WOW and SkyTeam Cargo: Strategic Alliances and Their Impact on Air Cargo Operations from 1998 to 2010 (based on Airline Business Cargo Surveys)

Bachelor Thesis , 2012 , 81 Pages , Grade: 1,0

Business economics - Supply, Production, Logistics

The formation of highly integrated strategic alliances in the airline industry started during the1990’s with Star Alliance as the first global player, as passenger airlines faced deregulation and wanted to support their growth and expansion in international markets. For cargo companies, this type of integration came around later at the beginning of 2000. As a result of this increased co-operation, major alliances were formed with the launch of SkyTeam Cargo and WOW. Beginning at the dawn of the new century, these alliances should mark a cornerstone that enables long term success and survival through synergy effects and higher competitiveness individually and as a group. Now, a decade later, WOW and SkyTeam Cargo have evolved, but in different directions and not all members or ex-members are content with the results.

Strategic alliances in air transport have been studied widely in recent publications, most of which just cover the passenger side of the business. There is a lot of information, statements and common knowledge about what benefits alliances can bring to its members, but a literature review leads to the fact that research is very sparse when it comes down to evaluating the actual impact of alliance integration on air cargo carriers’ standing.

Strategic Alliances (WOW, SkyTeam Cargo) in Air Cargo Operations: It is the purpose of this bachelor thesis to analyze and interpret the impact of a strategic alliance on cargo airlines‘ Revenue-Ton-Kilometers key figures (provided by Airline Business 1998-2010) and market share developments. The goal is to provide answers to the questions if air cargo operators did profit from alliance integration and why that was the case or not? Can alliances create value for their respective members by increasing their market share in terms of RTK?

Additional questions that will be addressed in the process of answering these core questions:

•What are the main benefits and disadvantages for alliance members
•What major challenges do (prospective) members face in an alliance
•Are there common success and stability factors and why do alliances fail
•What alternatives are there to alliance formation

Table of Contents

1. Introduction
1.1. Research Questions
1.2. Methodology
1.3. Structure

2. Research Background
2.1. Market Environment
2.1.1. Challenges
2.1.1.1. Liberalization and Regulatory Environment
2.1.1.2. Integrators and Competing Business Models
2.1.2. Opportunities
2.1.2.1. Innovation in Air Cargo Transport
2.1.2.2. Market Numbers
2.2. Idiosyncratic Economics of Air Cargo Operations
2.3. Reactions of Air Cargo Carriers
2.3.1. WOW
2.3.1.1. Taking Off with High Hopes
2.3.1.2. Difficulties Getting Off the Ground
2.3.1.3. The Recent Years
2.3.2. SkyTeam Cargo
2.3.2.1. The Early Days
2.3.2.2. Rapid Growth
2.3.2.3. Status Quo and Outlook
2.4. Summary of WOW and SkyTeam Cargo

3. Literature Review - State of the Field
3.1. A Definition and Distinction of the Alliance Term
3.2. State of the Field
3.2.1. Strategic Alliances in General
3.2.2. Strategic Alliances in Air Transportation
3.3. The Concept of Strategic Alliances
3.4. Alliances in the Air Cargo Business
3.4.1. Driving Forces of the Alliance Decision
3.4.1.1. Get Exposure to Growth
3.4.1.2. Fight for Market Share
3.4.1.3. Synergies and Complementary Assets
3.4.1.4. Others
3.4.2. Alliance Advantages
3.4.2.1. Access to Regional Knowledge and Established Relationships
3.4.2.2. Organisational Learning and Innovation
3.4.2.3. Counteract Market Uncertainties and Volatility
3.4.2.4. Economies of Scale, Density and Scope
3.4.2.5. Market Power and Presence
3.4.2.6. Usefulness for Professionals
3.4.2.7. Advantages for Customers
3.4.3. Disadvantages
3.4.3.1. Result of Economies of Scale, Scope and Density
3.4.3.2. High Requirements
3.4.3.3. High Dependance
3.4.3.4. Others
3.5. Core Questions and Prerequisites for Alliance Integration
3.5.1. Value Creation and Distribution
3.5.2. Alliances as a Long Term Commitment
3.5.3. Foreseeing of Conflicts
3.5.4. Reciprocation in a Network of Alliances
3.5.5. Prerequisites for Successful Alliance Creation
3.6. Alliance Criticism and Other Cooperation Strategies
3.6.1. Criticism
3.6.2. Other Co-operation Methods
3.7. Challenges and Common Complications

