LOG355 Air Freight Management

Study Unit 2
Supply, Alliances, Mergers and Acquisitions
in the Air Freight Business
Schedule
 Objectives

• At the end of this study unit, you are expected to:

1. Indicate the nature of supply in the air freight industry.

2. Demonstrate how freight forwarders can be customers of airlines and be
competitors to integrators.
3. Illustrate various types of alliances and their benefits to airlines.
4. Show the rationale behind mergers and acquisitions in the air freight sector

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 3.1 Concept of Supply by Freight Airlines
Concept of air freight supply

• Air cargo value chain reflects air freight as bi-modal in nature.

• For “traditional” or non-integrated air freight market:
– Shipments collected by freight forwarder and sent to airport to be palletised and
loaded onto aircraft.
– At destination airport, pallets are broken down and goods distributed to their
destination.
– Trucks can be operated by forwarder or come under flight number which represents
road feeder services provided on behalf of the airline.

Figure: The Air Cargo Value Chain

Origin Trucking Onload Airport Offload Airport Trucking Destination

Collect Build/
Cargo & Reconfigure/ Load Prepare
Shipper Offload Transfer Delivery Consignee
Deliver to Weigh Aircraft Cargo
Airport Pallets

Forwarder Handling Agent Airline Handling Agent Forwarder

Source: Morrell and Klein (2019).

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 Concept of Supply by Freight Airlines

• For integrated air freight market:

o Entire transportation chain in hands of an integrator.
o From pickup to delivery, even if flown part of journey is performed using other
airlines.
o “Middle mile” which is controlled by airlines including interface with other
transport modes becomes crucial for overall efficiency of supply chain.
o “Middle mile” has to complement first and last mile segments of value chain.

Figure: The Air Cargo Value Chain

Origin Trucking Onload Airport Offload Airport Trucking Destination

Collect Build/
Cargo & Reconfigure/ Load Prepare
Shipper Offload Transfer Delivery Consignee
Deliver to Weigh Aircraft Cargo
Airport Pallets

Forwarder Handling Agent Airline Handling Agent Forwarder

Source: Morrell and Klein (2019).

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 3.2 Combination Carriers
• Operate and sell space on both all-cargo and passenger aircraft.
• Account for 55% of international and domestic air freight and generate 40% of industry
revenues.
• Advantages:
o Build market with belly freight and deploy freighter if booking levels justify additional
capacity.
o When demand is low, withdraw freighter and maintain market presence with belly
capacity on passenger flights.
• As passenger flights will operate regardless, belly space can be treated as “sunk cost”.
• Carriers usually prioritise bookings on such spaces before filling their freighters.
• Some airlines operate cargo activities as a separate subsidiary while others integrate their
freighters with the passenger fleet.
• E.g. Lufthansa, Emirates, Cathay Pacific, LATAM.

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 3.3 Passenger Airlines
Differences between combination carrier and passenger airlines?

• Operate only passenger aircraft.

• Produce 20% of domestic and international air freight market and about 10% of
industry revenues.
• Sell cargo space in the form of belly compartments on passenger flights.
• May have freighter aircraft at some point in time (depending on level of demand).
• Belly operators may apply marginal pricing to offer aggressive rates to “buy market
share”.
• Flights determined by passenger requirements where airlines may offer low rates
particularly on weak cargo routes.
• May allocate operating cost to passenger business (includes crew, overflying, landing,
maintenance and most of the handling and fuel cost).
• Cargo load factors on passenger flights mostly low compared to freighters.
• Lower revenue contribution from passenger airlines versus their FTK share.
• E.g. British Airways, Swiss, American, Garuda.

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 3.4 Integrated Carriers

• Operate all-cargo fleet using aircraft of different sizes.

• Offer door-to-door services with guaranteed delivery times and tracking systems
with fast and reliable service. Process:
o Parcels are delivered to hub airports using small aircraft or trucks.
o Parcels sorted by automated handling systems before they are flown to
destination airport or another hub for final distribution.
• Core business being express freight.

