Freight-jumbos in action with a help of Rolls-Royce, Pratt and Whitney and General Electric.

AIR TRANSPORT: QUARTERLY REPORT NO.19 2nd QUARTER 2008 (April to June)

1 OVERVIEW...... 2

2. HIGHLIGHTS AND KEY DEVELOPMENTS...... 3 2.1 REGULATORY...... 3 2.2 ...... 4 2.3 AIRPORTS...... 12 2.4 SAFETY AND SECURITY ...... 16 2.5 ATM...... 17 2.6 MANUFACTURERS ...... 18 2.7 THE ENVIRONMENT ...... 20 3. AIR CARGO ...... 21 3.1 INTRODUCTION...... 21 3.2 AIR CARGO TRAFFIC ...... 21 3.3 AIR CARGO OPERATORS...... 25 3.4 REGULATORY TRENDS...... 27 3.5 CARGO FINANCIAL RESULTS...... 28 3.6 AIRPORTS...... 29 3.7 AIRCRAFT...... 30

Disclaimer and copyright: This report has been carried out for the Directorate-General for Energy and Transport in the European Commission and expresses the opinion of the organisation undertaking the contract TREN/05/MD/S07.52077. These views have not been adopted or in any way approved by the European Commission and should not be relied upon as a statement of the European Commission's or the Transport and Energy DG's views. The European Commission does not guarantee the accuracy of the information given in the report, nor does it accept responsibility for any use made thereof. Copyright in this report is held by the European Communities. Persons wishing to use the contents of this report (in whole or in part) for purposes other than their personal use are invited to submit a written request to the following address: European Commission - DG Energy and Transport - Library (DM28, 0/36) - B-1049 e-mail (http://ec.europa.eu/dgs/energy_transport/contact/index_en.htm)

Cranfield University: Quarterly Report Q2 2008 for DG TREN 1 1 Overview

Benin, Burkina Faso, Guinea-Bissau, , Ivory Coast, Mali, , Niger, Senegal, and Togo were added to the list of states with horizontal air transport agreements with the EU. These agreements remove nationality restrictions in each country’s bilateral air services agreements with EU states. The European network of air services continued to expand, although the rate of expansion slowed from that seen between the second quarters of 2006 and 2007. Over the two years from 2006, the number of cross-border routes served increased by one-quarter, and domestic routes by around 10%. However, between 2007 and 2008 the average weekly frequency of service on both domestic and cross-border routes fell. LCCs have been significant players in the creation of new routes, their reduced cost- base allowing them to enter point-to-point markets which would not be viable for network carriers, or full-service regionals. alone was responsible for more than one in every five of the routes new to the international network in 2008. A result of this increased activity in thin markets is the increasing number of routes operated by a single carrier. Of the 727 airport-pairs with new air services in 2008, only nineteen attracted more than one . AEA airlines reported total passenger numbers up by 1.6% in the three months to the end of June 2008. Increases in traffic did not match changes in capacity provided by many of the association’s member airlines, resulting in a deterioration in average load factors relative to the previous year’s second quarter. Overall, AEA load-factors were down by 1.8 points, reflecting the 4% increase in capacity against a growth in RPK of 1.6 percent. Growth in terms of passenger numbers was strong between Europe and the Middle East (up 10.9%), but disappointing on the North Atlantic, where a 2.5% increase in capacity was combined with slightly decreasing passenger numbers. Among the largest European carriers, , Air France and were the top performers in terms of RPK. EU network carrier operating results for the latest quarter were mixed. While both British Airways and Lufthansa improved their results, Air France-KLM, Iberia and SAS Group moved from profit to loss. Alitalia’s operating loss deteriorated by USD73m, and Austrian’s loss also increased. Among LCC, while Ryanair posted positive results, , SkyEurope and all generated operating losses for the quarter. March 2008 saw ACI’s European airports year-on-year passenger throughput up over five percent, above the 4.2% increase recorded by the association’s world-wide airports. Among the world’s very largest airports, there were some significant falls in traffic, particularly in the USA where recession has hit the domestic market. Among European majors, Heathrow recorded a very small drop in passenger throughput, driven by weakness in its domestic services.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 2 2. Highlights and key developments

2.1 Regulatory In April, the Commission adopted a Communication [COM (2008) 227] on the application of the slot allocation Regulation, clarifying a number of issues with a view to ensuring better implementation of existing rules and improving the use of scarce capacity at congested Community airports. A key change in policy is the acceptance of the “secondary trading” of slots between air carriers. The rules with respect to the independence of slot co-ordinators, new entry and the exchanging of slots are explained, and the need for better cooperation between slot co-ordinators emphasised. In April, the Commission initialled a “horizontal” agreement with India removing nationality restrictions in the bilateral air services agreements with twenty-six EU Member States. In May, the Commission initialled a “horizontal” agreement with the eight Member States of the Economic and Monetary Union of Western Africa (UEMOA: Benin, Burkina Faso, Guinea-Bissau, Ivory Coast, Mali, Niger, Senegal, and Togo). The agreement brings several provisions in the 47 bilateral air services agreements between EU and UMEOA Member States into conformity with EU law. Also in May, the Commission initialled a “horizontal” agreement with Mexico removing nationality restrictions in the bilateral air services agreements with twelve EU Member States. The agreement with Mexico is the thirty-seventh “horizontal” agreement to have been negotiated by the Commission, resulting in some 750 bilateral air services agreements with third countries now having been brought into conformity with EU law. In June, the Transport Council authorised the Commission to open negotiations with Australia and New Zealand on comprehensive air transport agreements. Both countries have already signed “horizontal” agreements with the EU. In June, following complaints from a competing carrier and an association of airlines, the Commission launched an investigation into public financing received by Frankfurt Hahn airport from the Hessen and Rheinland-Pfalz regional authorities, and from its publicly owned parent company, Fraport AG. The Commission has also decided to scrutinise the airport charges applicable at Frankfurt Hahn, as well as the individual contracts the airport has concluded with Ryanair. In June, the Commission approved assistance of €84 million for the construction of a new airport at Lublin in Poland from local and national government and the European Regional Development Fund. It also gave its approval to public funding of €1.7 million for upgrading aircraft parking stands and taxiways at Gdansk airport. In April, the Commission decided not to raise any objections to the public financing of infrastructure development at Lodz airport. In May, the Commission withdrew its intention to set legal limits across Europe on the size of carry-on cabin baggage (EC Regulation 358/2008). In April, the Commission adopted its seventh update of the blacklist of air carriers banned from EU airspace.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 3 2.2 Airlines

