A new reality

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Air France-KLM Cargo has continued to report significant financial operating losses in the first part of 2015 and although these were negatively affected by some currency headwinds, executive vice president Bram Gräber is quick to acknowledge that there is a lot of work still to be done to bring the organisation back into profit.

Gräber returned to cargo in March – at least temporarily – after Erik Varwijk announced he would not be available for reappointment upon the expiry of his contract in July, after “the completion of the strategic reorientation of cargo”

But the idea that the strategic reorientation Air France-KLM Cargo has been completed seems somewhat premature. “We are still going through a rather painful and important adaptation to the new reality,” Gräber admits. “The new reality is that we are in a market that will be structurally characterised by overcapacity, and that is a problem – but it is also manageable. None of us enjoys the growth any more that perhaps we were spoiled with 10 years ago.

“We are also migrating to a market where we have more focus on belly capacity being the source of growth than freighter capacity – where the classical combination carriers are all retreating a bit, taking a step back from their freighter exposure. You will still have specialised freighter operators, but that is the new reality that, after 10 years of absence, I find myself in now.”

Things were more buoyant – and indeed profitable – in early 2006 when Gräber took a break from cargo, taking on roles including executive vice president of passenger strategy at Air France-KLM. Gräber is also combining this role with his position as EVP of Air France-KLM’s Transavia business, a role he has held since late 2010.

Between 1995 and 2006, Gräber held several cargo posts at KLM and later Air France-KLM, effectively becoming Michael Wisbrun’s ‘number 2’ at KLM Cargo between 2003 and 2006, during which time he was deeply involved in the coming together of KLM Cargo and Air France Cargo.

“So it is another market from those days,” Gräber says. “But Air France-KLM will still have the number four or five cargo network in the world next year, and so will remain important within the industry and for our customers – but also for our own airline. Yes, we have fewer freighters, but those we keep will be in markets that are more easily defendable than some that we used to have – so, South America, Africa, and some in North America, where we traditionally have a very good market position, both from Charles de Gaulle and from Schiphol. So, it is another world, but it is still a key part of what we do as an airline.”

Breakeven target

The target is to make the cargo business profitable by 2017, although Gräber expects the full freighter operations to break even before that, “given the fact that we will be in markets that we believe will work – for example, the 777s from Charles de Gaulle”, he says. “Of course, in the passenger network we have flights that are very attractive for cargo and where we can easily contribute, and there will always be flights that are less favourable. But the target is that by 2017 the total cargo activity should be breakeven, not only the freighters.”

This year involves important steps to downsize the freighter side, with the rest of the freighter restructuring to be completed by June 2016, leaving the airline group with just three freighters at Schiphol and two at CDG. “And then we will continue to fight to get it right in the total system,” Gräber adds.

Attempts to sell Martinair proved unsuccessful, as have efforts by pilot union representative to keep three other Martinair freighters operating. “We made some decisions in September last year and that is what we will implement,” he says. “That is not easy, but there is no new market evidence that would say that this decision is not the right one.”

Gulf carriers

A major part of the new air cargo capacity that has been flooding the European air freight market has been coming from Gulf carriers such as Emirates and Etihad, and there is been considerable debate this year about whether their growth has been subsidised. So, how much of that debate is significant for cargo?

“It is not a prime focus of our time,” says Gräber. “That is more at a corporate level that we have these discussions, but they will not take away the short term reality we have to manage. Also, on the cargo side, traditionally the markets have been more open.”

Nevertheless, he believes there are limits in terms of how much even air cargo markets should liberalise. “For example, if you look at Schiphol where you have 25 freighter operators operating or having traffic rights, that can be a difficult environment to operate freighters,” he says. “There is nothing wrong with a competitive environment, but if you talk about creating structural overcapacity, then that is not healthy.

“There is growth in the cargo market, which is good news, but we know that currently, and also in the coming years, the growth in the market will be slower than the growth in capacity. Given the growth of passenger aircraft, we know for sure that we will have ongoing structural overcapacity as a market, so that is something that we have to deal with.”

