And then there was one

posted on 7th June 2018

IAG Cargo has completed much of the process of merging the cargo businesses of BA, Iberia and BMI, including moving cargo handling under one roof.  MD Steve Gunning tells Will Waters about the achievements so far and the challenges that remain

For much of 2011 and 2012, British Airways World Cargo and its new sister Iberia Cargo kept a low profile as the two organisations worked on the merger and alignment of their respective businesses, and more recently the cargo division of BMI following its acquisition by last year International Airlines Group (IAG). Having completed much of the alignment process, IAG Cargo Ltd. emerged at the end of 2012 as a semi-autonomous subsidiary of IAG, presenting itself to the market as a single entity with a combined network that makes it the seventh-largest air cargo carrier in the world.

BA and Iberia decided from the beginning that full integration of their cargo businesses was the way forward and immediately created a single cargo-leadership team, made up of senior management from BA and Iberia, and a cargo board sitting above this with representatives from BA, Iberia and IAG. The ambition of the group is “to become the world’s leading air cargo network”, and though he acknowledges that there is still a lot of work to be done, managing director Steve Gunning insists that IAG Cargo really is one organisation now, and the launch of IAG Cargo Ltd. last December means “there is no going back”.

Creating a single cargo business “rather than a working collaboration” means a single sales force, a single product portfolio, a single network, a single set of distribution channels, along with joint handling operations at stations that BA and Iberia both fly to. But Gunning says the merger within IAG Cargo of the companies formerly known as British Airways World Cargo and Iberia Cargo has been done “with scalability in mind”, and will be able to easily accommodate new entrants.

“It is about creating a world-class commercial platform − not just expediting the integration of those two businesses, but also other airlines that come along,” he says. BMI was the first “test case” for this strategy, and having successfully integrated the BMI cargo business, the structure is in place if and when other airlines join the IAG group, to “work their cargo capacity onto the platform”.  Spanish low-cost airline Vueling seems a likely future candidate, following the offer late last year by IAG to buy the remaining shares in Vueling that it does not already own.

Combining the cargo businesses of Iberia and BA within IAG Cargo has obviously helped build the group’s scale, although the nature of the networks has been a key factor too, with Iberia’s focus on the Latin America market complementing the BA network’s strength between Europe and North America, Africa, the Middle East, India and, to a certain extent, Asia Pacific.

“Actually, we now provide wide-body lift to more of the world’s top 120 cargo stations than anybody else. So it is really a well-connected network,” says Gunning. “That’s the high-level vision for the future and it’s one that’s very much built on growth.”

So, what has been achieved so far?

Eight of the group’s nine products have now already been integrated and the final product, for perishables traffic, is just a few weeks from final alignment. Furthermore, the incentive deals for the airlines’ top 16 cargo customers for 2012 were all joint deals, with the capacity of BA and Iberia and BMI treated as the same.

“So we’re facing the big global forwarders as one business, because we are one business,” Gunning says. The group already has a single sales force in many of its key markets, including North America, Latin America, the UK and Spain, and Gunning says the process of aligning GSAs is continuing in those countries where the group has more than one.

Handling consolidation

Progress has also been made with consolidation on the handling side. “We want our customers to only have to deal with one operation at each station,” says Gunning. “You don’t want to turn up with your cargo and say here is my cargo for the BA planes and here is my cargo over there for the Iberia planes. In our network we have 40 stations where we have both BA and Iberia aircraft flying to. “We have aligned 20 of those 40 stations, and probably achieved much better than 50%, because we have done all the big ones. We’ve done Frankfurt, JFK, Chicago and Heathrow. So if you looked at it in volume terms, we are probably over three quarters of the way through.”

Gunning says IAG Cargo is in the process of signing new contracts for five more joint stations and tender processes are on-going for a further nine. “The intention is to have as many as possible of the 40 stations aligned by the end of the first half of this year,” he said. “So, we’ve made good progress on that, which is absolutely essential. You want the same products and you want the same operation; it’s all got to come together.”

The approach taken in consolidating the handling suppliers, and the priorities, varied from airport to airport. “We will have judged each station on its merits, and very often with the ground handling, particularly with the big stations, you have got to consider the property angle, and what are the capabilities,” he says. “So you might have two very good handlers, and one has capacity to expand and the other one doesn’t.

“So we have judged it on a case-by-case basis. Where possible we will have tendered the business, because you want as keen and competitive a price as possible. But generally speaking, with maybe one or two exceptions, we have gone with one or other of the existing handlers.”

Gunning says this process has gone reasonably smoothly. “And due to the financial challenge that we are all under, given the weak economy, we basically put out virtually all of our North American stations to tender in 2012, on top of that, to try and get as competitive a cost base as possible.”

 

Re-tendering

This re-tendering, making use of the standard ground handling agreement’s 90-day exit clause, was partly triggered by the economic pressures and partly by the merger.

“Where you have got joint stations, you have got more volumes, so you would be looking to that supplier and saying: ‘with some more volumes I am looking for you to sharpen your pencil’. And also, given the market conditions, when the top-line is under pressure, you have to really examine your cost base, and where it makes sense you put it out to tender and see if you can drive a more-competitive price. In fairness, that is what the forwarders will do with us: they will put business out to tender. It’s a tough market out there.”

 

So does this mean that the choice of handling partner is now all about price? “No,” insists Gunning. “First and foremost it is about safety and security. Then it’s about operational performance,” he continues. “The two normally go hand-in-hand, because if you’re disciplined from a safety and security perspective, you’re probably a first-rate handler as well, because you have got similar disciplines. So no, it is not all about price.”

