Corona pushes AirBridgeCargo to reduce fleet faster

Though initial talks between the Volga-Dnepr Group and different financial as well as industrial partners to terminate leasing agreements for up to five 747s, already started in November last year, the recent Corona developments have increased the urgency to come to an agreement. The above-mentioned freighters include the units formerly operated by British carrier CargoLogic Air, an ally of the V-D Group of Airlines. CLA went out of business 3 weeks ago, returning the B747Fs to ABC.

In an interview in Kommersant this week, Tatiana Arslanova, AirBridge Cargo’s Senior VP Strategic Development, outlined AirBridgeCargo’s plans to secure survival over the coming months. “Currently there are 21 Boeing 747s, 12 An-124s and five IL-76s in operation. We want to return five Boeing 747s. The reduction of the fleet is likely to affect Atran Airlines (five Boeing 737 cargo aircraft) operating in the e-commerce market. The exact number of aircraft to be withdrawn will depend on a combination of returns or reduced pay, which will allow for more flexibility in the distribution of aircraft.”

A 6.3% decline in volume transportation in 2019
“We have been negotiating since the end of last year, when we realized that operating our fleet is too expensive in the current market realities.” By the end of 2019, AirBridgeCargo’s transported volume had shrunk by 6.3%, to 540.970 thousand tons. According to Arslanova, the reasons for this decrease were first and foremost the 14% drop in ABC’s main market: China-Europe and China-America, though she points out that ABC’s performance decline was slower than that of the market in general, given that the company had taken action early to adapt the route network to the customers’ changing requirements. Another reason for the decline, was the growing competition through the increasing number of passenger airlines offering low belly cargo rates, for which cargo is simply a nice-to-have additional income to the passenger tickets already covering the cost of the flight.

On the one hand, now many of these passenger bellies are temporarily unavailable as global routes are limited or grounded altogether – at least until the end of April. On the other hand, air cargo market experts quote the monthly leasing costs for a B747-8F at “starting at USD 1 million,” and a minimum USD 5 million saving per month would go some way towards bridging the circa USD 110-115 million losses expected once the Volga-Dnepr Group’s financial statement for 2019 is published.

Picking up, but impossible to predict full impact
Though flights from Europe and the USA to Beijing and Shanghai are resuming, and Chengdu and Zhengzhou are also ready to commence now that factory production is starting up again, and despite cargo rates having generally increased by 20-30% due to the limited capacities, AirBridgeCargo states that, like other airlines, around 30% of its fleet is on the ground. “Demand has not yet rebounded; all economic indices are falling. Today we have 30% of the fleet on the ground, and we are looking at a proportional reduction in capacity: to give up part of the fleet or reduce the cost of its operation. We understand that the production volumes will not reach the level that was before the coronavirus, which means that the freight flow will not fully recover. Our task now is to find the right balance.” By reducing the fleet by 30%, ABC expects “to confidently come to a plus, given the current market situation” yet points out that  it is unclear how long the coronavirus situation will go on for, and that forecasts point to economic depression as a result, coming from an already weak 2019.

Force majeure situation
"Coronavirus gave us additional arguments that we are not the only ones who cannot cope with the situation. In times of market downturns, declining traffic volumes and growing competition, planes are depreciating […]. We were among the first to come to the lessors with the announcement of force majeure. The exact number of aircraft that will be withdrawn will depend on the combination of the return or the transition to a reduced payment,” Arslanova stated. The decisions will be individually based on the termination conditions (perhaps a reduction in rent instead of total termination), the aircraft in question and its age and technical condition.

Terminations possible?
Speaking to Kommersant, Boris Rybak, who heads the intelligence platform, Infomost, confirmed that leased aircraft "can always be returned," but the agreement termination may incur a charge which, according to Aleksey Lanetsky, General Director of Friendly Avia Support, could be as much as the leasing payments for six months or even a year, depending on whether the lessor has another client to whom the aircraft can be transferred. "Today it is hardly possible to find such client." Yet, the “force majeure” situation currently could work in ABC’s favor when it comes agreeing the termination terms.  

Hang in there!
Boris Rybak predicts that ABC has good chances soon, given the fact that 30% of the world’s products are made in China, production is picking up and "Very soon the warehouses will be empty, and large retail chains will be ready to pay very big money for transportation to fill them again by autumn. AirBridgeCargo only has to be patien.” Lanetsky underlines this: he believes that those airlines that survive to autumn, will be able to make very good money on the rise of the air cargo market and the growth of tariffs.

Light on the horizon
Arslanova draws attention to the fact that ABC’s charter business is doing well, while regular cargo business is currently in its traditional low season (October to December is high season). That said, despite corona, there were a couple of slight increases around Valentine’s Day (14FEB20) and International Women’s Day (08MAR20), when flowers were being flown from Ecuador and Europe.

Brigitte Gledhill

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