2.2.1 Capacity and routes Focussing on routes operated by scheduled air carriers within and between European states (EU-27 plus Iceland, and Switzerland) at the end of the second quarter of the three years 2006-08, it is clear that the very high growth rate in the number of active routes seen over the first year slowed somewhat over the twelve month between Q2 of 2007 and 2008. The chart below is indexed on 2006 capacity, and shows in relative terms the number routes operated and the flights scheduled.

Routes operated within Europe, Q2 2006-2008

Avg Int freq/w eek/route 2008

Avg Dom freq/w eek/route 2007 2006

Int flights Int routes

Dom flights Dom routes 80 90 100 110 120 130 indexed 2006=100 The cross-border market saw the greatest increase in capacity in each year, with number of airport-pair routes operated up over 25% between 2006 and 2008, a period which witnessed expansion of the EU from EU25 to EU27. The analysis includes the EU27 states for all three years. The number of flights scheduled also increased, but at a significantly lower rate, causing the average frequency of service per route in 2008 to drop to around 90% of the 2006 value. Of the 620 routes new to the international network in 2008, most were operated by LCC, with Ryanair responsible for 131 of them. Domestic routes increased in number over both twelve-month periods, but the number of domestic flights performed dropped slightly between 2007 and 2008. The drop in average frequency of service on both international and domestic services is the manifestation of both the increased number of new, thin, routes; the pressure of competition from high-speed rail and the increased cooperation of rail and air companies in providing feed to major hubs as airlines seek to free slots for long-haul expansion. As an example of the impact of improvements in the European rail network, by Q2 2008, frequencies of service on Europe’s two busiest routes, between London LHR and CDG and between and Madrid, had dropped over two years by more than 35% and 12% respectively. A further manifestation of initiatives in launching new intra-European routes is the increasing number operated by single carriers. Of the total of 727 airport-pairs (domestic and international) with air services operated in 2008 but not in either of the two previous years, only nineteen had competitor airlines. This contributed to an

Cranfield University: Quarterly Report Q2 2008 for DG TREN 4 increase in single carrier routes between 2006 and 2008 of one percentage point to 76%. The proportion of duopoly routes remained constant, the more heavily competed routes with three or more carriers gave up a percentage point.

Number of carriers on European routes

one 80.0% two three or more 60.0%

40.0%

20.0%

0.0% 2006 2007 2008

2.2.2 Charter carrier news Airlines, a new entrant carrier based in the Netherlands, commenced charter operations to Turkey in June, using an Airbus A320. Aside from operating charter flights on behalf of tour operators, the carrier intends to engage in business to business all-premium operations and wet leasing. TUI Travel is to cut its in-house aircraft fleet over the next twelve months, operating six fewer aircraft this coming winter and ten fewer by summer 2009, the latter reduction representing a 12% cut in capacity compared to this summer. UK based charter carriers, and First Choice Airways, owned by TUI Travel are to merge and operate under the Thomson Airways brand from May of next year. MyTravel Airways A/S, based in Denmark, was rebranded as Thomas Cook Airlines Scandinavia in May 2008. Slovakian charter carrier, , which acquired its first Boeing 737 aircraft at the beginning of 2008, is anticipating delivery of a further two such aircraft this quarter. The company had previously performed charter flights with Cessna Citation executive jets.

2.2.3 Traffic Passenger traffic carried by AEA airlines in the three months to the end of June 2008 was up only 1.6 percent on the same period 2007. A large proportion of the ninety- four million passengers was carried by AEA-member airlines was on intra-European sectors (domestic and cross-border), although the longer haul services accounted for the majority of RPK. 27% total RPK were generated on the North Atlantic, while air services between Europe and Far East/Australia-Pacific routes accounted for just under one-fifth of AEA airlines’ RPK.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 5 It is notable that growth in passenger traffic fell off through each of the three months, from two percent in April to just one-third of a percent in June. RPK growth matched the downward trend, reversing April’s 1.5% increase to a 1.6% fall in June

Scheduled services of AEA members, April-June, 2008

Passengers ASK RPK Load Factor

thousands millions millions % Domestic 28,058 21,870 14,865 68.0% Cross-border Europe 45,962 69,534 48,758 70.1% Europe / N Africa Mid East 3,280 12,321 8,969 72.8% North Atlantic 7,771 65,423 53,269 81.4% South/Mid Atlantic 2,999 30,740 24,408 79.4% Europe/rest Africa 1,885 16,556 12,216 73.8% Europe /Far East, Australasia 4,544 46,821 36,552 78.1% Other 71 296 195 TOTAL 94,570 263,560 199,232 75.6% Source:AEA

AEA carriers increased capacity (ASK) on cross-border European networks by just under five percent, but on domestic routes capacity fell by four percent. However, domestic RPK fell by close to 7%, and cross-border RPK failed to match the increases in capacity provided, so that load-factors deteriorated in the European market.

