Accelerated development

posted on 1st December 2020
Accelerated development

As well as propelling freighter operators to the forefront of global logistics efforts, Covid-19 has heightened the focus on three key verticals that were already emerging as the prime areas for future growth, says Nikolay Glushnev, General Director of AirBridgeCargo Airlines. And it has also changed the airline’s business model, Will Waters reports

This year has been so extraordinary that it is easy to forget that many cargo airlines had a very difficult year in 2019, even before the challenges of 2020.

In what now feels like ancient history, if we cast our minds back we may just recall that after the restocking boom of 2017 had gradually fizzled out as 2018 progressed, global air freight volumes and yields went into retreat in most major markets by the second quarter of 2019 amid a slowdown in world trade growth, as trade and geopolitical tensions – particularly between the US and China – undermined global economic confidence.

Full-year figures for 2019 show that air freight tonnages dropped by around 4%. FTKs fell by just over 3%, average yields by around 7%, and overall global air freight revenues declined by close to 12%.

Ambitious growth strategy
Pursuing a relatively ambitious growth strategy, Volga-Dnepr Group (VDG) – parent company to cargo carriers AirBridgeCargo Airlines (ABC), Volga-Dnepr Airlines (VDA), and Atran Airlines – was hit particularly hard financially by the downturn, with some reports indicating the group had experienced operating deficits amounting to hundreds of millions of dollars by late 2019, forcing the group to make cuts to staff and services. After registering a 6% decline in cargo volumes during the first half of 2019 – 20% below its expectations and budget – the group in August 2019 announced a series of restructuring measures, aiming to “restructure the management team and increase operational effectiveness”, to “allow the group to get back to the growth strategy”.
Nikolay Glushnev replaced Sergey Lazarev as general director of the group’s scheduled airline, ABC. Glushnev had held various positions within ABC – including most recently as director for operations – and was given the key focus “to restore ABC customers’ confidence”.

Hopes of stability dashed
By early 2020, there were some signs that business confidence and air freight demand may pick up, encouraged by the partial easing of the trade tensions between the US and China. But hopes of a more stable economic environment following the Phase 1 US-China trade agreement were soon dashed by the arrival of the ‘new coronavirus’.

Although its ultimate impact on the global economy was still unknown, its initial impact on Chinese and global supply chains – and the air freight sector that supports them – was severe. The extension of China’s normal lunar new year factory closures for several further weeks led to the large-scale cancellation of air and ocean services from China in the first quarter, along with massive disruption to supply chains. China’s normally export-dominated air freight market became instead dominated by imports of medical and other supplies, but at reduced capacity. By early March, available air cargo capacity to and from China was down 39%, with belly capacity down 85% and maindeck capacity down by 12%, according to Seabury.

With most scheduled flights cancelled, those cargo airlines still operating to and from China were mostly doing so via charter flights, adding additional challenges. ABC says that even though the airline did its best to operate as many flights as possible, “you cannot compare their number with the number of scheduled flights”.

Severe strain on cargo airlines
By late February, the strain had taken a severe toll on many cargo airlines, with some smaller carriers forced to cease or suspend operations. ABC affiliate CargoLogicAir was among them, due to its exposure to “the drastic decrease of market demand”, particularly ex-China.

Plans for Boeing to deliver four freighter aircraft to VDG – one B747-8F and three B777 freighters – were reportedly terminated because of the challenges facing the airline group at the start of this year, although some of the details of that are contested.

But by late March, the mass cancellations of flights by passenger airlines globally, combined with a revival in Chinese manufacturing production and international demand – particularly for PPE – brought a vital new role for cargo airlines and a sudden and massive shift in the supply-demand balance. By the end of March, the loss of two thirds of passenger bellyhold cargo capacity – equivalent to 400 B747-8Fs a day – meant freighters were providing 75% of air cargo capacity on major global trade lanes, compared with around 45% before the coronavirus crisis.

By late April, global air cargo capacity had begun to stabilise at around 35% below 2019 levels, thanks mainly to the deployment of all available freighters in the market, plus the use of some passenger aircraft as ‘passenger freighters’ or ‘preighters’ – in many cases to help meet frenzied demand for capacity to fly PPE equipment. Freighter capacity deployed rose to 14% above 2019 levels, with outbound China freighter capacity up 45% versus 2019 levels. Utilisation of widebody freighters also increased, up 16.5% on average since January, Seabury highlighted.