4. Transition to the Analytical Part

5. Analysis of Both Alliances’ Revenue-Ton-Kilometers
5.1. Assumptions
5.2. Total Market
5.3. WOW and SkyTeam Cargo
5.3.1. WOW Alliance
5.3.1.1. Lufthansa Cargo
5.3.1.2. Singapore Airlines Cargo
5.3.1.3. SAS Cargo
5.3.1.4. Japan Airlines Cargo
5.3.1.5. WOW Conclusion
5.3.2. SkyTeam Cargo
5.3.2.1. Approach
5.3.2.2. SkyTeam Cargo Founding Members
5.2.3.3. Korean Air Cargo
5.2.3.4. Air France and KLM
5.2.3.5. Delta Airlines and Northwest Airlines
5.2.3.6. Aeroméxico
5.2.3.7. Alitalia
5.2.3.8. SkyTeam Cargo Conclusion
5.3. Comparison WOW And SkyTeam Cargo

6. Conclusion and Further Research Opportunities
6.1 Summary
6.2 Further Research Opportunities

References

Figure 1: Alliance Research Broken Down

Figure 2: Air Cargo Growth Rates (Source: Boeing)

Figure 3: Freight Yield 1989 - 2009 (Source: Boeing)

Figure 4: World Air Cargo Traffic in RTK (Source: Boeing)

Figure 5: World Air Cargo Growth (Source: Boeing)

Figure 6: Historical and Forecast Air Cargo Growth Rates (Source: Boeing)

Figure 7: Total RTK 1998-2010 from the 100 Largest Cargo Airlines (in Million), Source: Airline Business, own diagram

Figure 9: Total RTK 1998-2010 from All WOW Alliance Members (in Million) Source: Airline Business, own diagram

Figure 10: Total RTK 2001-2010 from All WOW Alliance Members (in Million) Source: Airline Business, own diagram

Figure 11: WOW Airlines RTK Market Share from 1998 to 2010, Source: Airline Business, own diagram

Figure 12: Total RTK 1998-2010 from the SkyTeam Cargo Core Members (in Million) Source: Airline Business, own diagram

Figure 13: Total RTK 2001-2010 from the SkyTeam Cargo Core Members (in Million) Source: Airline Business, own diagram

Figure 14: SkyTeam Cargo Core Member RTK Market Share from 1998 to 2010, Source: Airline Business, own diagram

„Aerodynamically the bumblebee shouldn't be able to fly, but the bumblebee doesn't know that so it goes on flying anyway.”

- Mary Kay Ash

1. Introduction

The formation of highly integrated strategic alliances in the airline industry started during the 1990’s with Star Alliance as the first global player, as passenger airlines faced deregulation and wanted to support their growth and expansion in international markets. For cargo companies, this type of integration came around later at the beginning of 2000. As a result of this increased co-operation, major alliances were formed with the launch of SkyTeam Cargo and WOW. Beginning at the dawn of the new century, these alliances should mark a cornerstone that enables long term success and survival through synergy effects and higher competitiveness individually and as a group.¹ Now, a decade later, WOW and SkyTeam Cargo have evolved, but in different directions and not all members or ex-members are content with the results.

1.1. Research Questions

The greatest change in corporate culture — and in the way business is being conducted — may be the accelerating growth of relationships based not on ownership but on partnership; joint ventures; minority investments cementing a joint marketing agreement or an agreement to do joint research … alliances of all sorts.

illustration not visible in this excerpt

- Peter F. Drucker²

Strategic alliances in air transport have been studied widely in recent publications, most of which just cover the passenger side of the business. There is a lot of information, statements and common knowledge about what benefits alliances can bring to its members, but a literature review leads to the fact that research is very sparse when it comes down to evaluating the actual impact of alliance integration on air cargo carriers’ standing.

illustration not visible in this excerpt

Figure 1: Alliance Research Broken Down

Strategic Alliances (WOW, SkyTeam Cargo) in Air Cargo Operations: It is the purpose of this bachelor thesis to analyze and interpret the impact of a strategic alliance on cargo airlines‘ Revenue-Ton-Kilometers key figures (provided by Airline Business 1998-2010) and market share developments. The goal is to provide answers to the questions if air cargo operators did profit from alliance integration and why that was the case or not? Can alliances create value for their respective members by increasing their market share in terms of RTK?

Additional questions that will be addressed in the process of answering these core questions: What are the main benefits and disadvantages for alliance members

- What are the main benefits and disadvantages for alliance members
- What major challenges do (prospective) members face in an alliance
- Are there common success and stability factors and why do alliances fail
- What alternatives are there to alliance formation

1.2. Methodology

In order to complete this bachelor thesis, a combination of different methodologies is used, based mainly on content analysis, literature review, the secondary data analysis including books, academic journals, data provided from inter-trade organizations, airlines, aircraft manufacturers and suppliers of aircraft manufacturers. In the first part of the thesis the alliance history and the environment is discussed using secondary data. The second part on the concept of strategic alliances in general and in the air cargo sector draws mainly on literature review and content analysis. After the literature review, the main purpose is to analyze specific Revenue-Ton-Kilometers derived from the Airline Business Cargo Surveys statistics on a year-to-year basis from 1998 till 2010. The Revenue-Ton-Kilometers data of the total market and of individual alliance members of both WOW and SkyTeam Cargo is extracted in order to serve as a basis for further analysis and also to be used to derive other market related figures. With the relevant data at hand, the market developments in terms of Revenue-Ton-Kilometers and respective growth rates are discussed, before each member carrier is analyzed on the basis of the absolute RTKs, the market share, the RTK growth rate, as well as on the global rank within the peer group (100 largest cargo airlines in terms of RTK) during the period under review. Additionally a compound analysis for both alliances is carried out.