AEA members, April– June,2008, change over same period 2007

Passengers ASK RPK Load Factor

thousands millions millions change (points) Domestic -3.1% -4.0% -6.8% -2.1 Cross-border Europe 3.8% 4.8% 2.9% -1.3 Europe / N Africa Mid East 10.9% 4.9% 6.0% 0.7 North Atlantic -0.3% 2.5% 0.2% -1.9 South/Mid Atlantic 6.8% 11.1% 7.0% -3.0 Europe/rest Africa 5.8% 5.2% 4.1% -0.8 Europe /Far East, Australasia 2.0% 3.4% 0.1% -2.6

TOTAL 1.6% 4.0% 1.6% -1.8 Source: AEA

Only the Middle East markets escaped the pattern of load-factors drifting lower as additional capacity was created. Overall, average load-factors for AEA carriers were down by 1.8%. Among AEA member airlines, Lufthansa was top performer in terms of RPK generation in Q2 2008, up 5% over a year earlier. The carrier’s capacity increased by 6% over the same period, bringing its average load factor down by just under one percentage point. In absolute terms, Lufthansa was far ahead of the other airlines, increasing RPK by 1.6 billion over the three months, one billion RPK above the increase recorded by its rival for top position, Air France. Alitalia, challenged on a number of fronts, recorded a significant drop in RPK, down by 2.2 billion, or twenty- three percent below 2007’s level. BA’s RPK total was hit by the loss of a number of

Cranfield University: Quarterly Report Q2 2008 for DG TREN 6 routes to Easyjet, when the LCC bought GB Airways, a BA franchise partner. Austrian’s network capacity grew only slightly and was matched by a disproportionate increase in RPK resulting in only a small improvement in average load-factor.

The largest AEA members, April-June, RPK change 2007/2008

Lufthansa

Air France

British

KLM

Iberia

Virgin Atlantic

SAS

Alitalia 2008 2007 Austrian RPK millions 0 10,000 20,000 30,000

Source: AEA

Virgin’s expanded long-haul network continued to mature, as the airline recorded RPK growth (up 4%) above the levels of capacity increase, boosting the average load- factor on its services by two points, to over 77%. IATA, representing 230 of the world’s scheduled carriers, also records a slowing of international passenger demand in the second quarter of 2008. The only region to report improved demand between May and June was Africa, where the rate of annual decline in demand improved slightly. North American carriers saw the most severe drop off in demand, down from 8.2% growth recorded in May, to 4.4% in June. For European airlines, IATA recorded growth rates down by a half, falling from 4.1% in May to 2.1% in June. Overall, world demand slowed from May’s six percent increase to 3.8% the following month. Average load factors fell worldwide by over one percentage point from 78.8% in June 2007 to 77.6% in June 2008.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 7 Changes in demand 2007/08 for international passenger air transport, by region

15%

May June 12%

9%

6%

3%

Year-on-year changes RPK in 0%

-3% Africa Asia/Pacific Europe Latin Middle North Industry Am erica East Am erica Source: IATA

Air freight carried in the three months was up over two percent on Q2 2007. The only negative performance recorded was in the intra-European markets, where domestic freight was down 3.6% and cross-border FTK fell almost two percent. The much larger market of the North Atlantic (almost one-third of the AEA total freight tonne- kilometres) improved significantly, in part reflecting the expanding north-Atlantic market of major freight carriers such as Lufthansa, while TAP’s expanding network to contributed to the seven percent increase in freight across the south Atlantic. However, a similar picture to that seen in passenger demand suggests that global economic conditions are reflected in a weakening of demand for air freight through the quarter. IATA reports international freight (FTK) declined by almost one percent, year-on-year, in June 2008, the first negative growth recorded in this market since May 2005.

Air freight AEA members, April-June 2008, with change over same period 2007

Freight (TFTK)

millions change Domestic 29 -3.6% Cross-border Europe 182 -1.7% Europe / N Africa Mid East 294 2.8% North Atlantic 2,747 3.4% South/Mid Atlantic 1,083 6.9% Europe/rest Africa 865 4.8% Europe /Far East, Australasia 4,317 0.3%

TOTAL 9,516 2.3% Source: AEA

Cranfield University: Quarterly Report Q2 2008 for DG TREN 8 2.2.4 Financial

European carriers

Financial performance of major EU carriers for January to March 2008

Operating Revenues Net result Op.margin Net margin result (USDm) (USDm) % % (USDm)

Air France-KLM 8,714 -70 -828 -0.8 -9.5 Alitalia 1,615 -246 -328 -15.2 -20.3 803 -64 -92 -8.0 -11.5 British Airways 4,016 258 101 6.4 2.5 Finnair 881 18 8 2.0 0.9 Iberia 1,987 -43 -1 -2.2 -0.1 8,535 287 87 3.4 1.0 Ryanair 883 46 39 5.3 4.4 SAS Group 2,084 -142 -184 -6.8 -8.8 Swiss 1,171 87 n/a 7.4 n/a Total above 30,689 131 -1,198 0.4 -4.1 Source: Airline Business, April 2008 and airline annual reports; exchange rates averaged for calendar year from OANDA.com

Comparisons of EU network carrier operating results for the latest quarter with the same quarter in 2007 were mixed. Even though Easter fell in the latest quarter but not in the same one in 2007, Air France-KLM moved from profit to loss, as did the SAS Group and Iberia. Both British Airways and Lufthansa, on the other hand, considerably improved their results. Alitalia’s operating loss deteriorated by USD73m, and Austrian’s loss also increased. Air France-KLM’s net loss included a sizeable provision for ant-trust fines. In addition to the above results, LCC Air Berlin reported an operating loss of USD103m in the first quarter of 2008 on revenues of USD1 billion, giving them a margin of -6.1%. SkyEurope fared worse with operating losses of USD33m on revenues of only USD73m. Vueling generated an operating margin of -36% on quarterly revenues of USD135m.

