?

“Nothing is protecting me from volatility,” laughs Mr Shoukroun. “But we are trying to listen to our customer needs and trying to adopt and give a tailor-made solution.”

Coming up: Challenge, Israel and Zim.