1.3. Structure

In order to fulfill the goals of my research, this thesis is structured as follows:

Section 1 contains the problem statement that underlies this thesis. From there, different research questions are constructed. The section concludes with the proposed methodology that will be used to answer the research question.

Under section 2, a framework is presented that should help the delighted reader to understand the research background in greater detail. In this part, the market environment that air cargo carriers are facing today is described with all its challenges and opportunities. Idiosyncratic characteristics of air cargo operations are explained. The section concludes with a historical reflection of the development of both SkyTeam Cargo and WOW.

Section three contains results of my primary and secondary research with references to academic works and implementation practices. Firstly, a definition of the term alliance that suits the purpose of this study adequately is presented. After introducing to the concept of a strategic alliance in general, the thesis puts the focus on the application of this concept in the air cargo industry. From there, the purpose of an alliance for airlines, the possible advantages and the driving forces behind the decision to enter into an alliance are carved out. What is more, this section answers the core questions that every potential alliance prospect faces and states the prerequisites that must be met within an organization in preparation for alliance integration. The thesis sheds light on the challenges of alliance formation and alliance integration and potential critical success and stability factors. Concluding, the section provides a critical perspective on strategic alliances as well as a collection of other forms of strategic integration.

Sections four provides a comprehensive conclusion of the literature review and acts as a transition to the analytical part of the thesis. It aims at giving the reader a short heads up before the thesis goes into a detailed examination of both cargo alliances.

The fifth section contains the analytical part of this thesis. It analyses specific Revenue-Ton- Kilometers derived from the Airline Business Cargo Surveys statistics on a year-to-year basis from 1998 till 2010. It includes an analysis of the total market development as well as an evaluation of the developments of both alliances, WOW and SkyTeam Cargo, in general, as well as of their respective members.

The final section provides a short summary of all chapters and the answers to the proposed research questions that have been reached through research and the preparation of this bachelor thesis. In the end, further research directions are pointed out.

2. Research Background

It is the purpose of this introduction to discuss relevant topics briefly in context of air cargo alliances and in a manner that relates to the subject of this bachelor thesis. It should help the delighted reader to get some sort of understanding about the current market conditions, without making any claims of being complete.

2.1. Market Environment

The business of air cargo operations has been a field of rapid changes and developments in the last few years. Embedded in a framework of global economics, trade development and subject to manifold regulations, air freight as a barometer of trade will continue to be a key driver in furthering globalization.³ For a detailed description of the development and the history of air freight services see Chiavi (2005) and Allaz (2004).

2.1.1. Challenges

Air cargo carriers operating in a global market are faced with all different kinds of challenges, including rather recent developments like the liberalization of air transport markets, increasing competition through the growth of integrators, as well as inherent challenges like directional imbalance, marginal pricing of substantial volumes, the absence of new dedicated freighter aircraft, airport noise regulations and a dependence on belly cargo and therefore a schedule to please passengers. Adding to that, air cargo operations are highly dependent on the overall world economic situation and macroeconomic variables.⁴ It is not exclusively world trade activity that affects air cargo operators. Other factors, such as the development of the oil price can have a large impact on the demand for and the supply of air freight services as well. As fuel costs make up a large part of the variable costs, especially on long haul freighter aircraft operations, a high oil price can lead to freight forwarders substituting the higher priced air transport services with road or maritime transport. Although the demand for air freight services has increased over the decades, freight yields have been declining sharply since 1989.⁵ Growth over the last 60 years has been rapid, yet profitability has remained very low.⁶

2.1.1.1. Liberalization and Regulatory Environment

It can be argued that liberalization in the air transport market can both be seen as an opportunity as well as a challenge for established air cargo carriers. Increased competition has forced cargo carriers to act and change their old thinking patterns and behavior. No longer protected, they had to find other ways of keeping their strong market position and standing. This challenge has been one of the key drivers for the foundation of alliances in that sector. With deregulation, the air transport industry has moved away from strong economic regulations and to a large extend has been freed from the state’s control over prices, market entry and exit. With the new, in many cases still restricted, freedom of entry and exit, capacity, fares and operations, competition among international cargo airlines has increased fiercely as previously state-owned carriers and/or flag carriers no longer enjoyed protection.⁷ With increased competition came significant traffic growth, a sharp reduction in prices and an increase in product quality for customers. On a positive note, liberalization allowed airlines to operate more efficiently within alliances and on their own.⁸

Liberalization attempts have been ongoing among many countries and trade blocks worldwide. It may well be argued that in an integrated economic block like the European Union, several packages have led to a high degree of freedom and harmonization.