USA and Asia network carriers The US majors reported an operating loss of USD1.1 billion for the first quarter of 2008 compared to a profit of USD758m in 2007. Revenues were up by 8.9% and the operating margin deteriorated by almost 7% points to -4%. The net loss widened from USD322 million to USD11 billion, mainly due to the provisions made by Northwest and Delta (or USD1.7 billion before provisions, as shown in the following table). Delta made a non-cash deduction of USD6.1 billion to account for loss of goodwill or impairment of assets. Northwest allowance for loss of goodwill was USD3.9 billion. Southwest was the only major to produce an operating profit which was almost unchanged from the previous quarter.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 9 Financial performance of major US carriers January to March, 2008 Operating Revenues Net result* Op.margin Net margin result (USDm) (USDm) % % (USDm) Alaska Airlines 840 -50 -36 -6.0 -4.3 American Airlines 5,697 -187 -328 -3.3 -5.8 Continental 3,570 -66 -85 -1.8 -2.4 Delta Air Lines 4,766 -145 -274 -3.0 -5.7 Northwest 3,127 -119 -191 -3.8 -6.1 UAL/United 4,711 -441 -542 -9.4 -11.5 US Airways 2,840 -196 -239 -6.9 -8.4 Southwest 2,530 88 43 3.5 1.7 JetBlue 816 17 -13 2.1 -1.6 AirTran 596 35 2 5.9 0.3 Total above 29,493 -1,064 -1,663 -3.6 -5.6 * excluding reorganisation items Source: Airline Filings

AirTran and JetBlue were also operating profitably. American Airlines experienced a large reversal from a profit of USD248m in 2007 to a loss of USD187m for the latest quarter.

Financial performance of major Asian carriers January to March, 2008 Operating Revenues Net result* Op.margin Net margin result (USDm) (USDm) % % (USDm) AirAsia 167 40 50 24.0 29.9 Air 1,797 155 142 8.6 7.9 China Airlines 996 -78 -95 -7.8 -9.5 EVA Air 765 -61 -74 -8.0 -9.7 Japan Airlines 5,120 72 -34 1.4 -0.7 Korean Air 2,362 20 -340 0.8 -14.4 Malaysia Airlines 1,142 41 38 3.6 3.3 PIA 285 -56 -88 -19.6 -30.9 Airlines 2,940 335 393 11.4 13.4 Thai Airways 1,768 153 71 8.7 4.0 Total above 17,342 621 63 3.6 0.4

Almost all the major Asian network carriers made positive but lower operating results for the first quarter of 2008, with an average operating margin of 3.6%. The exceptions the two Taiwan based carriers: China Airlines moved from a positive margin of 2.3% to a negative one of -7.8%, and EVA Air reported a larger operating loss than in the previous quarter. International’s operating loss also widened, giving it a margin of -20%. Of the big three Chinese airlines, only Air China had reported for the first quarter of 2008, showing improved results and an operating margin up from 4.9% to 8.6%.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 10 Key developments and announcements- network carriers World average jet kerosene prices in US dollars increased by 9.4% in April 2008 compared to the previous month, followed by a small rise of 1.7% in May (Airline Business, July 2008). The average jet kerosene spot price in May 2008 was 352.4 US cents per US gallon, up by 74% from that of May 2007. Euro based airlines had little help from currency movements over the quarter to end June 2008, with the €/$ rate scarcely changed, although the €/$ rate at the end of May 2008 was 16% higher than at the end of May 2007. Some airlines increased fuel surcharges in both May and June 2008, and British Airways introduced differential surcharges according to cabin class from mid-June. Etihad and Kingfisher were reported to be negotiating to gain access to more take-off and landing slots at London Heathrow. It is thought that Etihad has reached agreement with Luxair to lease two pairs of slots for five years for £9m (USD17.7m). Luxair also has a put option to sell the slots to Etihad at a pre-agreed price, and Etihad has a right of first refusal on a future sale. Luxair is expected to announce that it is withdrawing from Heathrow and will concentrate its services at London City airport. It is also reported that Kingfisher has obtained an initial pair of slots from the Heathrow co-ordinator, but is negotiating to take over a second pair of slots from KLM that plans to suspend its Rotterdam-Heathrow service in order to lease out the slots.

Acquisitions and disposals: The Italian government said that the €300 million emergency funding granted to Alitalia should keep it flying for another year. The statement was made in a document accompanying a decree to convert the loan into capital. The European Commission has warned that 's €300 million bridge loan may be violating EU competition rules on state aid if it cannot be proven the airline would have been able to obtain the money from a commercial lender. The European Commission set a deadline for to supply Brussels information on the loan. Air Berlin announced there had been a further, two-month extension of the time required for the German Bundeskartellamt (Federal Cartel Office) to complete its primary evaluation process of the potential transaction with . Air Berlin subsequently withdrew from the deal.

Labour In June, the pilots’ union at Lufthansa CityLine (Vereinigung Cockpit) held a ballot on indefinite strike action. A shortage stoppage occurred on 3rd June, and followed a previous one in May (and further action was planned for July). Finnair approved a deal with its pilots unions on 19 June, ending an overtime ban, increasing efficiency and giving the pilots a 3.9% salary increase. Finnair also planned to cut around 500 jobs in order to offset surging fuel costs and a sharp fall in demand.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 11 2.3 Airports

2.3.1 Traffic Europe’s ACI member airports increased passenger throughput by over five percent in March 2008, compared with March 2007. This represented the greatest regional increase among ACI airports, slightly above growth recorded in the Asia Pacific region, and more than one point above the worldwide ACI growth of 4.2%. North American airports continued to show the weakest growth figures.

March 2008 traffic change over March 2007 at ACI airports worldwide

6.2% 5.3% 4.8% 4.2%

1.3% 0.6% 1.4%

Passengers Freight

-5.6%

Asia Pacific Europe North America Total ACI

Source: ACI International

In terms of freight handled by the same airports, the North America region’s weak performance balanced out the strong growth seen at Asia Pacific airports (up 6%), leaving the worldwide ACI result up by just over one half of a percent with the help of 1.3% growth in freight at European airports. Viewed from the perspective of total passenger traffic, only Europe’s very largest hubs have places in the ranking of the world’s busiest airports. The following chart shows the world’s top thirty airports ranked by passenger throughput in March 2008, together with the change over March 2007. The distribution is dominated by US airports, although these are the ones which recorded the largest falls in traffic. This relatively weak performance among US airports appears to be a consequence of a weakening of the domestic market: for example, while Los Angles recorded an eleven percent increase in international traffic, its domestic throughput (some three times the international component of traffic) fell by six percent.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 12 The world’s 30 busiest airports: passenger traffic March 2008, and change over previous year