• Space also offered to block space agreements

catering to general cargo with remainder filled
through ad-hoc sales of general cargo where cargo
space is sold as by-product (secondary product).
FedEx Hub at Memphis
Source:
https://www.ainonline.com/aviation-
news/air-transport/2012-06-11/fedex-
retires-more-jets-cargo-markets-stagnate

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 Integrated Carriers

• Account for 14% of international and domestic air freight and generate 40% of industry
revenues.

Figure: Revenues of Airlines that

Operate Freighters, US$ (2015)
Source: Boeing (2016).

• Dominated by DHL, FedEx and UPS.

• Entry into global market requires very big investment in IT systems, aircraft, vehicles and
handling infrastructure across many different countries (posing formidable barriers to
entry).
• Airlines usually lack surface transport infrastructure while freight forwarders lack airport
facilities and aircraft.
Table: International Express
Market Share and Volume, 2013
Source: various.
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 Activity 2.1
Which integrators operate using Singapore as a hub in their network? Pay a virtual
visit to Airport logistics Park Singapore – ALPS
What advantages did they see in this arrangement?
What developments would cause Singapore to lose its attractiveness to these
integrators?
What is the impact of the COVID-19 pandemic on Singapore’s air cargo hub status?

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Activity 2.1

• Discuss in your GBA groups (10 min)

• Present findings (10 min)
• Choose one person to present
• Total (20 min)
Discussion

Refer to factors under consideration by carriers in selecting a hub (next 2 slides):

Geographical location and proximity to main production and consumption centres.
Demand
Connectivity – partner airlines, freight forwarders
Airport infrastructure (threat to Singapore if we lose our efficiency, capacity to handle air
freight)
Competition
Costs
Negative factors
Congestion
Bi-lateral restrictions etc
Need to build resiliency and prepare for future business needs, to be nimble and flexible
Articles:
https://theaseanpost.com/article/singapores-air-hub-status-under-threat
https://www.changiairport.com/corporate/media-centre/changijourneys/the-airport-never-
sleeps/air-cargo-adapting-new-normal.html
 3.5 Scheduled All-Cargo Carriers

• Operate only freighter aircraft, mostly active on international long-haul

routes.
• Account for about 12% market share and 10% of industry revenue.
• Schedule and sale of capacity based entirely on air freight requirements
with no influence from passenger operations.
• Especially vulnerable to directional imbalances, being unable to
compensate loss of revenue in weak sectors with passenger revenues.
• Operators often plan route in “big circles” to minimise empty sectors.
• Can provide some buffer to mitigate impact from directional imbalances
and achieve breakeven load factors for profitable operation of flight.
• Can also use network design of hub-and-spoke model with air freight
feedered into a hub for onward transportation to another hub.
• E.g. Nippon Cargo, Cargolux, SIA Cargo, Polar Air Cargo.

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 Scheduled All-Cargo Carriers

• Factors affecting choice of airports for non-integrated all-cargo carriers being:

Positive Negative Uncertain

• Origin-destination demand
• Presence of freight
forwarder
• Passenger operations (for
airline that operates in both
markets)
• Bilateral restrictions • Reputation of airport
• Capability of night • Airport advertising
operations
• Presence of integrator
• Regulation on noise
• Infrastructure availability

• Presence of partner airlines • Congestion

• Flight time and cost • Attitude of workforce (e.g.

militant workforce)
• Access to market
• Location of competitors
• Airport charges and
incentives

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 3.6 Charter Cargo Carriers and ACMI Operators
• ACMI operations: operate freight or passenger
plane on behalf of other airlines.
• Provide aircraft, crew, maintenance and
insurance (ACMI).
• Fly using call sign and route authorities of lessor
who also pays for handling, landing, fuel and
overflying.
• E.g. Atlas Air, Air Atlanta Icelandic.
• Charter cargo operations: operate freight
fleet with no scheduled network.
• Used mainly for disaster relief, military
charters and ad-hoc projects.
• Often use aircraft capable of serving
remote airports that lack handling
infrastructure.
• E.g. Volga-Dnepr, Antonov Airlines.