Still, liberalization is an ongoing process and air transport freedom rights differ among all countries and are very much dependent on overall integration into a more open world economy. Global markets are far from contestable.⁹ This is particularly important when looking at traffic rights, as there are still hundreds of bilateral air service agreements (ASAs) in place. It may well be that an airline that wants to expand into another market by acquiring a competitor will cause the traffic rights of the acquisition target to expire. This complex of problems has recently been in the news when Lufthansa took over Swiss and Austrian. In either case, Russia wanted to draw the traffic rights from both carriers as it no longer recognized Swiss as a Swiss airline and Austrian Airlines as being an Austrian company. In such cases, alliances can help to circumvent existing regulations. For a detailed analysis of the status of the liberalization efforts in the airline industry and the benefits of more open skies, see IATA (2006) study on liberalization.

2.1.1.2. Integrators and Competing Business Models

Although air cargo volumes increased rapidly (ten per cent annual growth between 1997 and 2004)¹⁰, the traditional airfreight sector suffered from an economic decline. With a different culture and methodology, offering a one-stop solution, integrators have been able to acquire an increasing share of the traditional sector’s high value customers, absorbing all of the premium market growth. During the past 20 years, companies like Federal Express, UPS, DHL and TNT expanded their presence by moving into the higher value express, door-to-door services. They have introduced new levels of service standards via extensive use of information technology and comprehensive global network ([Melbin, 1997] , [Hamilton, 1997] and [Chu et al., 2004] ).¹¹

2.1.2. Opportunities

However, air freight as a key instrument of globalization is still confronted with plenty of opportunities like an increase in international trade, rapid economic development of emerging markets and innovation. Liberalization and deregulation have enabled carriers to open new routes, enter new markets, attract new customers and build new relationships. Apart from air cargo carriers, Fu et al. (2010) summarize numerous reports and academic papers, which confirm that liberalization in air transport markets has had an important impact on worldwide economic growth and welfare gains.¹² Although innovation is more incremental, air cargo operators, together with all other service providers in the air cargo supply chain, constantly seek to drive down costs in all segments and improve product offerings. Leaving unpredictable fuel costs aside (which can also be hedged to account for unpredictability and to allow safer planning), it is safe to assume that this results in a light gradual decrease in production cost over time.

2.1.2.1. Innovation in Air Cargo Transport

The necessity of innovation in air cargo operations has been neglected for a long time, after few breakthrough innovations during the last 60 years. At the same time, cargo airlines are integrated in ultra dense global networks that provide fast service for customers, but still rely on outdated IT systems and procedures. Protective market conditions in the past and leftover structures of those times frustrated innovation, and have directed the evolution of the industry into a contrived and artificial structure.¹³ As comes with long time-to-market and long usage periods of aircraft, there is also no breakthrough innovation when it comes to new airplane models. This is even more true for the cargo side of the business, as freighter aircraft are often happen to be converted ex-passenger aircraft and stay in service even longer. The newest models on the market are the Airbus A330F, the Boeing 777F Freighter and the Boeing 747- 800F. All of them are derived from passenger airplane models and come with all sorts of compromise for dedicated air cargo carriers. Innovation in the field of airplanes can best be described as being incremental.

Nonetheless, there has been a continuous stream of innovation in the fields of RFID, tracking and tracing, development of time sensitive express products as well as products that offer greater flexibility for customers. Innovations that yielded special products for temperature sensitive cargo could be one of the key drivers that have helped cargo carriers to gain access to totally new customer groups, e.g. the pharmaceutical industry.

Notable initiatives in the recent years that try to obtain foothold in the industry are Cargo 2000 and E-Freight. Cargo 2000 aims at implementing a new quality management system for the worldwide air cargo industry that should reduce operating costs and enhance customer service while improving the efficiency of air cargo in general. All this should happen in close partnerships with courier service providers.¹⁴ E-freight is an industry-wide initiative involving carriers, freight forwarders, ground handlers, shippers and customs authorities that aims at taking paper work out of the air cargo supply chain and replace it with cheaper, more accurate and more reliable electronic messaging.¹⁵