8,000,000

6,000,000

4,000,000

2,000,000

0 Paris CDG Paris Dubai DXB Dubai Tokyo NRT Tokyo Tokyo HND Atlanta ATL Atlanta Beijing PEK Beijing Madrid MADMadrid Detroit DTW Detroit Denver DEN Sydney SYD Toronto YYZ Houston IAH London LHR Phoenix PHX Phoenix Newark EWR Orlando MCO Orlando Chicago ORD Bangkok BKK Charlotte CLT Charlotte Frankfurt FRA New YorkJFK Singapore SIN Las Vegas LAS HKG Kong Hong Guangzhou CAN Amsterdam AMS Amsterdam Los Angeles LAX Minneapolis MSP San Francisco SFO Francisco San Dallas/Ft Worth DFW Worth Dallas/Ft 20%

15%

10%

5%

0%

change over March 2007 -5%

-10% CO CO IAH IAH SIN SIN WR WR JFK JFK ATL ATL LAX LAX CLT CLT LAS LAS YYZ YYZ LHR LHR FRA FRA PEK PEK BKK PHX PHX DXB DXB NRT NRT SFO SFO SYD SYD DEN DEN CAN CAN HND HND HKG HKG AMS AMS MSP MSP ORD ORD CDG MAD DFW DFW M DTW DTW E Source: ACI Europe

The weakening of domestic markets manifested itself among some European airports. Frankfurt, London LHR, Madrid and Paris CDG were down in terms of domestic passenger numbers. This weakness reflects the impact of increasing fuel surcharges at a time of when the credit squeeze and concerns about economic performance hit consumer confidence and began biting into discretionary purchasing powers. However, the international component of passenger traffic pulled all these airports into positive, or near positive, territory in terms of year on year overall traffic growth.

The world’s 30 busiest airports: INTERNATIONAL passenger traffic March 2008

5,000,000

4,000,000

3,000,000

2,000,000

1,000,000

0 Seoul ICN Seoul Paris ORY Paris Paris CDG MXP Milan Dubai DXB Taipei TPE Taipei VIE Vienna Tokyo NRT Tokyo Rome FCO Rome Zurich ZRH Zurich Dublin DUB Madrid MAD Toronto YYZ Toronto Munich MUC Munich London LHR Geneva GVA London STN Bangkok BKK London LGW Brussels BRU Brussels Frankfurt FRA New York JFK York New Singapore SIN Singapore Barcelona BCN Hong Kong HKG Amsterdam AMS Los Angeles LAX Manchester MAN CPH Kuala Lumpur KUL 20%

15%

10%

5%

0% change over 2007 March over change

-5% VIE VIE SIN SIN ICN ICN JFK JFK LAX LAX KUL KUL YYZ YYZ TPE LHR LHR STN STN FRA FRA BKK BKK DXB DXB ZRH ZRH NRT NRT CPH CPH FCO BCN BRU DUB DUB GVA GVA MXP MXP HKG HKG AMS ORY CDG CDG MAN MAD MAD MUC MUC LGW LGW

Cranfield University: Quarterly Report Q2 2008 for DG TREN 13 The chart above demonstrates the strength of European airports in terms of this international component. In terms of international passenger traffic, European airports dominate the top thirty ranking with nineteen entrants. Four of the top five positions are held by European hubs. Growth in the international component of passenger traffic was positive among the European airports in the chart, with Madrid leading the group with fourteen percent increase (compared to a 2% fall in domestic passengers).

2.3.2 Delays The table below summarises Q1 2008 delay data for departures and arrivals of AEA member airlines at the ten best performing, and ten worst performing, airports. A delay is defined as a flight leaving, or arriving, more than fifteen minutes’ later than scheduled. The best performing airports in terms of departure delays were Munich and Vienna. At these airports, over eighty-two percent of flights left on-time, and the average delay was under forty minutes. By comparison, approaching one half of all departures and arrivals at London Heathrow experienced delays beyond fifteen minutes – a deterioration over the same period in 2007.

Major European airports with the worst, and best, record for departure delays (AEA airlines) Q1 2008

compared to average delay average delay Airport departures % arrivals % Q1 2007 (minutes) (minutes)

London Heathrow 44.1 ▲ 39.5 45.1 46.6 Dublin 33.0 ▲ 45.1 33.8 40.1 Helsinki 29.2 ▲ 38.5 26.3 40.5 Geneva 27.3 ▲ 43.5 26.8 38.2 Frankfurt 27.2 ▲ 39.5 33.7 44.5 Copenhagen 26.0 ▲ 41.0 31.3 40.3 Amsterdam 25.7 ▲ 43.0 20.0 57.4 Manchester 25.0 ▲ 43.5 23.3 39.5 Paris CDG 24.2 ▲ 38.3 19.7 38.6 Stockholm 23.2 ▼ 39.3 23.6 38.8

Lisbon 20.4 ▼ 41.0 24.2 34.9 Milan Malpensa 19.8 = 43.0 18.9 42.1 London Gatwick 19.5 ▲ 30.2 26.5 31.9 Paris Orly 19.2 ▲ 46.6 24.9 39.6 Barcelona 18.8 = 44.3 19.6 44.1 Istanbul 18.3 ▲ 43.9 29.9 44.1 Dusseldorf 18.0 ▲ 40.0 21.9 36.8 Larnaca 17.9 ▼ 55.5 24.3 52.2 Vienna 17.9 ▲ 34.9 19.0 38.8 Munich 17.6 ▼ 39.9 15.4 41.2 Source: AEA

Cranfield University: Quarterly Report Q2 2008 for DG TREN 14 Of the twenty airports making up the table below, only four recorded an improvement in on-time performance in 2008.

