Qantas freight enterprises

Executive manager of Qantas Freight Stephen Cleary explains that QFE holds a strategic position within the Group. “Alan Joyce always makes mention that Qantas has the two brand strategy which is Jetstar and Qantas and our core assets, and certainly the business that we currently have in Qantas Freight is considered to be core to the Qantas network,” he said.

“From a strategic perspective, it provides an alternative revenue stream to Qantas other than passenger tickets. It is still overall strategic within the Qantas portfolio.”

Accordingly, an important part of the Qantas Freight business involves managing and selling belly capacity on Qantas and Jetstar passenger services. This is predominately on the routes served by the airlines’ widebody aircraft, with a particular focus on time-sensitive freight such as fresh produce and seafood.

“If you look at the Qantas core passenger network, basically all of that is Australian based. It’s predominately strong into Asia There’s also some US and UK flights, but that’s not necessarily where the freight market is,” explained Cleary.

Indeed, Qantas is at something of a disadvantage when it comes to airfreight. Unlike carriers such as Cathay Pacific and Singapore Airlines, Australia is not a natural hub for major freight markets, with the exception of the South Pacific. Similarly, cargo traffic into Australia is at higher levels than outgoing traffic, although there is demand for express freight of fresh produce, seafood and other perishable goods.

In that background, five years ago Qantas Freight turned a large amount of its attention to operating dedicated freighter services on the Australia-China-United States corridor, where it has been able to access favourable rights. These services are operated by three Boeing 747-400 Freighters which are wet leased from US carrier Atlas Air.

“We set up Shanghai as a hub and based all our freighter operations through there four and five years ago when we first got into the freighter business, and now we basically run eight freighter services a week into Shanghai and five services between China and destinations in the US,” said Cleary. “Under the traffic rights that we operate, all the aircraft have to touch Australia in the rotation.”

“We also operate some point to point services, such as Australia to Hong Kong and back to Australia,” he added.

The 747-400Fs give Qantas a great capability, with the aircraft able to take a variety of belly and main deck freighter pallets and containers. The aircraft also has nose-loading capability, which allows for some longer containers to be carried.

“If you’re going to be a proper freight player, in my opinion, you need to have freighters as well as belly space because you can’t tackle the appropriate freight markets or trade lanes if you’re only a belly space operator,” said Cleary.

Another strategic market for Qantas is Europe, where belly freight is carried on A380 and 747-400 services to London and Frankfurt, while it also has access to freighter capacity under a special arrangement. “At one point we did some European flying, but we have now moved out of that altogether and entered into a codeshare arrangement with TNT from Liege to Singapore, and we pick up the freight from Singapore back into Australia on our own metal,” said Cleary.

In June last year, Qantas increased its dedicated freighter fleet by adding a newly converted Boeing 767-200F. Like the 747s, the 767 is operated under a wet leas agreement US carrier Air Transport International and is largely dedicated to trans-Tasman flying, flying a Sydney – Auckland – Christchurch – Sydney routing.

Cleary says that the move was brought about by the increase in 737-800 and A320 flying on the Tasman. “What we did was get the 767 in, not really to grow the market, but to supplement the belly capacity which basically disappeared with the down-gauging to narrowbody aircraft. Narrowbody aircraft are challenging for freight capacity as it they can’t handle pallets, and I would have preferred to still offer the belly space product.”

The 767 aircraft now offers uplift of up to 42 tonnes and operates four weeknights a week on a Sydney-Auckland-Christchurch-Sydney routing. This sees it primarily carry cargo from express freight consolidators and perishable exporters, including a number of cargoes which connect onwards through to Asia and the US. Qantas also has the aircraft available for additional flying over weekends and some ad hoc charter work.

As Qantas already operates large fleets of Boeing 747s and 767s, some question why the carrier initially sought to wet lease aircraft from other operators and why it has continued to do so, particularly when Qantas is beginning to sell off a number of its passenger aircraft.

“The reason that we started out with wet leased capacity was because we hadn’t been in this business prior, it was a good way to stick our toe in the water and see how we go in these sorts of markets, so wet lease capacity provided that option,” said Cleary.