A topic that is gaining momentum worldwide and that is becoming increasingly important is the security of the supply chain as a whole. As an important part of the supply chain, air cargo operators are faced with the need to adapt to various new regulations and policies that have been implemented since the 9/11 attacks.¹⁶ This is particularly important as air transportation represents a large point of impact and finds favor with terrorist attacks. All of these changes require a capable IT infrastructure. IT systems are expensive to change but necessary to keep up with the pace of business integration and better customer service (booking, tracking etc) and - as with other investments - can help to lower the costs and improve service in the long term. Information technology and handling of information flow is definitely the key for many cargo change initiatives.¹⁷ Integration and concerted implementation within an alliance network can help individual air cargo operators to gain even more value from such initiatives. Another current development that aims at improving safety and security along the air cargo supply chain as well as at enlarging economic savings refers to the deployment of new ULDs (unit loading devices).¹⁸

With decreasing market regulation, air carriers are forced to compete more fiercely. Being on the edge of innovation, quick reaction to customer needs and development of new products can help them to gain a lasting strategic advantage over their competitors.

2.1.2.2. Market Numbers

Commonly used quantitative measures of the international air freight business are Freight-Ton Kilometers (FTK)¹⁹ and Revenue-Ton Kilometers (RTK)²⁰. As stated earlier, the demand for air service operations depends heavily on the state of the world economy. A study in 2001 that used simple linear regression came to the conclusion that the growth of air freight equates 3.18 times GDP growth. From 1950 to 2000, the average growth rate for FTK was 9.76 per cent while the average GDP grew by 3.75 per cent. Four characteristics evolved in the analysis of the results:²¹

- The average growth rate of freight forwarding is significantly higher than the development of world trade and GDP
- Air freight is strongly related to the business cycle and trade development
- Air freight development shows a significantly higher volatility compared to real GDP
- The relative volatility seems to have decreased from 1970 to 2000

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Figure 2: Air Cargo Growth Rates (Source: Boeing)

The above chart from Boeing Airplanes, that describes the growth rates of air cargo in the last decade, highlights the volatility in the demand for air cargo services.²²

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Figure 3: Freight Yield 1989 - 2009 (Source: Boeing)

According to Boeing, even though scheduled freight yield increased from 2002 to 2008 because of fuel surcharges, it had been declining since 1989, at an average rate of 4.9% per year, after adjusting for inflation.²³

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Figure 4: World Air Cargo Traffic in RTK (Source: Boeing)

Latest data from Boeing shows that in 2009, the world maritime industry generated an estimated total of 60 trillion RTKs compared to 166.8 billion RTKs for the air cargo industry. However, this maritime traffic includes movement of bulk commodities such as oil, metal associated with transport by air. A better comparison of the air and maritime modes can be made using the remaining maritime dry cargo after bulk commodities have been subtracted, which totaled about 16.9 trillion RTKs in 2009.²⁴

The short term outlook is not comforting after all. Airport Council International ACI September 2011 statistics show a further decrease of 3.8 per cent in airfreight handled. The CEO of ACI Europe, Oliver Jankovec points out that the difference between passenger and freight transport is increasing and stands now by 10,8 per cent.²⁵ The downward trend for freight demand is real and freight as an early indicator for world economic development points to further declines in economic activity which in turn will decrease the demand for air cargo services even more in the near future.

Still, the long term outlook is bright. Although recent statistics point to a decrease in demand for freight volume, the long term upward trend is intact. This is supported by studies of both Boeing and Airbus as well as by studies from international organizations like IATA and ICAO.

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Figure 5: World Air Cargo Growth (Source: Boeing)

next 20 years. Air freight RTK growth, including express traffic, will average 6.0% annually. Airmail traffic will grow much more slowly, averaging only 1.4% growth annually through 2029. It should be noted that because of the dramatic 2009 drop, the historic 10-year world air cargo growth rate fell from 3.9% during the 1997-to-2007 period to only 1.9% during the 1999-to-2009 period. Overall, world air cargo traffic will increase from 166.8 billion RTKs in 2009 (down from its 2007 record of 191.4 billion) to more than 526.5 billion RTKs in 2029.²⁶

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Figure 6: Historical and Forecast Air Cargo Growth Rates (Source: Boeing)

Asia’s air cargo markets will continue to lead the world air cargo industry in average annual growth rates, with domestic China and intra-Asia markets expanding 9.2% and 7.9% per year, respectively. Markets linking Latin America with North America and Latin America with Europe, as well as markets between the Middle East and Europe, will grow at approximately world average growth rate. The more mature North America and Europe markets reflect lower-than-average traffic growth rates.²⁷

This long term upward trend is also reflected by estimates of Airbus and Boeing regarding the need for new freighter aircraft in the coming years: According to Boeing, the freighter fleet is forecast to expand by more than two-thirds, from 1,755 airplanes in 2009 to 2,967 airplanes in 2029.²⁸

Apart from short term considerations, the future outlook for cargo carriers can be considered bright as growth will continue over the next decades with the support of an increase in international trade, development in emerging markets and the growing need to transport time sensitive, higher-value goods.