• Provide tailor-made capacity to cater to ad-hoc demand (e.g. set up major new
manufacturing facility in another country, providing disaster relief or providing military
support).
• Highly specialised expertise involving licensing procedures for personnel and aircraft and
high costs of managing small fleets of freighters.
• Wet lease: (1) ACMI basis; or (2) CMI basis (lessee owns plane with operation outsourced to
lessor).
• Dry lease: only the aircraft is involved.
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 Scheduled Air Freight by Carrier Type

• Split between passenger and all-cargo flights for international services approximately 50:50.
• Combination carriers account for almost 60% of international air freight.
o About 50% in their passenger aircrafts’ lower deck and 50% on board their freighter
fleet.
• Pure passenger airlines with belly cargo account for around 20% market share.
• All-cargo carriers have only 12.5% of market and integrators around 8%.
• For domestic services, integrators are distinct majority with market share of 55.7% (mainly
due to US market – e.g. UPS and FedEx)
• Almost 40% of domestic cargo carried in belly of passenger flights and 4% on all-cargo
carriers.

Table: Scheduled Air Freight

by Carrier Type, 2016

Source: various, including IATA (2017).

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 Strategies of Air Freight Operators
(classified into 7 groups or clusters)
(1) Carpet sellers:
– Smaller combination or all-cargo airlines which focus
on niche product or regional market.
– Hardly profitable and driven by cash and capacity
rather than by margins.
– E.g. Etihad and many non-integrated all-cargo carriers
like Polar, Volga-Dnepr and Nippon Cargo.

(2) Basic cargo operators:

– Combination carriers focusing on passenger business
and providing reliable and fast transportation of large
freight volumes through their networks.
– E.g. Turkish Airlines, Korean Air and Qatar Airways.

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 Strategies of Air Freight Operators (SU2-9)
(3) Premium cargo operators:
– Similar strategic business model as basic cargo operators
but able to achieve much higher operating profits per
ATK (available tonne kilometre).
– Partly due to their broader cargo product offering,
better load factors and higher yields.
– Cargo operations are based at major hubs (e.g. Hong
Kong – Cathay Pacific; Singapore – Singapore Airlines).
(4) Strong regionals:
– Comparatively small airlines at secondary hubs
operating short and medium-haul networks focusing on
selected long-haul destinations.
– Fairly high load factor and low unit costs.
– E.g. passenger and combination carriers like China
Airlines, Malaysia Airlines and Swiss, and all-cargo
carrier like Cargolux.
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 Strategies of Air Freight Operators

(5) Huge Americans:

– Operate global network from US, employing
huge fleets of wide-body passenger planes with
significant cargo capacity.
– Highly profitable passenger carriers e.g. Delta
Airlines and American Airlines.
(6) Large passenger wide-body carriers:
– Operate global network using wide-body
Delta Airlines Route Map for US, Canada
aircraft with plenty of cargo capacity in lower
decks.
– Sell space aggressively with little product
differentiation, combine lowest yields, highest
weight load factors and lowest cost base among
the seven groups.
– E.g. British Airways and China Southern.

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 Strategies of Air Freight Operators

(7) Cargo stars:

– Highest unit revenues per ATK and offer broad product portfolio but at high unit costs.
– Strong focus on cargo business and operating it separately as a profit centre or even
subsidiary.
– E.g. Lufthansa, Emirates and Air France.

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Example: Strategy of Etihad Cargo

Dewulf (2014) grouped the strategy of Etihad Cargo under Carpet

Sellers

Refer Table 10 of the following research article by Wewulf

FROM CARPET SELLERS TO CARGO STARS: ANALYZING
STRATEGIES OF AIR CARGO CARRIERS

What operating and financial statistics show the

strategy of Etihad Cargo belong to the cluster
“Carpet Seller”?
Table 10: “Carpet Seller” Cluster

