Cargo helps pandemic-hit Indian airlines beat the blues

The two waves of Covid-19 pandemic have severely dented the air passenger segment with the demand hitting a rock bottom in both domestic and international markets

The two waves of Covid-19 pandemic have severely dented the air passenger segment with the demand hitting a rock bottom in both domestic and international markets. However, amid these challenging times, the cargo segment came to the rescue of domestic airlines.

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A massive shift towards online buying, triggered by repeated lockdowns and restrictions on people’s movement since the first wave last year, and movement of Covid-19 vaccines, medicines and other related-essentials, led to an increased transportation of cargo with air cargo cornering a major share in it.

For instance, budget carrier SpiceJet – the only passenger airline in the country with a dedicated freighter fleet – saw its cargo revenue growing by 36% in the third quarter (October-December) of the last financial year. Its bigger rival IndiGo, which has been carrying in-seat cargo on its passenger aircraft along with cargo in their belly space, logged a 9.6% growth in cargo revenue in the previous fiscal.

Air cargo is carried in two modes – through dedicated cargo aircraft and the belly space of a passenger aircraft.

However last year, a week after the government announced the suspension of commercial passenger services and a large number of these planes were grounded, aviation safety regulator Directorate General Civil Aviation (DGCA) allowed passenger airlines to carry cargo within cabin and on-seats to help meet demand for more supplies.

In the post-pandemic period, air cargo traffic recovered faster than passenger traffic, according to credit ratings agency CRISIL. While passenger traffic for financial year (FY) 2020-21 was only 34%, cargo traffic was at 74% due to the rising demand for freight during the first wave of the pandemic led by rise in e-commerce demand and disrupted global supply chains necessitating quick transport by air.

Moreover, cargo volumes in this March crossed pre-Covid levels (February 2020). The faster recovery in the cargo volumes is owing to the trade of essential supplies, primarily in the pharmaceutical, medical equipment and agricultural produce sectors, according to another ratings agency, ICRA.

In the past FY (2016-2020), air cargo recorded a compounded annual growth rate (CAGR) of 5.3%, with domestic cargo recording a faster 6% CAGR over the same period, along with international cargo which has grown at 4.8% said CRISIL.

However, the share of international cargo continues to be higher at around 60%.

Starting FY2013-14, the cargo traffic had witnessed continued growth till FY2018-19, with increase in both domestic and international cargo traffic, although the growth rates had remained volatile, stated ICRA.

CRISIL said the proportion of domestic cargo carried as belly cargo by airlines is expected to be around 80-85% and the remaining 15-20% by dedicated cargo during FY2015-16 to FY2019-20.

The proportion of international cargo carried by foreign carriers will be 80-85% and remaining 15-20% by Indian carriers during FY2015-16 to FY2019-20.

The country did not have a policy for air cargo until January 2019, said former civil aviation minister Suresh Prabhu, adding that it was during his tenure that such a policy was announced to push cargo traffic amid the rapid growth in domestic passenger traffic.

“The idea was to provide a backup to the airlines in the eventuality of a slowdown in passenger traffic, which is exactly happening at present. I didn’t know Covid-19 was going to come one year later. So if you don’t prepare for the worst when the going is good, you always run into difficulties,” Prabhu told HT.

William Boulter, chief commercial officer at IndiGo, said that for the 2020-21 fiscal, the cargo revenue increased by 9.6%, compared to the previous year. “This has really supported IndiGo during this pandemic period when its operations have been severely impacted,” he said.

“The pandemic has given us the opportunity to look at new ways of doing business. We always find new ways to combat difficult situations. We entered the crisis with no freighters but deployed around 10 A320/ A321 passenger aircraft for cargo operations as our ‘CarGo-in-cabin’ charters,” added Boulter.

As per ICRA, lack of significant niche cargo (over dimensional and hazardous cargo and express shipments) and intense competition from airlines – which also carry cargo in aircraft belly – are expected to continue, restricting growth of domestic dedicated freighters in India. It also noted that airlines transport cargo at lower prices compared to dedicated freighters (given that airlines are not dependent on cargo and only operate it as an ancillary business).

Observing that the Indian airline space is highly competitive and while one passenger carrier has freighter operations and another has announced plans to induct cargo aircraft, CRISIL says more players entering the cargo market may replicate the passenger space where several airlines are competing for limited demand, leading to airlines resorting to price cuts to fill aircraft.

Indian airlines are structurally weak, and diversification into cargo in a changed situation seems unlikely. As the Covid-19 situation improves and capacity starts getting back into the market, belly cargo capacity would return to pre-Covid levels while the additional freight aircraft/cargo only aircraft would lead to excess capacity in the market.

Furthermore, dedicated freighters command higher yields globally. The cargo yields for UPS – a US-based cargo airline – for instance, are two or two-and-a-half times more over the past three years, compared to those for Blue Dart as yields for global freighters are based on end-to-end movement of express segment, whereas for domestic freighters, it is airport-to-airport movement for the most part, according to CRISIL.

“The airline continues studying the market, and as it was important not to be too influenced by the unusual demand caused by the shortage of passenger belly capacity, that will inevitably return, “ said Boulter, whose airline is set to induct four freighter aircraft into the fleet, starting next year.

“We have initiated a freighter programme and are in the process of sourcing four A321CEO aircraft. The A321P2F passenger-to-freighter conversion is the most efficient narrow-bodied freighter available, offering 24 container positions and supporting a payload of up to 27 tonnes. The delivery of our first freighter is expected in the first half of 2022,” he said.

As per CRISIL, air cargo is expected to grow at a CAGR of 8-10% over FY20-26, higher than the growth rate over FY2015-16 to 2019-20.

According to Boulter, Indian carriers currently transport only around 10% of total export and import air cargo.

“Clearly, this is not satisfactory, and IndiGo, with the acquisition of freighter aircraft and optimal use of belly space, will do its best to help redress the balance,” he said.