Within that environment, carriers can still make a difference, insists Gräber. And he says Air France KLM has no choice but to be successful in cargo, because the passenger business needs a good cargo contribution. “So, we will remain very dedicated to cargo, meaning our handling, our commercial, and all this organisation close to the customer with our products, and with investments also in IT, we will continue to push forward and be relevant, with a huge network and portfolio. We are here to stay in this business and we can still make a difference for our customers. You don’t make money in cargo based on macros; it is on the micro level that it makes the difference. With customers we do the things that suit them in terms of price and quality.”

Productivity gains

Gräber says there are clearly still significant productivity gains to be made in air cargo. “We see some progress finally now in terms of digitalisation, and we are proud to be one of the leaders in the e-freight conversion of cargo – which is not an easy process, but something is moving there,” he says.

He is confident of making this year’s 45% eAWB penetration target, adding: “I do think that all of us together can make huge steps. Also, in making a smarter mix in terms of people interfaces and e-interfaces, both on status information and bookings, both ‘sides of the street’ (carriers and forwarders) can make a lot of progress.

“For instance, for bookings we will always have a mix between e-bookings and – for the more complex freight – personal contact. But for status information, increasingly I think that we should be able to give that without the need to make phone calls – including, if need be, reasons for deviation. So there are still a lot of things to be done there.”

These potential productivity gains can be very significant, and measurable in terms of your number of people versus your revenues or your throughput. “There are two ways of looking at it: one is our own internal productivity targets – these are quite stiff and are up to 4% a year,” says Gräber. “But I am also more interested in the productivity that we get together with our customers in interfacing with them, because that is not only my productivity but also how relevant and easy to use we are for our customers.

“If you are in an overcapacity situation, you still work to do all the things to differentiate yourself and win the business. Of course, it is to do with price. But although everybody says this is a commodity business, I think there are a few other things that are relevant for our customers. So if I can be helpful and also be a driver for productivity for the customer, then that is something to differentiate us.”

E-commerce potential benefits

While there is clearly potential to apply e-commerce to deliver benefits, there are also opportunities to serve the e-commerce market – but also threats from potential disruptors coming into the air cargo business, industry insiders acknowledge. As someone who has been outside of air freight for a few years, does he think the sector needs to bring an expertise from outside in order to make real step-changes in productivity or innovation?

“That is an intriguing question,” he says. “Of course, I was for 10 years on the passenger side, where digitalisation has gone very fast, and also the distribution has also been changing very aggressively. On the e-commerce side, e-tailing, we are just at the beginning of that, and we see the first strong signs – looking at our ‘mail’ channel – that this is exploding.”

He says the postal authorities are wondering how carriers are going to be able to respond to these shifts, which indications suggest “may not be subtle, but quite direct”, observes Gräber. “From a carrier’s perspective, it is about how we fix this within our transport system, as we open up. But also, is the way that we price per kilo the appropriate way to do it, if we are not talking about big consolidations any more, but all kinds of more differently consolidated packages? So, I think there are things to be changed.”

But he is reluctant to say that air freight needs people from the outside, “because in the end we need to change and move, and we need also people from the inside that understand how the thing moves,” he says. “So, we cannot say ‘let’s bring in a new team from outside the industry’ – I don’t think that would be very effective. What you need is people who are open to move along and not hoping that they can carry on longer than the market allows with old practices.”

He says it is no secret that there is some conservatism within the air cargo sector. “So that conservatism is a bit of an issue, because it might be that at a certain moment we become obsolete in providing services to new players,” he says.

Or at least someone within the logistics chain becomes obsolete…

“Yes, although I don’t think new players will bring in new transportation systems. That, I think, is not the issue,” he says. “But it is about how we interface beyond the traditional interface – which we all do, and optimize; how do we better reconfigure some of our interfacing. But there we are really at the beginning, I would say.”