Financial performance
• Low operating revenue, low profitability
Product strategy (what products or services are offered by the cargo operator?)
• Basic product differentiation – mostly general cargo requiring no special handling
(such as pharmaceuticals, perishables that are time and temperature sensitive
cargo)
• Low yield (what price/FTK the customer pays), low load factor – both low yield
and low load factor lead to low revenue
Market strategy (where the cargo operator positions in the market and to compete)
• Hub location, small hub
• Low-capacity management (limited routes, frequency), connectivity, alliances
Network strategy (How the cargo operator move freight)
• Small fleet, frequency, alliance, costs
Operating and financial statistics to show that
Etihad Cargo operates under “Carpert Seller” cluster

Use ChatGPT e.g. search “Air cargo strategy of Etihad Cargo”, etc
Background
• Cargo and logistics arm of Etihad Aviation Group, the national airline of the UAE
• Cargo revenue US$1.73 b (2021)
• Overall profit US$0.48b (loss)
Product strategy
• Low product differentiation - Pharma service, mostly general cargo
• low yield
Market strategy
• Small footprint (70 destinations) across Africa, America, Asia, Australia, Europe and
the Middle East via hub in Abu Dhabi.
Network strategy
• Mix of passenger and freighter aircraft (Dec-2022: 66 passenger aircraft, 5 freighters)
and extensive trucking network.
 Activity 2.2
• With reference to Changi Airport, can you identify which air freight operators call at
Singapore?
• Can you also classify these carriers according to the different types of cargo airlines with
reference to the following classification of cargo airlines?

1. Scheduled all-cargo carriers

2. Charter cargo carriers
3. Integrated carriers
4. ACMI providers
5. Combination carriers
6. Passenger airlines

Freighters
https://www.changiairport.com/en/flights/airlines.html#?st
atus=freighter&airline=all&terminal=all

Figure: Changi Region

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Activity 2.2

• Discuss in your GBA groups (10 min)

• Present findings (10 min)
• Choose one person to present
• Total (20 min)
Discussion – Air freight operators calling at Changi
Exercise

What did you take away from LO-1?

Think about nature of supply in the air freight industry

Takeaways (LO-1)

• Supply of air cargo capacity comes from traditional (or non-

integrated) market and integrated market
• Overall efficiency of the air cargo supply chain depends on how
airlines in the ‘middle mile’ interface with the first and last mile
• Suppliers of air cargo capacity can be broken down into 6 groups:
Combination, Passenger, All-cargo, Charter, ACMI, Integrators
• Combination carriers has largest share 60% of international air freight
market
• Integrators has highest share in domestic US market 55.7%
• Strategies of air cargo carriers are classified by (1) Carpet Sellers (2)
Basic Cargo op (3) Premium Cargo (4) Strong Regionals (5) Huge
American (6) Large passenger wide bodied (7) Cargo stars
• Operating at large cargo hubs with a broad product portfolio and high
load factors, (2), (3) and (7) produces the best yields
 Objectives

• At the end of this study unit, you are expected to:

1. Indicate the nature of supply in the air freight industry.

2. Demonstrate how freight forwarders can be customers of airlines and be
competitors to integrators.
3. Illustrate various types of alliances and their benefits to airlines.
4. Show the rationale behind mergers and acquisitions in the air freight sector

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 3.7 Freight Forwarders

• Intermediaries that act on behalf of

exporters, importers or other persons or Table: Top 15 Air Freight Forwarders in 2017
companies involved in shipping goods.
• Customers of airlines.
• Help to organise efficient, safe and cost-
effective transportation of goods.
• Arrange for best transport means,
employ services of airlines, shipping
lines and rail and road operators.
• Shippers see them as airline agents to
compete with integrators (who are
themselves competing with airlines). Source: Brett (2019). * Estimated.

• Dominated by big global firms such as

Deutsche Post DHL, Kuehne + Nagel and
DB Schenker.

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Exercise

What did you take away from LO-2?