For further information on market outlook, I would like to point the delighted reader to the Airbus Global Market Forecast 2011-2030, the Boeing World Air Cargo Forecast 2010-2011 and the Boeing Current Market Outlook 2011-2030.

2.2. Idiosyncratic Economics of Air Cargo Operations

Air cargo operators offer an undifferentiated, highly perishable product: Although companies try to differentiate their offerings from their competitors, provided services are still very similar. In addition to this, the air cargo services are highly perishable; an empty cargo hold cannot be stored for future sale and represents a dead loss for the service provider.²⁹ Modern air freight enables fast transport of goods within a global network and therefore stands out due to a high economic efficiency, when compared to other modes of transport. However, because of its nature, the cargo business is also much higher regulated when it comes down to safety standards and statutory requirements.³⁰

As a key driver of international trade, air cargo is highly dependent on the global economic situation and constantly has to cope with fluctuations in demand. The supply with air cargo services, however, is very inelastic. This can come as a problem as companies configure their capacity in order to manage demand surges, which is usually part of a long term planning process. Reaction to unexpected demand shifts, such as a change in aircraft configuration or a change in fleet size can be costly and require great effort. Air cargo operators therefore employ a very complex fare structure to account for that. With regard to the cost structure of a cargo airline, large part is made up of fixed costs as marginal costs are low.³¹ Adding to that, fuel costs as a major part of the variable costs depend on the oil price and are therefore not entirely predictable. In times of a strong dollar, this can prove to be an even greater concern for air transport operators outside the United States of America.

The competition in air cargo operations happens to be among carriers from all over the world, each carrier from a different home country. That implies that every air cargo operator has to deal with very different basic conditions in terms of available resources, economic and technical regulations.³² Various practioneers claim that air carriers from specific countries enjoy a greater degree of freedom as well as substantially lower cost structures and thus imply that the competition in some markets takes place in an unfair and distorted environment.

Compared to other modes of transport, air freight volumes are very low as both passenger airlines as well as dedicated cargo carriers together carry only one per cent of the world trade volume with their aircraft fleets. However, research estimates the value of those - often time sensitive - goods to make up between ten and 30 per cent of the world trade value.³³

2.3. Reactions of Air Cargo Carriers

In order to face the challenges and to leverage the opportunities, air cargo operators have adapted their short term as well as long term strategy in different ways. Short term reactions to a decline in economic activity included taking airplanes out of service and storing them in the desert. Long term considerations have led to different kinds of co-operations with competitors, most importantly the formation of alliances, which should have helped to create economies of scale, deal with the increased complexity of information flow and should have enabled each company to cover a bigger network.³⁴

2.3.1. WOW

2.3.1.1. Taking Off with High Hopes

After discussions and preparations started in April 2000, WOW (known under the project name New Global Cargo) was officially incorporated in October 2001 by three founder companies, namely Lufthansa Cargo, Singapore Airlines Cargo and SAS Cargo. Being autonomous, wholly owned subsidiaries of their parent companies, they enjoyed a greater degree of freedom and flexibility in decision making and in their operations. At that time, all parent companies were also members of the Star Alliance.³⁵ Japan Airlines, now a member of the passenger alliance OneWorld, joined the alliance in mid-2002 for its cargo activities, without setting up a dedicated cargo subsidiary.³⁶ At that time, the members of the WOW alliance together operated scheduled freighter operations to 523 airports in 103 countries.³⁷ The name WOW is no abbreviation but should rather stand for a new, dynamic and innovative way of carrying freight. As a symbolic step Lufthansa Cargo started to add the WOW logo to their MD-11 freighters from 2003 onwards.³⁸

The underlying premise of WOW was that customers are no longer seeking pure transportation services, but innovative solutions to complex logistics requirements. Therefore, the WOW alliance was looking for ways to harmonize business product lines, processing, handling and information technology systems as well as ways to unify freight networks, sales and marketing structures to meet customer demand for rapid, reliable and flexible global service.³⁹

2.3.1.2. Difficulties Getting Off the Ground

Hopes to revolutionize the air cargo business in a way that Star Alliance has transformed air travel were flying high but the following years will eventually prove that the venture did not take off quite as planned and never managed to live up to the promising name.