2.3.3 Ownership and airport developments Vienna airport operator Flughafen Wien has increased its stake in Letisko Košice, the company that has a majority equity stake in Kosice Airport in Slovakia. Flughafen Wien’s share of the company will increase to 81%. The remaining equity is held by the Austrian bank, Raiffeisen Zentralbank AG. Ferrovial, the owner of BAA, has placed Belfast City Airport up for sale. The company acquired the UK regional airport from Bombardier in 2003. Macquarie Airports has increased its stake in the UK’s from 32.1% to 35.5%. Hochtief formally expressed an interest in participating in the privatisation of Skopje, Ohrid and Stip airports in Macedonia. The government is inviting expressions of interest in operating 20-year concessions to interested developers. This includes the construction of a new terminal and extension to the main runway. The process of separating from DAA ownership and control appears to have been revived after the DAA and the board of Cork airport reached an agreement over the allocation of debts. The agreement will then be submit to the Government which will then decide whether to proceed with complete separation. Portugal’s Council of Ministers has backed the decision to locate the new Lisbon Airport at Alcochete. The new site is located to the east of the City and on the south side of the River Tagus.

2.3.4 Regulatory news The UK Department for Transport launched a review on the future economic regulation of airports. The review is independent of the Competition Commission’s ongoing investigation into airport competition. The European Commission launched an investigation into alleged state aid and airport charges discrimination in relation to Frankfurt Hahn airport in . The investigation involves payments made by the local region and the airport’s publically- owned parent company Fraport. The airport charges part of the investigation will focus on a series of agreements with the airport’s largest airline operator, Ryanair. The High Court in London rejected an application by three local authorities aimed at introducing further restrictions on night flying at London Heathrow. The judge upheld the October 2006 restrictions implemented by the Department for Transport. Italy’s state council court upheld a decision by ENAC, the national civil aviation regulator, to restrict traffic at Rome Ciampino to one hundred flights per day. The restrictions, which aim to address noise and environmental impacts, were initially challenged by Ryanair. The German government announced that it is to compensate Fraport for losses incurred as result of its participation in the failed project to build a new international terminal at Manila. The payment amounts to €42 million and is part of a guarantee

Cranfield University: Quarterly Report Q2 2008 for DG TREN 15 offered by the government to protect German companies’ overseas investments from political risks.

2.4 Safety and security The European Society of Air Safety Investigators (ESASI) held their inaugural Air Safety Seminar in April. With an emphasis on current European issues in the investigation and prevention of accidents and incidents, the two-day event, was held at Cranfield University and addressed current issues in the European environment, challenges of modern air safety investigations, and operational developments. There were airlines of fourteen countries on the April update of the blacklist of airlines banned from the EU. Eight of the countries with banned airlines were African, and six Asian. The three states with the highest number of banned carriers were: • Democratic Republic of Congo 54 carriers • Indonesia 49 carriers • Kyrgyz Republic 24 carriers

A near total ban was imposed on European operations by Gabonese carriers. The exceptions being Gabon Airlines and Afrijet, although neither of these companies will be permitted to increase European activity until further notice. In June the Commission proposed to extend the remit of the European Aviation Safety Agency (EASA) to cover the key safety fields of aerodromes and Air Traffic Management / Air Navigation Services, underpinning the safety element of the Single European Sky. EASA was formed in 2002 as the single European safety entity, to address differences in the application of, and compliance with, non-binding aviation safety rules throughout the Member States. EASA currently oversees airworthiness of aircraft, aircraft operation, and air crew licensing. The UK Air Accidents Investigation Branch published the final report into the accident on 15 June 2006 involving a Belgian registered Boeing 737. The aircraft, operated by TNT Airways Limited, was operating a scheduled cargo flight from Liège (LGG) to London Stansted (STN). The crew diverted to Nottingham East Midlands (EMA) due to poor weather at STN. After an unsuccessful approach to EMA where the aircraft touched the ground approximately 90 m to the left of the runway centreline, the aircraft became airborne again and the crew subsequently made an emergency landing at . The report identified a number of causal factors, including inappropriate transmission of company messages by EMA ATC; the inadvertent disconnection of the autopilot, and the subsequent lack of decision to go- around; and a loss of situational awareness in the latter stages of the approach.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 16 2.5 ATM

Single European Sky In June the European Commission adopted a new package of proposals for implementing the Single European Sky1. By advocating a total system approach for European aviation based on four pillars linking ATM performance, safety, necessary technological developments and airport capacity, this package followed-up the report on the future of European aviation commissioned last year by the European Commission.

UK / Ireland functional airspace block Also in June the governments of the UK and Ireland reached agreement to jointly manage parts of their airspace to minimise air traffic delays and develop more fuel- efficient routes. The creation of the first functional airspace block (FAB) in Europe will allow air traffic controllers to manage flights along operational rather than national boundaries. The FAB will be regulated by the CAA and the Safety Regulation Division of the Irish Aviation Authority.

4D Flight trajectories In April it was reported that Eurocontrol has begun work with the major aircraft manufacturers to enable the four-dimensional trajectory management of air traffic. This is one of the fundamental requirements for meeting Single European Sky and US Federal Aviation Administration's NextGen air traffic management performance objectives. Airbus and Boeing have both indicated to Eurocontrol that they are ready with systems that can now feed data-linked ATM clearances direct to aircraft flight management systems. Each uplinked instruction is subject to pilot acceptance before the crew routes it to the flight management system. Eurocontrol expects to have drawn up the technical and operational standards for this system and procedure by 2011, and for it to be operational by about 2013.

European business aircraft traffic Business aircraft movements in Europe have increased from half a million in 1997 to 764,000 in 2007, according to Eurocontrol, and the proportion of jets in the mix has risen dramatically from about half of all movements in 1997 to nearly 75% in 2007. Business aircraft movements now make up 7.8% of all instrument flight rules traffic, and the sector has grown more than twice as fast as all the other sectors collectively. About 500 VLJs (Very Light Jet) are on order from European customers and nearly half of these are expected to be delivered by the end of 2010. Eurocontrol's latest research indicates that the average VLJ in Europe, mostly operated by air taxi companies, will operate three flights of about 1h duration each day. Each year, Eurocontrol sees the ATM system having to handle an additional 200 to 300 flights a day because of the introduction of VLJs into Europe's airspace.

SESAR May saw the official transition from the SESAR definition phase to the development phase, with delivery of the SESAR master plan and the work programme for the

1 COM (2008) 389, 388 and 390 of 25 June 2008.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 17 project’s first five years of working life. The process signals the beginning of the end of the national ANSP and progress toward a single Europe-wide air traffic management system.