Think about how freight forwarders can be customers of

airlines and be competitors to integrators
Takeaways (LO-2)

Freight Forwarders wear two hats:

• Act on behalf of shippers or consignees

– consolidate cargo of shippers
– become the sole shipper and customer of airlines
• Act on behalf of airlines as agent
– compete with integrator for business of shippers
 Objectives

• At the end of this study unit, you are expected to:

1. Indicate the nature of supply in the air freight industry.

2. Demonstrate how freight forwarders can be customers of airlines and be
competitors to integrators.
3. Illustrate various types of alliances and their benefits to airlines.
4. Show the rationale behind mergers and acquisitions in the air freight sector

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 4.1 Alliances between Airlines
Alternative to mergers

• Emergence of different alliance groupings aiming to expand global reach, reduce costs,
improve revenues and increase benefits for customers on multilateral basis.
• Regulatory restrictions on ownership, market access and control result in airlines
forming strategic alliance groupings.
• Legislation to protect national interests means it is almost impossible to buy over
controlling interest in airlines of other countries or trading blocs.
• Greater depth of agreements increases possibility of alliances producing tangible
benefits.
• 3 broad categories of alliances and agreements between airlines:
o Commercial: mostly on route-by-route basis, can include code sharing for limited
routes, joint venture flights or block space agreements.
o Strategic: covers extensive marketing agreements and code sharing over airlines’
networks.
o Equity partnership: partners investing into each other through share purchases.

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 Main Types of Commercial Agreements for Airlines

(1) Prorate agreement:

o Sharing revenue produced from a multi-sector service with more than one
airline involved.

Prepared by WY Yap for SUSS Source: https://simpleflying.com/air-italy-finnair-el-al/

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 Main Types of Commercial Agreements for Airlines

(2) Code share:

o Use by one airline of another airline’s designated code with actual flight flown by
the latter.
o Non-operating airline able to market service like its own.
o Can be route-specific and not under strategic alliance.
o Note: Code share is different from interline agreement with the latter being
agreement between airlines to coordinate passengers with an itinerary that uses
multiple airlines, without having to check in again or deal with their baggage at the
stopover.

(3) Block space agreement:

o Purchase of agreed space or capacity on another airline’s flight.
o Involves code sharing.
o Can be “hard block” where purchasing party has to pay for capacity irrespective of
whether it is sold or “soft block” whereby buyer pays only for space sold.

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 Main Types of Commercial Agreements for Airlines

(4) Capacity swap:

o Back-to-back arrangements where each airline takes block space on flights
operated by the other.
(5) Joint venture:
o Used to be called “pooling agreements”.
o Both airlines sell space on all flights in the agreement with operating costs and
revenues of the flights being divided between the parties according to pre-
arranged agreement at end of specified periods (usually accounting period).

Source: https://www.travelweekly.com/Travel-News/Airline-
News/Airline-joint-ventures-face-big-operational-challenges

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 Alliance Advantages – Revenue Enhancement

• Alliances boost traffic and load factors and increase revenue through:
o Access to more destinations (may be only way to certain destinations beyond
regional gateways).
o Set up presence in markets with low volume using minimum capital outlay by code
share.
o Obtain access to slot constrained airports (i.e. via code-share agreements with
partner airlines).
o Obtain coordinated feeder traffic through minimum connecting times.
o Exercise price leadership on hub-to-hub markets of members.
o Improve booking system display as partners’ codes under code-sharing agreements
will be displayed for same flight.

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 Alliance Advantages – Revenue Enhancement

• Evidence suggests global alliances saw increase in revenues through better traffic
feed, better hub connectivity, code sharing and rationalisation of networks and
schedules.
• Provision of “seamless travel” by alliances supposed to boost passenger loyalty.
• This has positive impact of traffic level for member airlines.
• Joint marketing programmes (e.g. targeted promotional rates or fares) can help to
raise attractiveness of alliance’s services.
• However, these methods may be more difficult for cargo markets.

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 Alliance Advantages – Cost Reduction
• Alliances can bring about cost reduction through scale economies and economies of
scope by:
o Reducing duplications in areas of distribution, sales and administration.
o Rationalising services and networks, allowing partners to redeploy assets more
effectively and enter new markets via code sharing which incurs much lower cost
than physical presence.
o Coordinating slots among alliance members can improve operational efficiency
through better aircraft utilisation.
o Providing joint airport services can reduce costs through sharing of terminal and
check-in facilities and also cargo handling, baggage handling, aircraft marshalling
and cabin cleaning.
o Developing joint IT systems costs can be shared by whole alliance (but
harmonisation may be expensive).
o Joint purchasing to strike better deals with suppliers through bulk purchases
➢ Suppliers include catering firms, aircraft manufacturers, cargo handling services,
fuel, equipment, spare part supplier and aircraft maintenance companies.

