Airlines can use empty-bellied jumbos to lift luggage limits
Credit: Bloomberg
To cope with an evaporation of demand, airlines started parking their planes in the deserts of Australia (Alice Springs) and Spain (Ciudad Real) to cut costs. By the end of 2020, Cathay had 92 passenger aircraft, 44 per cent of its passenger fleet, on hiatus. As a result, utilization numbers across the region were no longer falling. In fact, they started to inch back up because passenger capacity had been slashed to just 5 per cent of the peak levels seen at the start of the pandemic, according to AAPA data.
Credit: Bloomberg
As passenger numbers plummeted, cargo demand climbed, peaking in December 2021, with consumers shopping online for gadgets and pandemic supplies.
These two divergent trends — fewer passengers, more cargo — was about to become a huge problem because around 50 per cent of all air freight, including mail, travels in the hold of passenger aircraft — called belly cargo. During normal times Cathay Pacific and China Airlines get around a quarter of their revenue from ferrying goods instead of people. Relying on passenger flights to ship freight became a weakness during the pandemic because many of those planes were not available.
Credit: Bloomberg
Airlines such as Cathay started converting passenger aircraft into hybrid freighters — dubbed “preighters.” By the end of 2021, the Hong Kong-based airline had ripped out the seats in seven of its Boeing Co. 777s. Freight revenues across the industry continued to soar. For the year to March 2022 Singapore Airlines sales from cargo doubled compared to fiscal 2019.
These trends are now being unwound.
Falling prices for shipping and the economic slowdown have made air less competitive, driving freight rates lower. But instead of passenger demand also falling, as we tend to expect during tough economic times, people are increasingly engaging in “revenge travel.” Singapore Airlines’ net profit doubled in the June quarter to a record, Cathay’s first-half operating income was at an all-time high, and China Airlines reported its strongest second-quarter earnings in 13 years.
While many aircraft have been dusted off and put back into use, passenger capacity in Asia still remains around 30 per cent below the levels seen in January 2020, constraining airlines’ revenue potential. More will come online over the next year, including delivery of new planes that had been delayed by the pandemic. This not only means extra seats for the rising numbers of humans who want to fly, which is what airlines want, but a massive increase in freight capacity even as demand continues to fall.
Credit: Bloomberg
Cargo load factors across Asia dropped back to pre-Covid levels earlier this year. But now they’re destined to fall even further and there’s a good chance they will dip under 50 per cent for the first time in a decade. There’s not a lot that airlines can do to juice demand beyond cutting rates more — Cathay’s cargo yield halved in the first half from a year prior.
But there is one thing left to try: give that empty cargo space away to passengers as an increased luggage allowance. Carriers charge for excess baggage to defray expenses and to discourage lots of check-in baggage that can delay loading and unloading aircraft. Increasing baggage volume isn’t without costs — every item is handled by numerous people across multiple airports and countries. So instead of upping baggage allowances for all passengers, airlines can use them as a reward for loyalty, matched with aggressive marketing campaigns so that wannabe platinum members are incentivized to book with them.
The world is enjoying a renaissance in passenger travel, but competition is tough and capacity tight. Airlines have long known that loyalty is a key to staying ahead, and now is the time to deploy more of that one asset that’s not in short supply.