Right after the formation, the aftermath of 9/11 had a substantial impact on the venture: due to a decrease in demand for air cargo operations, Lufthansa Cargo had to ground two of its 20 freighters temporarily, while Singapore Airlines Cargo deferred the delivery of its 12th new Boeing 747-400F freighter by six months. The rollout of the brand name WOW was delayed until March.⁴⁰

As soon as the first milestones had been reached, other challenges arose: In 2002 Andreas Otto, a member of the Lufthansa cargo board, proclaimed that over 80 per cent of the total cargo business of the three founding members are harmonized as well as 100 per cent of each firms’ time-definite offerings. This was only half the truth as each carrier has retained the individual brandings for their time-definite products (td.Flash of LH Cargo, SAS Priority of SAS Cargo and S1A Swiftride of SIA Cargo). At that stage LH Cargo has embarked upon long-term "business partnerships" with the major forwarders and was already planning new ventures with Deutsche Post World Net and DHL to enhance and promote their own products. SIA Cargo, on the other hand, openly admitted that it did not have the resources to set up such programs.⁴¹

After the launch of seamless joint express services on the worldwide systems and a time- definite general cargo product, alliance planners now focused on the integration of sales, handling and IT systems as well filling missing geographical gaps in the global network to increase market share and global presence. Despite a combined fleet of 33 dedicated freighter aircraft (MD11 and 747F) and the underbelly capacity of 600 aircraft, the three founding airlines still held only about ten per cent of the global market share at that time, which showed the high degree of fragmentation in the air cargo industry.⁴² Aside from the founding airlines, two associated carriers, namely Thomas Cook/ Condor and Spanair also provided additional bellyhold capacity for the WOW alliance.⁴³

Although it was unclear how much business actually moved as part of the alliance, each member carrier had set aside ten per cent of the capacity on all their flights toward a seamless, worldwide air freight network by September 2003. By 2004, the alliance had reached its peak, operating a combined fleet of 43 freighters and more than 760 passenger aircraft with bellyhold capacity, serving "an unparalleled route network of destinations, linking the world's major trading centers."⁴⁴

On the contrary, the limits of alliances seem to have been immanent from the very beginning. In 2003, SAS Cargo launched 747-400 freighter flights to New York under a pact with Korean Air Cargo, one of the founding members of the rivaling SkyTeam Cargo.⁴⁵ By 2005, Lufthansa Cargo has engaged in several global co-operations and deals like the foundation of Jade Cargo, a joint venture with the Chinese Shenzhen Airlines. What is more, the development of AeroLogic⁴⁶ was well under way at that time. It was in the same breath that the founding member of WOW proclaimed that it is no longer bound by any alliance or partnership and was openly speaking about a portfolio of partnerships. This change of wording reflected the shift of thinking inside the German cargo carrier: The WOW alliance no longer had the highest priority.⁴⁷

In a vicious circle, decreasing commitment of all members to the alliance and their partners led to an increasing engagement in other strategies, which led to further contradictions of the alliance.

2.3.1.3. The Recent Years

In 2008, a source at Lufthansa told Die Welt that the alliance is eventually going to be dropped by all its members as “no one is sufficiently aware of the advantages offered by the alliance". Other reports claim that members of the WOW alliance have competed against each other and have failed to agree on joint offers, in light of the general increase in competition within the global commercial aviation industry.⁴⁸ Lufthansa Cargo mourned missing reservation systems and customer retention programs.⁴⁹

Even before the announcement of its withdrawal from the alliance in 2009 Lufthansa Cargo has started to change the livery of their aircraft back to a pre-alliance state without any WOW markings.

After entering bankruptcy in January and financial restructuration, Japan Airlines decided to suspend all scheduled freighter flights after more than 50 years of operations by November 2010. With the storage and sale of six dedicated 747 and three 767 freighter aircraft, Japan Airlines simultaneously left the WOW alliance.⁵⁰

To this day, only Singapore Airlines Cargo and SAS Cargo belong to the WOW alliance, both operating as subsidiaries of the respective Star Alliance passenger airlines. SIA Cargo operates twelve dedicated 747-400 freighters and has a network that spans 72 cities in 37 countries, with over 600 flights scheduled every week. In contrast, SAS Cargo - without dedicated freighter aircraft - uses free bellycargo compartments from aircraft of its parent company SAS.⁵¹

The alliance continues to exist, but the effort and the dedication of both carriers is highly questionable, as there are barely any intersections in their operations, as well as no words from officials of either company or joint press releases. At present, the former website of the WOW alliance is no longer online and the domain wowingtheskies.com is currently (21.10.11) not registered and up for sale.

2.3.2. SkyTeam Cargo

2.3.2.1. The Early Days

Sky Team Cargo was founded in September 2000 as a separate arm of the passenger airline alliance SkyTeam which itself has just been incorporated three months earlier. The founding members Aeroméxico Cargo, Air France Cargo, Delta Air Logistics and Korean Air Cargo were soon to be followed by Czech Airlines Cargo and Alitalia Cargo in 2001. In the same year, Air France Cargo, Delta Air Logistics and Korean Air Cargo launched the US Cargo Sales Joint Venture in Atlanta. With even tighter integration, they hoped to offer customers the benefits of a combined sales force, a centralized reservation and service center, a comprehensive route network and a common product line for US export shipments.⁵² The joint venture used its own IT system, revenue management and customer database.⁵³ Both the wording and the appearance of the newly formed SkyTeam Cargo differed from the one and only competing alliance WOW. In 2002, Delta Air Logistics chief Anthony Charaf noted, that "they’d rather be small and effective than large and ineffective."⁵⁴ On the other hand, unlike WOW, the Air France/Delta-led partnership intended to embrace all members of the SkyTeam passenger alliance, provided they agree to its overall marketing and product philosophy.⁵⁵ Over the coming years this strategic concept led to fast growth in terms of members and broad geographical presence.