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 Alliance Advantages – Cost Reduction

• Estimated cost savings range from 2% to 11% depending on degree of integration.

• Note:
o Alliances can see higher operating cost for members especially in first few years
with need to integrate areas including product features, IT, pricing and various
service provisions.
o There is also cost of management time in planning and executing alliance
policies.
• Involve competition authorities which will depend on market contestability and
effects on existing competition.
• Competition authority investigating on cargo operations mostly focused on price
collusions particularly regarding fuel surcharges.

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 4.2 Alliances Between Airlines Pertaining to Air Cargo

• WOW alliance:
o Formed in April 2000 by Lufthansa Cargo, Singapore Airlines Cargo and SAS Cargo.
o Joined by JAL Cargo in July 2002 (airline left in 2010 with discontinuation of its air cargo
freighters).
o Initially possessed fleet totalling 43 freighters and lower deck capacity of >760
passenger aircraft.
o Aim to harmonise express products of alliance partners which are “J SPEED” by JAL
Cargo, “td.Flash” by Lufthansa Cargo, “SAS Priority” by SAS Cargo and “Swiftrider” by
SIA Cargo.
o 10% of cargo capacity by each carrier allocated for alliance bookings.
o Each carrier retained own brand.
o Genuine cooperation between alliance members proved difficult.
o Each carrier jealously guarded own markets and capacity.
o Lufthansa lost interest in mid-2000s and left WOW alliance by 2009.
o Singapore Airlines and SAS still remain as part of WOW.

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 Alliances Between Airlines Pertaining to Air Cargo
• SkyTeam Cargo
o Established about 6 months after WOW.
o Members are Air France Cargo, Delta Air Logistics, AeroMexico Cargo and Korean Air
Cargo (Delta Airlines and Korean Air left in 2008 and 2009 respectively).
o Alitalia Cargo and Czech Airlines joined in 2001, KLM Cargo in 2004 and Northwest in
2005, China Southern in 2010 and China Eastern in 2013.
o Members share cargo terminals at several airports.
o 4 standard categories of products developed to harmonise operations:
➢ Equation: targeted at express cargo.
➢ Cohesion: provides fully customised shipping using 3-way contract between
SkyTeam Cargo, shipper and forwarding agent.
➢ Variation: cater to precious artwork, perishable freight, oversized objects,
dangerous goods or live animals.
➢ Dimension: standard product for shipments that does not need special handling.

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 Activity 2.3
• Singapore Airlines is a member of the Star Alliance. Who are the other
members of this alliance?
• Can you identify the benefits to Singapore Airlines by participating in this
alliance from the air freight perspective?
https://www.staralliance.com/en/about

Source: https://www.staralliance.com/en/member-airline-details?airlineCode

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Activity 2.3

• Discuss in your GBA groups (10 min)

• Present findings (10 min)
• Choose one person to present
• Total (20 min)
Discussion

Commercial agreements: 5 types – see slides

Alliances advantages: revenue enhancement and costs reduction

Alliance however incur costs from integration of IT etc, management

time in handling policies and competition authorities investigations on
price collusion

Two (2) alliances related to air cargo: WOW alliance, SkyTeam Cargo
Exercise

What did you take away from LO-3?

Think about various types of alliances and their benefits

to airlines
Takeaways (LO-3)

• Commercial agreements: 5 types – see slides

• Alliances advantages: revenue enhancement and costs reduction
• Alliance however incur costs from integration of IT etc, management time in
handling policies and competition authorities investigations on price
collusion
• Two (2) alliances related to air cargo: WOW alliance, SkyTeam Cargo
 Objectives

• At the end of this study unit, you are expected to:

1. Indicate the nature of supply in the air freight industry.

2. Demonstrate how freight forwarders can be customers of airlines and be
competitors to integrators.
3. Illustrate various types of alliances and their benefits to airlines.
4. Show the rationale behind mergers and acquisitions in the air freight sector
Self study

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 4.3/4.4 Air Cargo Mergers and Acquisitions

• Within one country:

o Most merger and acquisition activities involving air cargo took place in the US.
o Due to large size of cargo market and deregulation since 1977.