Even with the scale now built up, Cleary says that there are still advantages to the current wet lease arrangements. “If we were operating three planes in our own right, crewing in particular would be a bit more problematic in that you’d have to have more crew than required to operate the extensive network that we do,” he said.

“With Atlas, because they’ve got other carriers and operations in places like the US and China, we’re able to take advantage of the crewing facilities that they can offer. We wouldn’t be able to do that in our own right.”

He adds that the airline keeps an open mind to the prospect of operating its own freighters at some point in the future. “We’re always evaluating our options in terms of whether we continue to wet lease, whether we dry lease, whether we look at potentially flying our own aircraft,” said Cleary. “At this point in time we have a partnership with Atlas, who have been a very good partner with us over the last five years, and our current arrangement runs until 2014.”

And even as the passenger 747-400 and 767 fleet at Qantas is being drawn down and freighter lease rates remain low, there appears to be little change ahead. “In an environment where capital is tight, wet leasing in your aeroplanes provides a good way of being able to grow capacity without having to spend money on either converting aeroplanes or buying freighters, so we can preserve capital and continue to grow in the international market,” said Cleary.

Complementing its international presence is a range of domestic operations which cover road, express air and bonded freight. Prominent in these are its two joint venture freight companies – Australian air Express (AaE) and Star Track Express. Both companies are joint ventures between Qantas and Australia Post and operate in different areas.

AAE primarily operates overnight freight services within Australia, utilising both belly space on Qantas and Jetstar services, as well as dedicated Boeing 737-300 and BAe 146 Freighters.

The four 737-300Fs used by AaE are operated by Express Freighters Australia, which is a Qantas subsidiary but operates under its own air operator’s certificate. The aircraft were originally in the Qantas fleet, and were converted to freighters by Qantas Engineering at Avalon in 2006, replacing Boeing 727 Freighters previously operated by National Jet Systems (now Cobham).

The 737s now form the backbone of the AaE network, and operate two trunk routes each weeknight. The first one runs on a north-south run, starting from Cairns and flying to Brisbane, Melbourne and Launceston, crossing over with another aircraft that departs from Melbourne. The 737s also operate twice daily to Perth from Melbourne.

While holding less capacity than the 727s, Cleary says that the aircraft have performed well, even on the longer routes. “The 737 aircraft regularly uplifts maximum capacity, which is up to 15 tonnes, and they’re proving to be very reliable aircraft,” he said, noting that AaE’s major competitor, Toll Express, also utilises 737Fs (operated by Airwork) on domestic freight runs.

The other main aircraft utilised by AaE are three BAe 146 Quiet Traders. Operated by Cobham, the aircraft are used to provide overnight freight services into Sydney after the curfew. While they are now into their 18th year of operations been operating for AaE, a new lease agreement signed in 2009 will take the relationship between the two companies into its third decade.

The other major component of Qantas’s domestic freight operations is a unique business called Jets Transport Express, which uses specialised, bonded trailers to take air cargo containers between city centres. Qantas acquired the business in 2008, but the business continues to be managed independently.

Cleary explains that the Jets service provides a vital service linking domestic destinations with its international freighter services. “For example, cargo might arrive in Sydney on one of our freighters and be destined for Adelaide, and it’s of such a size and nature that it can’t be broken down and transported in the belly space of a passenger aircraft, so it’s road-freighted in its entirety. The pallets are untouched – they come straight off the plane and straight onto the truck,” he said.

The other major part of the QFE business is its freight terminals. Qantas currently operates freight terminals at Melbourne, Brisbane, Sydney and Perth, as well as a terminal at Los Angeles. Last year, these terminals handled more than 575,000 tonnes of freight.

“Over the past four or five years we have continued to invest in our terminal business, and probably the best example of that is our Melbourne freight terminal where we’ve transformed it into a state of the art facility,” said Cleary.

That investment has seen the terminal at Melbourne has introduced a greater degree of automation, as well as the construction of Australia’s first airside temperature-controlled handling facility, which provides for better storage of perishable items while in transit.

Dealing with downturn

Globally, the last two years have been particularly challenging for the airfreight industry as the global financial crisis saw trade volumes fall dramatically.