Buoyant freighter market
Following the slow reintroduction of some passenger air services since the end of the first wave of Covid-19 lockdowns, and the continuing use of ‘preighters’, the proportion of freight carried on passenger aircraft has continued to recover, reaching 41% by the end of September, according to WorldACD. That still leaves freighter operators with a much-elevated 59% of the air freight market – and a market prepared to pay much higher prices for the constrained capacity available.

Indeed, in its analysis of the “first two Covid -19 quarters”, the period April-September 2020, WorldACD estimates that total airline cargo revenues increased by 42% during this period, despite a 21% YoY decrease in tonnages carried, thanks to average yields increasing by 81%.

Recovery of demand and capacity
The gradual recovery of demand and capacity has continued; by October, flown tonnages rose another 8% compared with September and had recovered to just’ 11% below October 2019 levels. And although average global yields may have fallen somewhat from their extraordinary levels in May, they remain high by historical standards; since August, they have averaged more than 60% higher than the equivalent period last year – rising further as the peak season has developed, to US$3.28 by the second week of November.
This is the wider context of Nikolay Glushnev’s first year in charge of AirBridgeCargo Airlines. Although cargo airlines are now in a much stronger position than when he took charge last year, navigating a successful path through the various challenges has required considerable agility.

“Indeed, this is an exceptionally turbulent year which required flexibility, adaptability and speed of reactions,” acknowledges Glushnev.
Rapid reactions required

“With COVID-19’s rapid spread, lockdowns and closure of borders, we needed to react quickly and adapt our regular schedule, process charter permits, re-configure our network, and re-route most flights via Krasnoyarsk instead of Moscow – to avoid crew changes in China and 14-day quarantine,” he highlights. “This all happened within a one-month timeframe; we managed to reshape processes which normally would have taken months to complete.”
He continues: “We were able to adjust to the changing environment and introduce more charter options in the beginning, and long-term charter programmes for our long-standing customers later on to guarantee capacity availability and support our customers’ business activities.”

It also required major changes within the business – including additional biosafety measures such as crew medical checks, Covid-19 tests, PPE, dedicated hotel accommodation and crew transport, and the disinfection of equipment, cargo and aircraft.

He attributes the speed of the company’s reactions “to the joint experience within Volga-Dnepr Group: throughout 30+ years, we have weathered various crises and learned from the best experience, like the battle against Ebola and yellow fever spread. Basically, we did not have to start from scratch, as most of the internal procedures have already been in place,” Glushnev says.

Flexible culture
He says the ability to be flexible was also something ingrained within the culture of the cargo airline used to responding to customer demand, “which has enabled us to offer more charter options and long-term charter programmes. This has become the backbone of Covid-19 logistics, as sometimes the situation changed within minutes and we all needed to act accordingly.”

But last year’s challenges had also shaped the company into a lean organisation. “While 2019 had not been the best year for the air cargo industry, it helped us significantly to prepare for the Covid era, as we introduced additional measures for cost-optimisation and were prepared,” Glushnev notes.

Revenue growth of 45%
Despite the huge challenges in the first quarter of 2020, and existential threats to many airline and air cargo businesses, the loss of bellyhold capacity this year and subsequent surge in demand for freighter capacity has enabled ABC to more than recover in terms of revenues this year, if not yet fully in terms of volumes.
“The results of the first nine months
demonstrated rather positive dynamics for this exceptional year in terms of volumes (-5%) and revenue,” he notes, with revenues for the first nine months up 45%, YoY. He attributes this achievement “to our diversified product programme – scheduled, charter, long term charters – ability to leverage Covid-19 shipments with regional outbursts, and to keep uninterrupted deliveries of essential cargo under strict restrictions”.

He adds: “With passenger fleets being grounded during spring and a slow recovery throughout summer and autumn, air cargo carriers were at the forefront and were expected to provide speedy, reliable service in line with novel biosafety measures.”

Changing commodity types
Meanwhile, ABC has seen a number of changes this year in terms of the volumes and proportions of various commodity types that it carries – partly directly because of Covid-19. “We have seen the upsurge in e-commerce volumes – an almost four-fold increase; healthcare products (two-fold increase) and live animals (1.5-fold increase),” Glushnev highlights. “The rise in these sectors come as no surprise as people tended to change their buying behavior: from offline to online shopping due to lockdowns; countries needed to supply the nations with PPE, medical gowns, medical equipment and other Covid-19-related cargo,” with some food commodities also switching to air freight amid the pandemic.
Part of the increase in e-commerce volumes has come from “a rise of high-tech goods when people tried to equip their ‘work-from-home’ environment”, Glushnev says.