• Cross-border:
o Acquisition of KLM and Martinair by Air France.
o Lufthansa acquired Swiss, bmi, Austrian and Brussels Airlines.
o Merger between British Airways and Iberia.
o Combined Air France-KLM entity became biggest air cargo operator in Europe.
o Air France Cargo and KLM Cargo both have sizeable cargo operations and
established hub airports.
o Both continue as two separate divisions with one hubbing at Paris CDG and the
other at Amsterdam Schiphol airport.

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 Activity 2.4 (Homework)
Singapore Airlines has been involved in a series of mergers and acquisitions.
Discuss the impact of these events on the air cargo business of the airline.

– 1989: Delta Air Lines and Swissair (tripartite alliance)

– 2000: Air New Zealand
– 2000: Virgin Atlantic Airways
– 2004: Tiger Airways
– 2007: China Eastern
– 2010: China Cargo Airlines
– 2012: Virgin Australia
– 2013: Vistara (JV)
– 2016: Tiger Airways

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 4.5 Integrators Cross-Border Mergers and Acquisitions

• Scene for integrators has been quite active in foreign purchases to fuel their
international growth particularly in Europe and Asia.
• Acquire other integrators allows building up critical mass in other parts of the
world to compete more effectively.
• Targets are normally logistics companies that possess local or regional truck
distribution strengths.
• Acquisitions did not involve airlines however.
• View is that airline capacity can be acquired more easily from other airlines or
even wet leased.
• Example of DHL’s joint ventures:
o Europe: with Lufthansa (Aerologic)
o Asia: with Cathay Pacific (Air Hong Kong)
o US: with Polar/Atlas Air
o Africa: with Ethiopian Airlines
DHL’s expanded Leipzig hub to boost European operations
Source: https://www.aircargoweek.com/dhls-expanded-
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 Airline Alliances, Mergers and Acquisitions

• Neither mergers nor alliances played important role for air cargo.
• Alliances from passenger side not designed to provide specific benefits to cargo
business.
• Attempts at alliances between cargo airlines were not successful.
• Airline mergers beyond single countries or economic areas were not possible
because of rules requiring majority owners to be located in airline’s country of
registration.
• But we have seen considerable merger activity between forwarders and
integrators.
• Larger forwarders may increasingly operate or charter their own aircraft.

Airline alliances
Source: https://en.wikipedia.org/wiki/Airline_alliance

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Exercise

What did you take away from LO-4?

Think about mergers and acquisitions in the air freight

sector
Takeaways (LO-4)

• Rationale for M&A:

o Within the US – sizable market and de-regulation
o Outside the US – cross border e.g. AF acquired KLM and Martinair
o Combined Air France+KLM is biggest air cargo operator in Europe with 2 major
hubs at Paris CDG, Amsterdam Schiphol
• M&A for integrators: quite active for integrators to acquire other integrators for
growth (e.g. FedEx and TNT merger)
• Considerable merger activity between integrators and FF that possess local or
regional truck distribution
• M&A and Alliances played no role in air cargo
• Rules requiring majority owners to be located in country of registration deter
airline mergers
Summary (SU-2 Chap 3)

• Supply of air cargo capacity comes from traditional (or non-integrated) market and integrated
market
• Overall efficiency of the air cargo supply chain depends on how airlines in the ‘middle mile’
interface with the first and last mile
• Suppliers of air cargo capacity can be broken down into 6 groups: Combination, Passenger, All-
cargo, Charter, ACMI, Integrators
• Combination carriers has largest share 60% of international air freight market
• Integrators has highest share in domestic US market 55.7%
• Air cargo carriers compete by 7 different strategies: (1) Carpet Sellers (2) Basic Cargo op (3)
Premium Cargo (4) Strong Regionals (5) Huge American (6) Large passenger wide bodied (7)
Cargo stars
• Operating at large cargo hubs with a broad product portfolio and high load factors, (3) and (7)
produces the best yields
• Freight Forwarders act on behalf of shippers or consignees, consolidate cargo of shippers
become the sole shipper and customer of airlines; Act on behalf of airlines as agent compete
with integrator for business of shippers
Summary (SU-2 Chap 4)