Cleary says that Qantas Freight was not immune from this. “We didn’t do any worse or better than the industry in general. Within Australia, like how the country fared better than a lot of international countries, domestic air freight performed worse than in previous years, but not to the same extent as the international side of the business.”

As such, the company made a number of adjustments, particularly on the international side. “With the freighter side of the network, we constantly review our routes and our schedules, and we did make adjustments to the freighter network during the peak of the GFC,” said Cleary.

“At the peak of the GFC, what we did was we altered services from China to the US. We also added destinations in the US so that we could pick up from more than one location to get some more freight on that way, and we also reduced some capacity,” said Cleary.

“To the extent that you can vary your flying with Atlas, that’s what we negotiated to do during the GFC,” he added. “To be fair, Atlas was very accommodating to allow us to make several changes during that period.”

Signs are now that there is some recovery occurring, with other freight carriers in the recording significant increases in tonnage, while cuts in capacity over the last two years are beginning to turn into higher load factors.

From a Qantas perspective, there are some signs of recovery but volatility continues to reign. “It tends to be a little bit up and down in terms of month to month trading activity. So for us, we’ll certainly be looking forward to when trading conditions return to a bit more of a predictable norm. It still is quite difficult to predict where things are tracking at this point in time,” he said.

Nevertheless, the key freighter markets for Qantas have strong. “China to the US has been a booming market over the last six to eight months so its really picked up well, but other markets just haven’t come back,” said Cleary.

Not surprisingly, the markets where economies remain uncertain have not yet come back as strong. “Some of the recovery in the US is a bit touchy. Certainly Europe continues to be weak for us. We haven’t seen Europe return to anywhere near the strong levels we had in prior years,” said Cleary.

With the lights starting to burn again in China, some competitors have also been adding capacity to the market, although rights issues and the like have prevented it from becoming a flooded market.

“Certainly as the market has improved there has been more capacity brought into the Chinese market, but I think we’re still in the position in China where there is a reasonable balance between supply and demand,” said Cleary.

Domestically, the market for airfreight declined but nowhere near as bad as the international business. Nevertheless, the timing was not ideal. “In the case of AaE, that was a business that had undergone significant capital development with sortation centres in Brisbane, Sydney, and Melbourne,” said Cleary. “So you had a business that had spent quite a bit in capital to build new facilities and got hit with the GFC.”

Nevertheless, Cleary says that both AaE and Star Track are now performing well. “Both those businesses this year have shown marked signs of improvement and signs of recovery,” he said. “Generally speaking, while its’ not back to 2008 levels yet, it’s certainly on the right trajectory to get us back to those sort of levels.”

Freight Futures

As with other businesses within the Qantas Group, QFE has a firm eye to the future and has been undertaking a $40 million program called ‘Freight Futures’ which is aimed at continually improving its internal processes.

A part of that includes a major change in its IT systems to a new system called iCargo, which will handle its revenue management and booking functions. “iCargo is now being relied on by 20 per cent of Qantas Freight’s global workforce with all aircraft capacity, schedules and reservations being managed through the application,” said Cleary.

He adds that it also goes wider than Qantas’s IT systems. “Freight Futures is not just a technology program. Equally important is the work being done to transform our business processes to ensure greater service consistency and product flexibility across an increasingly integrated global supply chain.”

As well as its continual process improvements across its core businesses, Cleary says that QFE remains on the lookout for new opportunities, particularly with the global cargo market improving. “We are continuing to look at new opportunities for the freighter market and looking at new opportunities to expand the number of freighters that we operate,” he said.

One of the most recent opportunities it has taken on is the South Korean market, where Qantas was has recently been allocated unlimited rights to operate. “Korea was a place that we hadn’t been to before, and we just commenced new operations there last month,” said Cleary. “That’s a market that is basically from Korea to the US and that’s going well.”

Broader than that, QFE has started to play a greater role in some wider cargo initiatives, like Cargo 2000, which aims to implement processes and standards, to improve the efficiency of air cargo and cut down on operational costs and enhance customer service.

“Historically we haven’t been a part of that, but we have recently announced that we are going to sign up to Cargo 2000 and that’s been well received within the industry,” said Cleary.