But the rapid growth of ABC’s e-commerce business has been no passive development; it has accompanied a strategy to actively build its operations around key players in this market – including partnerships with fast-growing Alibaba logistics specialist Cainiao and Belgium’s Liege Airport (LGG), plus expansion of its activities at Leipzig (LEJ), also developing as an e-commerce hub, notably for Amazon. ABC’s commitment to Liege’s growing cargo capability includes a 10-year, €25 million lease agreement on 25,000 sqm of newbuild warehouse premises and the creation of a European hub there.

Glushnev says LGG and LEJ have both been important airports for ABC this year, particularly given the rise of e-commerce market demand. He adds: “We have been gradually strengthening our positions in both LEJ and LGG, working closely with local regulators, customs authorities, airport managements and ground handlers to guarantee smooth cargo operations for import-export traffic, which resulted in over 120% growth in tonnage in Leipzig and almost 50% growth in Liege for the first nine months of 2020, YoY.

“While the pandemic influenced many sectors, e-commerce is among the winners. Most e-commerce players are strategically focused on Leipzig and Liege as European gateways for cross-border shipments; they invest in dedicated infrastructure with building of logistics and distribution centres, cargo terminals, and lobbying for simplified handling and customs procedures. We feel positive about the future prospects for these destinations, based on our customers’ intentions and the airports’ cargo-friendly approach. There is still room for improvement, but again, as with other sectors, we have been actively collaborating to guarantee quality performance.”

Challenges operationally
The rapid changes required this year have obviously created significant challenges operationally, including on the ground.

Glushnev says the biggest challenge has been to guarantee high-quality services throughout the whole air logistics chain, requiring “particular attention to stakeholder relations, working with like-minded companies who share our values, our ‘can-do’ attitude, and are committed to industry standards. We have been able to upscale our ground operations by strengthening or building business relations with trustworthy and reliable partners, although each undergo strict risk assessment prior to signing any agreement and “are chosen based on their industry compliance and the range of services they offer – to guarantee services for customers from various industries.”

VDG wider capabilities
He says at the beginning of the Covid-19 pandemic, when there was particularly high demand for PPE and medical equipment, leveraging the wider VDG group capabilities its ‘Cargo Supermarket’ offering, “we were able to expand the number of commodities and help our customers in delivering medical equipment, out-of-gauge sanitising and outdoor disinfecting vehicles, ambulance vehicles onboard our An-124-100 and Il-76TD-90VD aircraft – and other sophisticated cargoes which require additional expertise and experience.”

That group capability is expected to be increasingly used to find synergies between the activities of Volga-Dnepr Group’s three airlines, in order to optimise efficiencies and generate extra services and business.

New digital initiatives
Meanwhile, Covid-19 and the associated lockdowns and behavioural changes have “served as a trigger for digitalisation” for air freight providers as well as their end users, “and we have seen a number of initiatives being introduced across the industry”, Glushnev notes. From ABC’s side, the carrier has aimed to enhance the “customer journey experience, through user-friendly online booking solutions and e-services via websites and partners’ platforms”.

Glushnev adds: “The ‘work-from-home’ environment brought additional hurdles as the boundaries between business and private have been dissolved, and customers expect the similar level of digitalisation that they get as consumers. We improved our online booking tool to facilitate smooth ‘work-from-home’ process for customers, with constant booking confirmations; collaborated with industry digital booking platforms – WebCargo, cargo.one; fine-tuned our e-services (schedule, track and trace, etc.); extended our MobApp features; and developed advanced schedule updates through e-mail in auto mode with frequency and other settings adjusted upon customers’ needs.”

Higher fleet utilisation
Among the successes this year has been an improvement in ABC’s fleet utilisation, “despite the pandemic and disruption of the scheduled network”, to 14-15 flight hours per day for each freighter. “We have also enhanced fleet reliability,” Glushnev notes

That fleet has grown this year to 18, with the company’s first Boeing 777F joining the 17 Boeing 747 freighters it had at the end of 2019.

Despite the current strong demand for freighter capacity, ABC’s fleet growth plans for next year and beyond are relatively modest – especially given that there had been a reported plan originally to add four freighters this year. Negotiations with Boeing about the disputed cancellation of those aircraft are understood to be still taking place.

