by Tim Culp

Strong earnings in Asia’s aviation sector, including records for Singapore Airlines Ltd and Cathay Pacific Airways Ltd, heralded a triumphant comeback after three brutal years of COVID-19. Yet dark clouds are gathering over a significant portion of the industry that should prompt airlines to reconsider their approach to one of the most controversial aspects of flying: baggage.

As travelers pull out their frequent-flyer cards for the first time in years, many have found that points have expired or travel patterns have changed. Securing these returnees should be a major goal of airline authorities. Fortunately, the confluence of two unrelated developments in aviation is opening up a cheaper way for them to do just that.

Passenger demand dropped by 99% in April 2020 as governments around the world closed their borders. The load factor, the proportion of available seats that were occupied, fell to 28, according to data compiled by the Association of Asia Pacific Airlines, whose members include Singapore Airlines, Cathay Pacific, Japan Airlines Co. and Taiwan’s China Airlines Ltd. % Done.

To deal with the lack of demand, airlines began parking their planes in the deserts of Australia (Alice Springs) and Spain (Ciudad Real) to cut costs. As of the end of 2020, Cathay had 92 passenger aircraft, accounting for 44% of its passenger fleet. As a result, utilization numbers were no longer declining across the region. In fact, according to AAPA data, they began to scale back as passenger capacity dropped to only 5% of peak levels seen at the start of the pandemic.

As passenger numbers plummeted, demand for cargo soared, peaking in December 2021, as consumers shopped online for gadgets and pandemic-related supplies.

These two divergent trends – fewer passengers, more cargo – were to become a major problem as approximately 50% of all air freight, including mail, travels via passenger aircraft – referred to as belly cargo. In normal times, Cathay Pacific and China Airlines get about a quarter of their revenue from carrying cargo rather than people. Relying on passenger flights for freight became a weakness during the pandemic as many of those aircraft were not available.

Airlines such as Cathay began converting passenger planes into hybrid freighter aircraft – called “pritors”. By the end of 2021, the Hong Kong-based airline had sold seats on seven of its Boeing Co. 777s. Freight revenue continued to increase across the industry. By March 2022, Singapore Airlines’ sales of cargo to double as compared to FY2019.

These trends are now opening up.

Falling shipping prices and the economic downturn have made air less competitive, leading to lower freight rates. But rather than passenger demand falling as well, as we would expect during tough economic times, people are increasingly engaging in “revenge travel”. Singapore Airlines’ net profit doubled to a record high in the June quarter, Cathay’s first-half operating income hit an all-time high, and China Airlines reported its strongest second-quarter earnings in 13 years.

While many aircraft have been dusted off and put back into service, passenger capacity in Asia is still around 30% below the level seen in January 2020, constraining airlines’ revenue potential. More will come online next year, including deliveries of new planes that were delayed due to the pandemic. This not only means extra seats for the growing number of people wanting to fly, which airlines want, but also a huge increase in freight capacity, even as demand continues to fall.

Cargo load factors across Asia returned to pre-Covid levels earlier this year. But now they are set to fall even further and there is a good chance that they will fall below 50% for the first time in a decade. There isn’t much airlines can do to meet demand other than cutting rates – Cathay’s cargo yield halved in the first half compared to a year earlier.

But there’s one thing left to try: Give up that free cargo space to passengers in the form of increased luggage allowance. To defray costs and to discourage excessive check-in baggage, carriers charge for excess baggage, which can cause delays in loading and unloading aircraft. Increasing baggage volume is not without cost – each item is handled by multiple people in multiple airports and countries. So instead of extending baggage allowances to all passengers, airlines can use them as loyalty rewards with aggressive marketing campaigns to encourage platinum-seeking members to book with them.

The world is enjoying a renaissance in passenger travel, but competition is tough and capacity is limited. Airlines have long known that loyalty is the key to staying afloat, and now is the time to deploy more of that one asset that is never in short supply.

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