[...]

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¹ See Serna Velez (2007), p. 7

² Drucker (1996)

³ See Chiavi (2005), p.489

⁴ See O’Connor (2001), p.200 and Grönlund and Skoog (2005), p.474

⁵ See Boeing (2010), p.2

⁶ See Doganis (2005), p.4

⁷ See Liasidou, (2004), sl. 3-4

⁸ See Fu et al. (2010), p.374

⁹ See Kleymann and Seristö (2004), p.4

¹⁰ See Piermartini and Rousová (2008), p.1

¹¹ See Hui et al. (2007), Chu et al. (2004), Hamilton (1997), Melbin (1997)

¹² See Fu et al. (2010), pp.2-3

¹³ See IATA (2006), p.3

¹⁴ See Hui et al. (2007), and IATA (2011), www.iata.org (1.11.11)

¹⁵ See IATA (2011), www.iata.org (1.11.11)

¹⁶ See Pienaar and Vogt (2009), pp.394-396

¹⁷ See Conway (2009), pp.7-8

¹⁸ See Warehousenews.co.uk (2011), http://www.warehousenews.co.uk/ (2.11.11)

¹⁹ FTK: the sum of the products obtained by multiplying the number of tonnes of freight and express carried on each flight stage by the stage distance. For ICAO statistical purposes freight includes express and diplomatic bags but not passenger baggage

²⁰ RTK: A single ton of goods that is transported for one kilometer

²¹ See Chiavi (2005), p.504-506 and MDS Transmodal et al. (2001), p.16

²² Boeing (2010), p.2

²³ Boeing (2010), p.3

²⁴ Boeing (2010), p.6

²⁵ See Payer (2011), www.austrianaviation.net (8.11.11)

²⁶ Boeing (2010), p.8

²⁷ Boeing (2010), p.8

²⁸ See Boeing (2010), p.9

²⁹ O’Connor (2001), p.6

³⁰ Pompl (2007), p. 45

³¹ Pompl (2007), p.46

³² Pompl (2007), p.50

³³ See Pienaar and Vogt (2009), p.389 and Piermartini and Rousová (2008), p.1

³⁴ See Grönlund and Skoog (2005), p.484

³⁵ Star Alliance: The first and largest passenger airline alliance, founded in 1997

³⁶ oneworld: The 3rd largest passenger airline alliance, founded in 1999

³⁷ See Japan Times (2002): www.japantimes.co.jp (21.10.11)

³⁸ See Allaz (2005), p.351

³⁹ See Taverna (2001), p.58

⁴⁰ See Taverna (2002), p.52

⁴¹ See Turney (2002), pp.14-16

⁴² See Taverma, (2002), p.52

⁴³ See Taverna, (2002), p.52

⁴⁴ See Karp, (2004), p.20-25

⁴⁵ See Air Cargo World (2003), p.4

⁴⁶ AeroLogic: A joint venture between DHL Aviation and Lufthansa Cargo

⁴⁷ See Turney (2005), pp.14-15

⁴⁸ See Transportweekly (2008), www.transportweekly.com (21.10.11)

⁴⁹ See Airliners.de (2011), www.airliners.de (21.10.11)

⁵⁰ See Shippingonline (2010), www.shippingonline.cn (21.10.11)

⁵¹ See www.siacargo.com and www.sascargo.com (21.10.11)

⁵² www.skyteamcargo.com, (22.10.11)

⁵³ See Conway (2002), p.9

⁵⁴ See Air Cargo World (2002), p.6

⁵⁵ See Taverna, (2002), p.52

• College: Vienna University of Economics and Business
• Course: Transportwirtschaft und Logistik
• Grade: 1,0
• Author: Florian Smeritschnig (Author)
• Publication Year: 2012
• Pages: 81
• Catalog Number: V199184
• ISBN (eBook): 9783656323464
• ISBN (Book): 9783656326953
• Language: English
• Tags: Air Freight, Strategic Alliances, Aviation, Civil Aviation, WOW, SkyTeam Cargo, Cargo, Lufthansa Cargo, Lufthansa, Singapore Airlines Cargo, Air France, KLM, Innovation, Economies of Air Cargo Operations, Air Cargo Market Analysis