2.6 Manufacturers

2.6.1 Aircraft manufacturers In April the two main aircraft manufacturers announced their first quarter sales, with a combined total of 683 net orders received (this being well over double the figure for the same period in 2007). Airbus had received the most orders with a total of 395 aircraft, with 110 of these being for A320 family aircraft for China. Despite production problems with the B787, 75 of the type were ordered. At the third Aviation and the Environment Forum in Geneva in April, Airbus and Boeing’s signed a joint agreement to work together more closely on environmental issues – especially with regard to their input to the Single European Sky ATM Research (SESAR) programme.

Airbus At the beginning of April Airbus announced that it is reconsidering the option of fitting winglets to future A320 aircraft. In the past Airbus had discounted the possibility due to the negative impact of strengthening the wing. In mid May EADS reported first quarter results. Overall revenues had risen and the Airbus division had been profitable, which was put down to improved operational performance and implementation of Power 8 restructuring. In May Airbus announced that ramp up in production of the A380 would be slower than hoped and that they would be able to make twelve and not thirteen deliveries in 2008 and 21 and not 25 deliveries in 2009. In June Airbus announced that the A350 was not going to meet its weight target and as a result the European manufacturer was forced to increase the Maximum Take-off Weight of the aircraft to compensate for the weight growth.

Boeing In April Boeing announced the third major delay to the 787 programme with another six months’ delay put on first flight and delivery dates. Production numbers for 2009 were reduced from 109 to only 25. The net effect of the delays is that some customers will receive their aircraft over two years’ later than initially promised. While no formal announcement was made with regard to a new 150-seat aircraft to replace the 737 family, Boeing did indicate in May that their new design would now not be available for delivery until the “latter half of the next decade”, i.e. later than the previously quoted entry into service date of 2015. Boeing and Air New Zealand jointly announced in June that they would be conducting flight trials later in 2008 with a 747-400 powered by RB-211s using fuel from Jatropha plants. The airline’s CEO indicated that the cost of such fuel would be some 20 – 30% less than the then current fuel price.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 18 By the end of June, Boeing had started power-on testing for the first 787 aircraft. This was a significant event since the 787 is a “more electric” aircraft than its predecessors with many pneumatic systems (using engine bleed air) being replaced with electrically powered compressors and pumps.

Bombardier At the beginning of April Bombardier announced their results for the year ending 31 January 2008. Its Aerospace division had performed well with revenue up 17% to USD9.7 billion and deliveries up 11% to 363 aircraft. The order backlog had surged to 452 business jets, 238 regional aircraft and 2 amphibians. Bombardier did not formally launch its C Series aircraft during this quarter, but the signs were that a decision was imminent and it was announced that the new aircraft would be able to operate from London City Airport within one year of production.

ATR While the Franco-Italian turboprop manufacturer did not announce the launch customer for its new -600 variant, it did suggest that a wholly new 90-seat design is being considered, for which a new engine will be required.

Embraer In early April Embraer announced it has delivered 38 jet aircraft in the first quarter of the year, up from 25 on the previous year. It expected to deliver a total of 215 jet aircraft during 2008. At the end of March its firm backlog stood at USD20.3 billion. The company further announced that it is considering developing a family of turboprop aircraft, following the collapse of the 50-seat regional jet market and the increase in fuel price. The manufacturer said it is facing the biofuel challenge by considering fuels from the Babassu, (obtained from a palm tree), Jathropa (a fast-growing plant) and algae.

2.6.2 Engine manufacturers

Pratt and Whitney Pratt and Whitney announced phase two of ground testing of its Geared Turbofan had started and that is was on schedule for the air tests in July on a B747 and an A340.

Rolls-Royce At the end of June Rolls-Royce proposed that a new generation turboprop engine could be developed in the future to power a short range 150-seat aircraft which flies mostly for less than 1.5 hours. It believes high oil prices are likely to drive airframe manufacturers to sacrifice cruise speed for economics. This could build on the technology developed for the TP400 engine which powers the A400M.

GE In mid May GE announced a new variant of the CF34 could be available by 2015 and offer 15-20% reduction in specific fuel consumption and noise. The company also said that it may make a return to turboprop engine production (which it was heavily involved in the 1980s with the CT7 which powered the Saab 340 and Casa CN235): if

Cranfield University: Quarterly Report Q2 2008 for DG TREN 19 it does so it will be through a joint venture with its Czech partner Walter who produce the M601 turboprop.

2.7 The environment In May, the Netherlands government was considering building into its new controversial environment tax a specific levy linked to climate-changing nitrogen oxide (NOx) emissions. The move to differentiate its contentious new air passenger tax according to an aircraft's NOx emissions on landing and take-off was to be considered at Cabinet level before the Dutch government makes a formal response to its Parliament, where the idea was first proposed. At the end of June 2008, ministers formally backed the deal brokered between European Council officials and Parliament negotiators over the terms for aviation’s inclusion in the EU emissions trading scheme. The compromise deal will now be put to a vote in the European Parliament at the bill’s second reading on 9 July. Under the agreement intra-EU and flights to and from the EU will be included in the emissions trading scheme from 2012. It also sets the cap on the quantity of allowances allocated to airlines each year at 97% in 2012 and 95% from 2013 (both relative to the 2004 to 2006 baseline average emissions), although this could later be subject to change under a separate emissions trading directive. The agreement also specifies that 15% of allowances should be auctioned. Also towards the end of June, European Commission regulators unveiled a four- pillared second package of legislation on the Single European Sky (SES), aimed at kick-starting progress in reforming Europe’s air traffic management system. The proposal aims at helping reduce queues to take off and land, as well as improve punctuality. The package will also deliver safer and greener flying (for example by reducing emissions through shorter distances flown), and create more capacity.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 20 3. Air Cargo

