With the ongoing threat of COVID-19, airlines have seen a precipitous drop in passenger travel and are focused on the possibility of a voluntary or mandated halt to U.S. passenger flights. In response, major carriers are finding ways to keep flying during the global health crisis.
American Airlines and United Airlines, for example, have offered their passenger aircraft for charter cargo flights. Even in normal times, the lower deck of passenger aircraft carries cargo to maximize the utilization of space. With the sharp scale-back in passenger travel, however, the companies are offering dedicated cargo runs to deploy their assets and replace revenue while helping to keep supply chains moving and facilitate the shipment of essential goods.
Attention All Passengers:
Many air travelers don’t realize that it’s not just their own and fellow travelers’ luggage that checked in for their flights. The big passenger airlines generally have a lot of available space in their bellies. With operating costs covered by passenger tickets, the airlines often generate supplemental revenue by carrying packages, freight or mail for the U.S. postal service on board passenger flights.
In turn, cargo shippers secure relatively cheap space and can get goods close to their ultimate destination given the dense network of airports serving passenger flights around the world. Even logistics players like UPS and FedEx partner with passenger airlines, particularly in emerging markets where trade volumes may not justify deployment of their own regularly scheduled aircraft. Technology tools enable precise coordination to ensure goods off-loaded from a freighter aircraft make their departure on a passenger aircraft and vice versa.
The trend is taking off. The International Air Transport Association (IATA) has been cited as estimating the split between cargo carried by passenger airlines and freighter aircraft at 60/40 and forecasts that will grow to 70/30 in the coming years.
In 2018, American Airlines moved 2 billion pounds of cargo and raised $1 billion of cargo revenue despite not operating cargo aircraft. Airlines based in Asia such as Korean Air and Cathay Pacific do have freight fleets, but still carry more than half of their cargo in the bellies of passenger aircraft. McKinsey has noted that with the expansion of the major Middle Eastern passenger carriers and new aircraft designs with large belly-cargo configurations, the belly capacity of Middle Eastern carriers flying into Europe in 2016 equaled the capacity of more than 100 weekly Boeing 777 freighter flights.
“Open Skies” agreements governing the transport of people, pallets and packages are designed to enable market forces to guide decision-making about routes, capacity, and pricing. Critically, Open Skies agreements also provide both passenger and cargo flights unlimited market access to partner markets and the right to fly to all intermediate and beyond points. The United States now has Open Skies agreements with over 100 partners around the world, including both bilateral agreements and two multilateral accords. So-called fifth freedom rights – also called beyond rights – are a core element of Open Skies agreements, permitting a carrier to fly to a second country, offload passengers and cargo, pick up new passengers and cargo, and continue on to a third country.
While Open Skies agreements provide benefits to both passenger and cargo carriers, cargo carriers to a large extent fly international packages and freight themselves, while passenger carriers utilize code share agreements and worldwide alliances. The different business models and complex tie-ups can produce a divergence in interests. A prominent example was the dispute between the “Big Three” U.S. passenger carriers – American, Delta, and United – and the governments of the United Arab Emirates (UAE) and Qatar, who the carriers alleged were providing billions of dollars in subsidies and other benefits to their state-owned carriers: Emirates, Etihad, and Qatar Airways. Among other serious concerns, this raised red flags about subsidized fifth freedom operations (e.g., Newark-Athens-Dubai) and the potential for their expansion, negatively impacting U.S. passenger airline service to the Middle East and India.
U.S. Airlines for Open Skies, a coalition that included FedEx, Atlas Air, the Cargo Airline Association and JetBlue (which has a code-sharing agreement with Emirates), opposed the call of the Big Three for restricted Gulf fifth freedom rights (a violation of the U.S.-UAE and U.S.-Qatar Open Skies agreements if restricted involuntarily). The cargo carriers expressed concern that challenges to the Open Skies accords with Qatar and the UAE put at risk the fifth freedom rights that cargo carriers depend on for their complex global networks. They discounted the view that the U.S. could breach passenger fifth freedom rights without setting a dangerous precedent for the equivalent all-cargo rights.
The dispute was ultimately resolved in 2018 through U.S. government agreements with the Qatar and UAE governments under which the parties acknowledged that government subsidies adversely affect competition and committed to financial transparency and business on commercial terms.
In the Upright Position for Takeoff
As passenger carriers step up to support cargo at this extraordinary time, you may not know that from 1997-2001, UPS also ran passenger operations. For a period of years, the company had contracts with tour companies and cruise lines to offer vacation flights as well as charters for college and pro sports teams, politicians, the press corps and others. In under four hours, a 727-100QC could be ready to carry 113 passengers. See here for the UPS Quick Change process.
Air cargo capacity is critical at this time of crisis and the airlines’ role is deemed a critical infrastructure industry by the Centers for Disease Control and Prevention (CDC). American Airlines reports that its recent cargo-only charter carried medical supplies, mail for active U.S. military, and telecommunications equipment and electronics to support people working from home. United’s wide-body charter cargo flights are likewise getting critical goods into the hands of businesses and people in need. Stakeholders across the cargo and passenger industries look forward to a post-pandemic era where all can return to their respective roles in transporting people and cargo globally, described well by United’s slogan “Connecting People. Uniting the World.”