New interfaces needed

Gräber believes responsibility for developing that interface lies mainly with freight forwarders. “I would say they are in the lead in terms of understanding how they want to play in that (e-commerce delivery) channel – although we are also open to any new player that we don’t know yet today,” he says. “For us, what is important to understand is the additional standards that we would have to develop. We are not ‘customisers’ in the first place: we have products; we try to standardise. For us, it is important to see what is the new standard, if any. We are not immune from that. That does not mean that we don’t keep an eye open and try to experiment and learn.”

The recent growth in ‘mail’ volumes comes mainly in the form of small parcels and courier shipments rather than letters, although the postal authorities themselves are a major driver in that growth. “We have, over time, increasingly integrated the way we deal with our mail and express products,” says Gräber. “A lot of the growth is in the classical logistical term of ‘mail’, including in a real mailbag. That is not envelopes in there any more; it is all kinds of boxes.”

Parcel factory

Responding to these trends, AF-KLM plans to build a new fully integrated mail and express handling facility at its Schiphol hub and recently significantly upgraded its Paris facility. “We don’t care whether it is in a mail or express bag,” he says. “That is more of a parcel factory than a kilogramme factory. And that is what differentiates it from some of our other parcels facilities.”

He says the company is very open to the non-mail customers. “It can be a forwarder; it can be anybody, I would say,” he says. “For instance, for many years in Paris we have had the multi-express supermarket there, which is open to interface with anybody that wants to use that channel.”

He believes that openness may prove to be a good model for the future, not just catering for the traditional mail and express customers: forwarders, integrators, and mail operators. “I would say there will probably be some intermediate category evolving, using that same channel,” he says. “I’m not to say who that will be: I don’t mind, as long as we make sure we get them in our system.” But he expects that express and mail channel – which is focused on loose shipments, parcels and air mailbags, rather than express pallets – to continue to show growth.

All-in rates

Other key developments this year have obviously included the move by several carriers to all-in rates, although so far AF-KLM has not felt it necessary to make a similar change.

“I think that at the end of the day, whether technically you do it with a surcharge or you say ‘I am all-in’, there is a market mechanism that makes sure that within a certain range of total costs you get the business or not,” Gräber observes. “That is nothing to do with having a surcharge or not. There are some pros and cons to both.”

He continues: “Businesswise, we live in an all-in world. Am in a hurry to make all kinds of technical adjustments to that? No. It is more important that our people in the field get the right all-in price to the customer than how exactly that is built up. To me, it is not a huge thing. The market is efficient enough that you cannot escape from what, in the end, the total cost is.”

So it is about communicating the total cost in a way that allows the customer to make clear comparisons. “Yes, and I think whatever technology or techniques you use, that is clear enough. I may not want to put in a lot of technical effort to change that now, because it is not necessarily really going to bring in more business. Our customers are smart enough already to take everything into account at the all-in level; when we discuss with customers we also talk in terms of all-in.”

He says it is not difficult to make that calculation in order to present the total price. “And let’s also remember that are a lot of Asian markets that are important to us where it is not us that is doing the surcharges: the governments are.”

But he does not believe it is such a big issue. “In the end, we will make sure that our pricing, however it is made up, is competitive at the total level. That is how we steer it.”

Cargo still key

Gräber stresses that although AF-KLM, “like many other combination carriers”, is “stepping back from freighters, to focus them on the markets that we can defend”, it is still very committed to cargo and to make it increasingly professional. “It is a matter of survival for the total airline – and I think we have enough ingredients of people, and product experience, and customer relations, to make something get out of that, and reach that breakeven target soon.”

He is confident of achieving those targets. “Our business is driven by networks, and from Europe we still have the widest and the highest-frequency network to the world, and I think that is attractive and relevant to the market. I know we have a lot of cargo professionals in handling, all in the fields and offices worldwide.”

Gräber concludes: “They are not there by coincidence; they are there because we believe in our business and we think we need to be there on the ground, rather than outsourcing that to a call centre. And we have close to 50% of the revenue in a product of some kind, a more dedicated service.

So I do think we have a lot of ingredients.”