he extraordinary admission by British Airways that it was culpable of fuel surcharge price fixing is expected to cost it upwards of $660 million, the amount BA set aside to cover possible fines and litigation on both sides of the Atlantic.
The U.K. Office of Fair Trading, the European Commission and the U.S. Department of Justice are queuing up to impose hefty fines on the carrier after BA admitted that two of its senior executives colluded with rivals over setting both passenger and cargo fuel surcharges. If found guilty of operating a price-fixing cartel, a carrier can be fined up to 10 percent of its worldwide sales.
No wonder BA is filling its war chest.
Certainly, the impending raft of litigation and lawsuits will seriously dent the airline's year-end pre-tax profit line of $1.2 billion. BA's cargo business is also set to share the pain. It contributed the equivalent $1.2 billion in commercial revenue, a fall-off of 0.5 percent. Volume fell 4.7 percent and capacity dipped by 0.5 percent. It would have been a flat year for British Airways World Cargo had it not managed to increase yields by 4.6 percent.
Sean Doyle, financial controller at BA World Cargo admits the results were achieved, "against the odds" given the problems the airline faced over the year.
"We lost thousands of flights due to a terrorist threat at London Heathrow last summer and then many flights were fogbound at the airport in December. Apart from disruption to our cargo business it seriously impacted the capacity we able to put into the market, which is why this figure shows up as negative growth," said Doyle.
But, said Chris Bosworth, BA World Cargo's general manager for commercial development, the airline managed to overcome the odds and achieve the high yields with a strong focus on its premium product business.
"The opening of the $30 million Premia facility at the end of last year provided us with dedicated handling capability at Heathrow for our premium product business," said Bosworth.
Bosworth said the Constant Climate product is proving very strong in the pharmaceutical market. Also, the carrier's re-entry into the mail transfer market is becoming another winner.
BA World Cargo has also had to overcome the departure of Gareth Kirkwood, managing director of the business, who left earlier his year to become director of operations for the airline's passenger services division.
Market Leads
Kirkwood is credited with helping the cargo division regain respectability in the marketplace. Steve Gunning, previously head of finance for the cargo division, replaced Kirkwood.
In terms of global markets, Doyle said, "We have been facing soft market conditions, particularly out of the U.K., Europe and Japan. On the other hand, demand out of the Americas and Greater China has held up well, with the Middle East still strong."
To combat the softer European market, BA World Cargo is intensifying its short-haul freighter network strategy across the region. Beginning in 2007, BA increased short-haul freighter operations by 40 percent, providing 45 feeder flights weekly into the U.K.
"This increase had the effect of firmly establishing Frankfurt and Milan as our premier feeder hubs in Europe, with virtually a daily freighter service." said Bosworth. "It has also given us the opportunity to open up new points such as Rome and increase frequency to others, such as Stockholm and Paris."
In a deal first struck with DHL Aviation thee years ago, BA continues to use the available daytime short-haul freighter capacity, which otherwise would lie dormant when not used by DHL's nighttime express operations in Europe.
The operation is designed to feed in and out of the carrier's mainstream long haul freighter services. The carrier grew its 747 freighter operations to a point last year when it operated four aircraft. But it pulled one plane at the start of its winter schedule.
But now it appears BA is rethinking its long haul freighter strategy. In a complicated piece of maneuvering to achieve U.K. traffic rights with foreign owned aircraft, BA obtains long haul freighter capacity from U.K. registered airline GSS, in which U.S. owned Atlas Air holds a 49 percent stake.
"The problem we have had up to now is not constraints in our own business, but constraints in obtaining the right capacity, " said Bosworth. "The three 747s we currently operate are -400F series aircraft. When we moved up to a fourth aircraft it was a -200F series, which we found very difficult to mix in with the rest of the fleet."
Bosworth said BA World Cargo wants to move back to a four aircraft, same type, operation, but -400 series freighters "are in very short supply."
BA World Cargo appears keen on setting up a short haul freighter operation in the Caribbean. The airline has outbound belly-hold capacity available. The answer, said Dave Shepherd, BA World Cargo's commercial vice president for the Americas, is to consider setting up a feeder network to fly cargo in from Latin America to fill these passenger aircraft.
"We used to have a very strong presence in markets such as Caracas, Santiago and Bogota," said Shepherd.
Perhaps BA World Cargo may not have to go to the trouble. BA recently joined a consortium, led by the U.S. private equity group TPG, to bid for Spanish national carrier Iberia, which has a strong Latin American network. BA already holds a 10 percent stake in Iberia, with first refusal on a further 26.5 percent of the stock.
But BA is itself not immune from takeover bids; some analysts saying it's a prime buy. Yes, it's a dog eat dog world out there.
Tech CHAMP
CHAMP Cargosystems joined the International Air Transport Association e-freight initiative as part of the the technology provider bid to step up its reach into airlines' cargo business of airlines.
The Luxembourg-based technology provider, spun off from Cargolux as a private business, is undertaking an aggressive expansion, The e-freight alignment joins last month's announcement at the Air Cargo Europe meeting that CHAMP launched a Web-enabled, Java-based container management system called ULD Manager.
CHAMP Chief Executive Officer John Johnston said the system can work on a standalone or with CHAMP's main cargo management software. "This is a huge investment area for airlines, which spend an estimated $200 million each year maintaining, repairing and replacing (unit load devices). .... The bottom line is that (the ULD Manager) will optimize the use of expensive assets."
Joining IATA's e-freight initiative is part of the company's goal to build on a technology business that now includes 50 carrier customers.
In the short term, IATA's hopes to replace air transport paper documents with electronic facsimiles, using electronic data to eliminate the millions of paper air waybills and house waybills. In time, certified and verified digital documents will replace other shipping documents, such as letters of instruction, packing lists, invoices and certificates.
… Briefly
Cargo traffic for European carriers edged up 0.5 percent in April, according to the Association of European Airlines, but trade on Asia-Pacific lanes was off 2.2 percent, the fifth straight monthly decline. Overall traffic was up 0.7 percent in the first four months of the year. … Geodis said the merger of its newly-acquired TNT Freight Management into the company will be done by the end of the year and renamed the operation, which will be the France-based logistics company's freight management division, Geodis Wilson. … Lufthansa Cargo is expanding freighter frequencies to Dallas, São Paulo and Shanghai, and will add belly capacity with new flights to Lahore and a direct connection from Cologne through East Midlands, U.K. to Wilmington, N.C. … SAS cargo traffic fell 11.9 percent in the first four months of 2007, including a 12.4 percent drop in April. … London Heathrow Airport saw cargo traffic grow 2.4 percent in April, the best monthly showing for cargo there since March 2006. ... Cargo traffic at Air France/KLM edged up 0.1 percent in May on a slight cut in capacity. But trans-Atlantic traffic was down 2.7 percent in the first two months of the company's fiscal year. ... Synergy Group Logistics and Seko UK joined forces to and will operate under the single brand, Seko Synergy. … Cargo traffic at Frankfurt Hahn Airport fell 1.4 percent in April after declining 15.2 percent in the first quarter. ... Air New Zealand named Kales Airline Services its cargo general sales agent in the Netherlands.
