What Azul Brazilian Airlines Can Teach U.S. Airlines About Cargo

As U.S. airlines prepare to report second-quarter earnings, cargo is providing a rare bright spot. But cargo is a tough business. It’s locked into old methods, dominated by entrenched carriers trying to fight off Amazon Air’s
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incursion and trying to adjust as a global pandemic creates reduced demand and capacity that has been reduced even more.

Azul Brazilian Airlines is trying to make the most of the new environment and may have lessons to offer to larger passenger carriers.

In the U.S., airline second-quarter earnings season will kick off Tuesday, when Delta is set to report. Total revenue for U.S. carriers is likely to fall about 90%.  

Cargo revenue will likely provide about 5% of total revenue, up from between 1% and 2% in 2019, but hardly sufficient to make a dent in the overall revenue decline, says Cowen & Co. analyst Helane Becker. “Cargo is not their core business,” Becker said, in an email.

Normally, the five biggest U.S. carriers use only about 20% of belly space for passenger cargo, said Milind Tavshikar, founder of SmartKargo, a Cambridge, Mass.-based cargo software provider. The rest must be sold to cargo shippers.

At American Airlines
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, for instance, “In 2019, the total capacity used for bags was right at 19%,” said American spokeswoman Kristin Rademacher. “In March – June of this year, that number has dropped to 12% due to the downturn in demand due to Covid,” she said.

Azul Brazilian Airlines, Brazil’s third-largest carrier, implemented a SmartKargo solution for domestic e-commerce in January. The coronavirus crisis makes it challenging to ascertain the impact, but Douglas Pacheco, Azul cargo planning manager, said cargo tonnage is increasing month to month.

Azul’s overall cargo tonnage diminished 43% in the first six months of the year, better than the 54% decline in overall tonnage for the Brazilian cargo industry. Azul’s June tonnage was 40% higher than May’s.

The principal change, Pacheco said, is that Azul now provides the “first-mile, last-mile” service (comparable to Uber for cargo) that passenger airlines have historically eschewed. Additionally, SmartKargo provides an app for pricing and tracking loads to an industry that sometimes still relies on paper waybills.

“If you limit yourself to air (transport) from one airport to another, your business will be small,” Pacheco said. “When you offer a full logistical service, picking up at houses, then air transfer, then delivery to houses, you can fight your competitors.”

Already, Amazon, FedEx
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and UPS all provide first mile, last mile coverage. “They have all the money in the world,” Pacheco said. To compete, passenger carriers “have to re-invent, and not be limited to air. Otherwise, they will always be seen as ‘I (accept) cargo at the terminal and give it back at the other terminal.”

One more key to Azul’s cargo success is that Manaus, Brazil’s seventh-largest city with a population of about 2.2 million, is tough to reach by road, making Sao Paulo-Manaus a busy air cargo route, connecting cities about 1,700 miles apart. Azul serves the market with daily Boeing 737 passenger service and Airbus A-330 cargo service four times a week.

While U.S. carriers fill about 20% of their cargo bins with passenger baggage, leaving 80% available for commercial cargo Pacheco said the number is higher in Brazil, about 50% on average with wide variations between markets. “Brazilians carry more luggage with them,” he said. In particular, on flights to Manaus, many passengers carry baggage, leaving limited space for e-commerce shipping. “Cargo holds are completely full,” Pacheco said. “Demand is amazing.”

Globally, while global air cargo shipments showed a slight gain in May, “capacity remains unable to meet demand as a result of the loss of belly cargo operations on passenger aircraft that have been parked,” the International Air Traffic Association said last week.

Aviation consultant Rob Britton, a consultant to SmartKargo, said that while passenger carriers may have an opportunity, “because cargo revenue is a relatively small share of total revenue, cargo people get a very small part of the IT budget, so the thing perpetuates. Low revenue leads to low budget leads to not investing in software on the cargo side.”

On the passenger side, yield management departments use sophisticated algorithms to boost revenue per available seat mile. But on the cargo side, Britton said, “the tools are from the stone age.” Hence the paper waybills.

SmartKargo has about $7.5 million in annual revenue and a client list of 15 airlines. Founder Tavshikar said he began looking into air cargo as a student at MIT Sloan School of Management.

 “Airlines are a very old industry and ecommerce is the new industry,” he said. “Amazon Air is an example of how e-commerce and airlines intersect. (It) built an airline. In Brazil, Azul has done same thing.”