News / IAG searches for bargaining chip on freighter contract as yields tumble

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IAG Cargo is believed to be reviewing its freighter operations as the market continues to face low yields and overcapacity.

The carrier withdrew its last freighter service between London and Shanghai last month, shifting it to Hong Kong, and, according to industry sources, has been looking to re-tender its cargo flying or renegotiate its contract on its three 747-8Fs.

“IAG gave just 10 days’ notice of its Shanghai cancellation,” said one experienced head of airfreight at a global forwarder.

“The yield ex-China was not too bad, but the yield ex-Europe couldn’t make up the difference. I’d estimate it cost about $400,000 to put on the flight, and it would get revenues of $300,000. Just to position the aircraft would have cost it money.

“Ironically,” he added, noting the current peak in China, “BA could have filled it every day this week.”

One forwarder who had blocked space agreements with BA on the Shanghai flight for the third quarter empathised with the carrier’s predicament.

“We need more volume than its passenger flights give, so we’ve had to go back to the market, but BA can’t keep subsidising the market. I wouldn’t be surprised if it was reviewing its freighter contract. It has too much capacity at the moment.”

One source reported that BA was considering interlining cargo through Shanghai to meet its freighter in Hong Kong, but said: “In a soft market, you can’t compete doing that. There’s a cost to moving it to Hong Kong and double handling. I can’t see it working.”

While BA has been known for its strict control of revenue management, one customer has reported that it appeared now to be seeking more volumes.

“It is panicking, and struggling with North America. Rates are on the decrease. One year ago, BA was trying to protect its margin. But now it is under more pressure from Virgin, Delta, American Airlines and United.”

At least one rival airline confirmed that BA’s switch to an A380 on its London-LAX route had given competitors an uptick in volumes.

BA continues to operate a freighter service to Africa, calling at Johannesburg and Nairobi, while another freighter is thought to be currently available for charter operations, this week helping the disaster relief operation in the Philippines.

But the real question is how IAG plans to relieve the burden on its finances of running three freighters.

British Airways World Cargo, now IAG Cargo, signed a five-year deal with Global Supply Systems (GSS), the 49% subsidiary of Atlas Air, in July 2011 for a three-747-8F deal. Company accounts filed by GSS in December 2012 reveal a turnover for the year of £68.5m, made up almost entirely from BA.

While GSS had begun to market its services to other customers, it only signed its first contract in late 2012, and noted in its accounts that “the principal risk of the company is that it currently has only one key customer”.

A GSS spokesman confirmed to The Loadstar this morning that it continued to have just one customer.

GSS reported a loss in 2012 of £115,905. Company accounts show that Atlas Air Inc charged GSS £49.6m in 2012, the first full year of operating the 747-8Fs, against £33.6m in 2011.

Industry sources claim IAG is looking to renegotiate its contract with GSS/ Atlas. One senior analyst with knowledge of the situation said: “I was shocked when it signed for those aircraft; what was it thinking?

“I am sure that, to get BA to sign, Atlas/GSS would have included a clause that allowed it to cancel. It would have been extremely stupid of BA to do otherwise in the market we have today.”

One source at another carrier revealed that BA had recently asked it to tender for cargo operations.

“I think this is a bargaining tool,” said one seasoned forwarder.  “We’ve just seen Evergreen leave the market and World Airways enter bankruptcy. I think BA is letting its position be known. What better way to renegotiate a contract? BA has clever people and it will use everything it can.”

Another source added: “The word is that BA is benchmarking by talking to carriers. A lot of people think it is doing it to pressure Atlas to provide lift that is in line with prices being offered in the market now, not at the prices it signed for.”

One analyst told The Loadstar that ACMI prices for 747-400Fs had fallen by 20-30%, negating the 15% fuel efficiency benefit of the 747-8Fs and adding pressure on carriers which leased the -8F.

The news is likely to add pressure to both GSS and Atlas – although it is only a minority shareholder in GSS. Qantas is believed to be exiting its Atlas contract next year.

IAG Cargo was unavailable for comment, while GSS said it couldn’t comment on its customer contracts.