• Commercial agreements: 5 types

• Alliances advantages: revenue enhancement and costs reduction
• Alliance however incur costs from integration of IT etc, management time in handling policies and
investigations into price collusion
• Two (2) alliances related to air cargo: WOW alliance, SkyTeam Cargo from competition authorities
Rationale for M&A:
• Within the US – sizable market and de-regulation
• Outside the US – cross border e.g. AF acquired KLM and Martinair
• Combined Air France+KLM is biggest air cargo operator in Europe with 2 major hubs at Paris CDG,
Amsterdam Schiphol
• M&A for integrators: quite active for integrators to acquire other integrators for growth (e.g. FedEx
and TNT merger)
• Considerable merger activity between integrators and FF that possess local or regional truck
distribution
• M&A and Alliances played no role in air cargo
• Rules requiring majority owners to be in country of registration deter airline mergers
TOA 2022 Q4

(a) There are many types of airlines involved in the air cargo
business. Think of an airline that you are familiar with. Determine
the characteristics of this airline (e.g. aircraft fleet, services
provided, products, service quality and service coverage) and its
classification by the air cargo business.

(b) With reference to the same airline, critique on three (3) key
challenges the airline is likely to face in terms of managing its
revenue.
Feedback

(a) Most students chose an airline and elaborated on its characteristics such as
services provided, fleet size etc but some failed to classify the air cargo
business (e.g., all-cargo carrier, combination carrier, integrator etc.)

(b) Most students could relate the challenges to revenue management such as
three-dimensional capacity problem, uncertainty to overall cargo space on
passenger flights, allocation of space between long-term contract clients that
typically get cheaper rates for supplying the base load and those available for
free sale via the booking system, and percentage of “overbooking” to
compensate for no-shows, cancellations and shipments of cargo that do not
match bookings (Refer Seminar 4).
TOA 2021 Q3

a) In 2018, Singapore Airlines (SIA) Cargo was re-organised and now operates
as a division within the SIA Group. Previously, SIA Cargo operated as a
subsidiary of SIA Group. Demonstrate how SIA’s cargo division can be
classified before the re-organisation with reference to the classification of
cargo airlines. In addition, show how the cargo division can be classified
after the re-organisation. What is the strategy of SIA Cargo in the context
of this arrangement? Give your views.
b) SIA Cargo flies to many destinations overseas such as Sharjah in the United
Arab Emirates. Suggest three (3) main factors that you think can affect the
choice of airports that SIA Cargo serves. Give reasons to support your
answer.
Feedback

(a) Most students did not compare the strategic change at SIA Cargo
before and after the pandemic occurred. From an all-cargo carrier to
being a combination carrier, SIA Cargo has become part of SIA. It made
the change to match the supply of air cargo space to demand which is
impacted by the pandemic.
However, as part of SIA, SIA Cargo could still adopt the strategy of
premium cargo operator and operate with high operating profit per ATK
with its broad product offering, network coverage, high load factor and
high yields.

(b) Students who did well elaborated on the factors that drive the
decisions at SIA Cargo regarding choice of airports. These factors relate
to demand (origin/destination that drive load factor, market access etc),
supply (partner carriers, freight forwarders), competition (e.g.
integrators), operating costs (e.g. airport charges) and regulations (e.g.
bi-lateral restrictions).
Evening Classes (T): Assignments due

Assignment 1: Tutor-marked Assignment (TMA)

Submission Deadline*: 16 Feb, 2355hrs

Assignment 2: Group-based Assignment (GBA)

Submission Deadline*: 15 Mar, 2355hrs

* Marks are deducted for late submission

Examination
Please refer to examination timetable on Students' Portal.
 Feel free to post questions.

Thank you for your participation ☺