The merger and the renewal of supplier contracts have also created an opportunity and a need to revise some internal processes.

“We have been aligning our product specifications, and so that does require some changes,” says Gunning. “We have also had to work at generating new types of reports that show what is happening across both hubs. So I get a weekly report showing me all the premium express movements, and how they have successfully been going into London and across to Madrid and down to their final destinations.

“So, if they’re coming from the Far East and going down to South America, and you are hitting two hubs, you have got to make sure that you are giving the right levels of service, and making sure we have got the right visibility of the overall performance is very important.”

Different hub models

Gunning says BA and Iberia operate two very different types of hub, with BA’s very automated ‘Ascentis’ facility at Heathrow contrasting with Iberia’s “more traditional type of open terminal” in Madrid.

Gunning acknowledges that there are some performance differences between the two. “But this is predominantly due to the different mix of business,” he insists. “In Madrid there is far more loose business and far more perishables business; in London it is far more intact and far more premium products. As a consequence, if you look at the two hubs, the London hub has a slightly higher overall delivered-as-promised.

“But what is encouraging is that both hubs have been improving their level of performance. There has been, I wouldn’t call it competition, but people looking at each other’s performance and saying what are you doing to make that work better? And as we go forward, we are keen across the business to grow the premium products, so that is also giving a lot of focus at both hubs in terms of how to drive that forward.”

At the heart of the group’s combined business there is also a single revenue-management system that controls the inventory, bookings and transactions, optimising the revenue across the network. This has been a key project and something the group has been working on for around 12 months.

“We have finished phase one,” says Gunning. “That now gives us the ability to look and book across the entire network. So if you want to move some freight from Hong Kong down to Lima in Peru, and you want to go British Airways to London, and then either BA or Iberia down to Madrid, and then Iberia to Lima, you could do that within one system, and the sales agent who is taking that call can do it all the way through. That is hugely instrumental, and you don’t have to wait two hours to see whether you have made the booking.”

Gunning believes one of the reasons that there aren’t a lot of very successful partnerships and alliances in air cargo is because that ability to book across each other’s networks is quite limited. “We don’t have the same sort of facility that they do on the passenger side, with things like code-sharing,” he says. “So that is a really big development. We are probably still about a year to 15 months away from finishing all of the revenue-management capability.”

This moves on in 2013 to focus on “transactional optimisation”, helping to determine things like the best routing and the best traffic to take. “Is it better to take that Hong Kong to Lima booking, or is it better to do three bits of business, where one is Hong Kong-London, for example. It is that trade-off and revenue optimisation that we still need to work through. But it has been a great step forward, and I am really quite encouraged by that.”

IT investments have included the launch of IAGCargo.com. “The functionality is still on the basic side, but it has track and trace capability in there and it will lead you to sites where you can do online bookings. But it is still in its infancy, and I see the development of IAGCargo.com running in parallel with the revenue-management systems, because ultimately what we want is IAGCargo.com to enable you to do full online booking, and in order to do that you need that revenue management functionality sitting behind it.”

The group also launch a smartphone app at the beginning of 2012 that is proving quite popular, says Gunning, enabling people to track and trace by air waybill number. But he is determined to appeal to all types of customers, whatever their size or level of technological sophistication. “Our strategy at the moment, because in the midst of all this we have put together a five-year strategy, is that we are very keen to align the customer segments with the distribution channels. With the big global forwarders, it is going to be around host-to-host, and we’re already exploring that with some of them. With some of the medium-sized forwarders and some of the small ones, they may want IAGCargo.com to be their channel, or they may even want to use the likes of Ezycargo or CPS or GF-X. So our game plan is not to put all our eggs in one distribution channel, but actually to enable various different customer segments to access our capacity the way it suits them best. That makes us easier to do business with, and as a customer will hopefully drive business onto our network.

Cargo Connector vans

“We have been innovating and have tried some different things; for example, we created this “Cargo Connector van” proposition, which basically goes round to the forwarders, small forwarders as well, and picks up shipments under 300 kg. We are using this in New York, LA, Chicago, and we have just kicked it off in London.

“That’s convenient and helpful for the small forwarders, because it saves on transport costs, and for us it is a way of picking up additional volumes. So we are very keen with to work with all segments. To be a really successful cargo carrier we are going to need to be able to be successful with each of the segments, not to specialise in one.”

Gunning says the Cargo Connector van service has been well received. “It has created quite a strong talking point as well, which is great,” he says. “It is generating business, and it is not necessarily just the volume of the business, it is also the quality of the business. Small shipments tend to be more profitable shipments. So it is good cargo business.”

The creation of IAG Cargo Ltd last December means that the process has started of transferring all of the commercial and central cargo functions into that legal entity. “We have transferred all of our UK staff and all of our US staff that sit in those functions, and over the next 12 or 15 months we will be transferring country by country into that, so we will have the whole of that commercial platform sitting in that separate legal entity,” says Gunning. “That is great from an autonomy prospective, and it’s great because it formalises this business model. What was working in a sort of virtual way is now formalised, sitting in a separate legal entity, which is a great way forward for us.”

For the time being, certain cargo functions will remain embedded within the airlines’ respective passenger organisations, although even that is likely to come under IAG Cargo eventually. “At some point in the future, perhaps a year or so out, I think it will be running as an autonomous business; we will be driving our own HR policies, and things like that,” says Gunning.

And so, overall, the message is clear. “We’re trying to get the message out there that we are truly one business; we are different from some of our European competitors, who have consolidated and have got several cargo businesses in their groups. We are creating one single cargo business and that is why we need a single brand, because we’re not either British Airways World Cargo and we’re not Iberia Cargo – we are IAG Cargo.”