JAL to drop freighter service
Airline limits cargo capacity to passenger planes as industry shows signs of rebounding.
By Eric Kulisch
Japan Airlines, Asia's biggest airline by sales, will permanently ground its freighter fleet at the end of October and exclusively use the belly capacity of passenger planes to move cargo, the indebted carrier said March 25.
JAL operates four Boeing 747-400 converted freighters, two factory-built 747-400s and three 767-300s. Two other cargo planes are in storage, according to information from market research firm Ascend Worldwide.
The move is the airline's latest attempt to restructure its operations and return to profitability. JAL is significantly shrinking its size after entering state-supported bankruptcy in January. It had more than $25 billion in debt, making it Japan's biggest bankruptcy by a non-financial firm.
The company pointed to difficult market conditions for international air cargo as a factor in its decision, even though the industry has been buoyed in recent months by a strong rebound in business growth, especially in Asian trade lanes. The new volume, however, is somewhat illusory because it only represents a partial recovery of business lost during the recession.
JAL said its passenger fleet offers three times the cargo capacity of its freighter fleet and will be able to meet shipper needs throughout its international network, though there are large loads that such planes will not be able to handle. The airline has 508 weekly passenger flights.
'It is surprising that the largest airline in Asia and the dominant carrier in what is the world's second-largest economy, and one based on export manufacturing, can't maintain a viable freighter business,' said David F. Hoppin, a managing director for transportation and logistics consultant MergeGlobal.
Eliminating freighter service after 50 years follows news earlier in March that JAL and Nippon Yusen Kabushiki Kaisha, a conglomerate that includes ocean carrier NYK Line, had abandoned plans to merge JAL Cargo and Nippon Cargo Airlines.
'Nippon Cargo Airlines will be one of the beneficiaries when JAL pulls out of the freighter market. They won't have JAL as a partner, which may have been better for them, but they won't have JAL as a competitor,' said Bob Dahl, managing director of Seattle-based Air Cargo Management Group.
The deal broke down during JAL's reorganization when officials made clear they wanted Nippon Cargo to take on a larger piece of the joint venture, with more responsibility for aircraft and personnel. Nippon Cargo wouldn't take on the additional risk given JAL's financial condition, Dahl said.
The air freight market tumbled at least 25 percent from mid-2008 through September 2009, before a recovery became apparent. During that period, most carriers experienced a substantial drop in air freight revenues as traffic, yields per shipment and fuel surcharges all fell. Carriers were hard pressed to make money flying freighters.
Freighter volumes, however, have fared better than belly freight during the downturn and recent upswing. In 2009, cargo revenue collapsed more than 25 percent, the air cargo industry's worst decline ever, the International Air Transport Association said.
Airlines such as Lufthansa, Cathay Pacific and Air France-KLM responded by temporarily parking some MD-11 and 747-400 aircraft. About 240 aircraft have been taken out of service in the past two years, including 40 to 50 newer generation planes, Dahl said. The rest are older, more inefficient planes ' 747-200s, DC-8s, DC-9s, 727-100/200s ' at the end of their useful lives and due for retirement.
Air India had four Airbus A310-300 aircraft converted into freighters, but has since backed off all-cargo operations and is leasing them to other carriers.
JAL joins Delta Airlines as major combination carriers that have opted to exit the freighter market and solely utilize capacity on passenger planes. Delta in late 2009 dumped its freighter fleet, which it acquired via its merger with Northwest Airlines.
The timing of the freighter terminations differed though, with Delta opting to take full advantage of the peak shipping season before shutting down. JAL's decision could have been influenced by major scheduled maintenance checks, aircraft financing requirements, the market for used aircraft or other factors, aviation experts said.
Once-proud JAL lost $2 billion in the last nine months of 2009, and $1.9 billion in 2008. It has been in the red three of the last four years, failing to recover after the dot-com bust in 2000 and subsequent shocks such as the 9/11 terror attacks, the Iraq War, and the SARS outbreak. The last straw was the global recession in 2008 that led to a huge drop in passenger travel and cargo business.
Creditors appear ready to waive billions of dollars in debt and JAL is reducing staff, aircraft and routes to cut costs. It is even disbanding its women's basketball team, the JAL Rabbits, at the end of the season.
JAL earlier this year petitioned the U.S. and Japanese governments to enter into a joint venture on routes between the two countries, something it probably would never have done if it was in better financial health.
The closure of scheduled freighter operations reflects JAL's overall financial condition, but is also the result of industrial demographics and severe pressure from lower-cost Asian cargo carriers, Hoppin noted. 'One of the problems that Japan has is an eroding home market because of the migration of manufacturing to China, and JAL faces intense and growing competition from other Asian airlines for transshipment traffic from China.'
Air freight exports from Japan to North America have slid since 2001 as Japanese manufacturers relocate China and Vietnam.
Meanwhile, airline industry officials are cautiously optimistic the sharp increase in demand will continue. Trade lanes from Asia began a strong rebound in exports late last year that created a relative shortage of capacity and follow-on rate increases of up to 50 percent. North American and Asia-Pacific airlines experienced year-over-year freight growth of 34 percent in February, IATA said. Analysts who last year predicted air freight volumes wouldn't return to early 2007 levels until late 2013 or 2014 now say the recovery could be complete by year end.
'That's the good news. But it still means we've lost three years worth of growth,' Dahl said.
Carriers have begun to recall grounded freighters to meet demand and IATA said more than 50 newbuilds are scheduled for delivery this year. Seventy-two percent of cargo airline and division chiefs IATA surveyed reported improved confidence in growth of volumes and yields in the next 12 months.
Concern about the fragility of the global economic recovery still overshadows the industry, because it's unclear whether the boomlet is simply due to companies restocking depleted inventories or a sign consumer and business spending has turned the corner enough to sustain air freight growth.