“The plan is to optimise ABC’s fleet, as well as Volga-Dnepr’s, and utilise it in the most effective manner for our customers’ needs and in line with our internal capabilities – in terms of staff availability, trained and certified crew,” says Glushnev. “We do plan to enlarge the fleet next year with one additional B777F, although it is expected to be phased in closer to Q4 2021. Beyond 2021, we will expand our wide-body freighter fleet, deploying one to two annually to leverage growing volumes of our customers worldwide.”
Meanwhile, a broader, common VDG fleet development strategy will focus on modernising the fleet, especially its An-124 and Il76 ramp freighters, and optimising its utilisation – “through a partnership approach” with strategic partners. The combined strategy involves “using fleet and network connectivity options between three carriers within Volga-Dnepr Group, and gradual expansion of our widebody fleet”, Glushnev explains.

Business model change

The events of this year have also changed ABC’s business model.

“2020 has already taught us a lot, and one thing for sure is that ABC will not be purely a scheduled carrier any more – based on the current market demand, we offer scheduled cargo operations, charter cargo operations and long-term charter programmes,” Glushnev says. “With all the forecasts for the next year, our internal calculations and expectations, we feel confident that this is the right strategy to follow, as this will support our customers worldwide.”

And so, what are those expectations for next year and beyond?

“No matter how hard it is to make any forecasts right now, we think that cargo carriers will play a vital role for another 2-3 years, as it is expected that the transportation industry will be back to pre-covid levels by 2023-2024,” Glushnev says. “This, coupled with the high demand for the upcoming vaccine transportation, will create additional demand for freighter aircraft and dedicated cargo services.”

Covid-19 vaccine preparations
He adds: “We are now in another phase of the Covid-19 battle and getting ready for the biggest logistics challenge of all times – vaccine transportation.” He believes that can only be accomplished fully through a collaborative approach, describing it as “the responsibility of the whole supply chain to guarantee vaccine integrity throughout the journey and keep its efficacy”. He adds: “We have been shipping vaccines for more than five years and know the process very well, although no company in the world is experienced to handle such volumes of temperature-sensitive cargo simultaneously, and we need to coordinate it together with other stakeholders.”

ABC and Volga-Dnepr Group, along with other supply chain stakeholders, are now getting ready for Covid-19 vaccines transport. “While meeting the industry standards with IATA CEIV certification – which we successfully re-confirmed last year – we are also taking additional steps through a 360-degree approach to embrace all the areas of our business,” he says.

This preparation covers areas including:

temperature mapping of all freighters within the group fleet to understand which parts of cargo compartments work best for vaccines;
special solutions for the logistics of temperature-controlled containers after completion of vaccine transport;
working under various options for vaccine delivery onboard all types of the Group freighters (B747F, B737F, B777F, An-124, Il-76);
Regular shipments of other vaccines, as well as vaccine-related shipments (equipment, vials, injections, etc.), which are essential for vaccine production;
Station profile across its temperature-sensitive facilities and capabilities;
Risk assessment of the airports within and outside of the existing network;
Workshops with vaccine manufacturers, freight forwarders, ground handling agents, airports, container leasing providers, and other stakeholders;
Regular dialogue with governmental, global healthcare organisations and other legal entities;
Industry association membership, including Pharma.Aero;
Use of Validaide risk assessments;
Internal trainings of sales, marketing, operations and procurement personnel.

Given that Covid-19 vaccine transportation is “a novel logistics challenge which our industry has never experienced before”, Glushnev notes: “There is a certain degree of uncertainty concerning the conditions which will be required for Covid-19 vaccine transportation. It is expected that some of them might require deep-frozen facilities, which is extremely difficult to maintain and creates additional hurdles for transportation. Furthermore, with Covid-19 vaccines being very fragile and delicate, the slightest deviation will mean that the whole batch is ruined. That said, vaccine safety and integrity could be achieved through a strong collaborative approach between airlines, freight forwarders, airport, GHAs and other stakeholders.”

Accelerated developments
Reflecting on the wider current state of air freight markets and the sector as a whole, Glushnev believes Covid-19 has heightened the focus on three key areas that were already emerging as the prime areas for future opportunities, concluding: “2020 has served as the trigger for an active development in healthcare, e-commerce and high-tech sectors. They will be the growth drivers not only for the air cargo industry, but for most leading economies in the years to come. We have been sharpening our expertise in these areas and are prepared for the logistics challenges which we might face.”