3.1 Introduction The air cargo industry includes the movement of freight, express packages, mail and courier bags by air. The term ‘air cargo’ is often used for the combination of freight and mail, but the emergence of the express package sector and the decline of courier bags has led to a blurring of types of traffic carried. The demand for air cargo is for a door-to-door product, whether from manufacturer to final user, or between the various intermediaries in the supply chain. This will involve trucking and flights and possible a part of the trip by rail. Integrated carriers such as FedEx and DHL offer a door-to-door service while airlines generally only offer an airport to airport service, with other parties providing delivery to the airport and collection at the destination airport. Air cargo is a key ingredient of the trade in goods, whether internationally or between different regions of the same country, although the latter tends to be carried by truck or rail. Air cargo accounts for 34.6% of the value of non-land international trade in goods, but only 6% of the weight.2 The average value to weight ratio of air shipped goods is 31 times as that of vessel shipped goods. This enables such items to bear the higher cost of shipment by air. Air cargo can thus be described as a derived industrial product. Some countries such as India have been very successful in developing services industries which are much less dependent on air transport. China on the other hand has a substantial manufacturing base and generates large air cargo flows both to North America and Europe.

3.2 Air cargo traffic World schedule air freight traffic increased at an average rate of 7.4% a year between 1970 and 2007 to reach 155 billion freight tonne-kms.3 This growth rate was around 1% a year higher than the growth in air passengers. The largest share of this traffic is carried by airlines based in the Asia/Pacific region (35% in 2006) followed by 28% for North America and 27% for Europe. The chart below compares the trend in growth rates for both air passengers and cargo for international air services. Cargo increased at an average rate of 6.5% a year over the period from 1987 to 2006, compared to passenger growth of 6.3% a year. Thus more recent rapid growth in the low-cost airline passenger sector has brought the two outputs closer together in terms of rate of growth. Both types of traffic also display some cyclicality, with a freight downturn in 2000 as a result of the collapse of the IT and high tech bubble following ‘the year 2000’. This preceded the passenger

2 From ‘The impact of the air cargo industry on the global economy’, by John Kararda et al, paper presented to TIACA Air Cargo Forum 2006: www.tiaca.org

3 Data from ICAO, the 2007 figure being provisional

Cranfield University: Quarterly Report Q2 2008 for DG TREN 21 downturn in 2001/02 following the events of 9/11. Some industry analysts believe that a downturn in the air cargo industry is often followed by a downturn on the passenger side around six months later. A previous downturn was evident in 1991, but this was more marked for passengers with many trips by air cancelled through fear of flying during the aftermath of the Gulf War.

Annual Growth Rates by Traffic Type for IATA International Scheduled Service

20.0

FTK growth rates Pax-kms growth rates

15.0

10.0

5.0 Percent versus previous year 0.0

-5.0

Source: IATA WATS

-10.0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

A strong air cargo recovery was underway in 2004 especially in Asia; with IT/PC replacement needed again (3-4 years from Y2K), but this appears to have slowed considerably since then. As shown in the following table, around half of the air cargo traffic carried by European airlines was on Asian routes and a further 25% on the North Atlantic.

Cargo traffic flown by AEA members, 2006 FTKs m % on passenger Average aircraft sector kms Total Europe 898.1 81.0 1,235 North Atlantic 10,116.6 68.1 6,740 Mid Atlantic 1,542.1 80.6 8,482 South Atlantic 2,229.3 58.9 9,208 Europe/Far East 17,406.8 39.7 8,607 Total scheduled 36,347.0 54.9 6,704 Source: AEA Key statistics, 2007

The share of total AEA intra-European freight tonne-kms was only 2.5% in 2006, or 13.4% in terms of tonnage. A high percentage of this was carried on passenger flights, with much higher tonnages carried by truck than on freighter aircraft. In contrast, only 40% of traffic to/from Asia and the Far East is carried on passenger flights. The rest is put on freighter services operated principally by Lufthansa,

Cranfield University: Quarterly Report Q2 2008 for DG TREN 22 Cargolux and Air France-KLM. Freighters, on the other hand, take a smaller share of North Atlantic traffic, partly due to the shorter sector lengths and thus greater cargo payload available on these passenger services. In addition to AEA carriers, integrators such as DHL, TNT, FedEx and UPS also carry increasing amounts of air cargo within Europe. Boeing estimates this to have risen in terms of tonnages flown from 8% in 1990 to 39% in 2000 and 51% in 2005. Much of their business is express packages and thus air transport is often the preferred mode for meeting next day delivery times. Integrator traffic is included in the following table. This gives directional flows between the EU 27 countries and major hubs of the integrators and network carriers. The importance of stems partly from Brussels being a DHL hub, although this will decline in importance with the transfer of flights to as a result of the night curfew.

Total air cargo tonnes carried between EU countries by major flow, 2007

From to: EU 27 Belgium Germany France UK Spain EU 27 1,876,987 300,242 525,851 261114 501,911 225,515 Belgium 503,903 : 79,223 61187 94,154 61,900 Bulgaria 14,297 320 5,765 835 726 179 Czech Republic 36,652 4,916 12,037 2525 3,886 599 Denmark 5,722 3,025 300 12 38 7 Germany 802,642 76,990 : 94832 176,562 76,849 Estonia 5,906 97 563 22 161 2 Ireland 70,656 3,496 16,594 4116 40,246 648 Greece 60,387 13,349 19,522 2748 7,176 937 Spain 171,496 40,703 62,855 17175 19,974 : France 304,365 30,248 110,690 : 48,835 29,093 Italy n/a : : : : : Cyprus 31,834 393 1,563 1936 14,871 0 Latvia 4,652 133 482 52 400 44 Lithuania 6,858 97 476 246 710 0 Luxembourg 67,790 2,089 762 259 29,373 2,357 Hungary 32,510 5,809 4,932 1248 507 54 Malta 15,342 355 4,616 226 3,575 63 Netherlands 101,658 377 8,330 7491 40,271 6,959 Austria 65,073 15,465 24,536 3912 3,940 1,349 Poland 19,082 762 6,107 1421 2,780 277 Portugal 61,982 6,530 19,872 5360 9,168 15,280 Romania 14,262 1,719 2,424 1189 620 269 Slovenia 21,724 750 11,673 455 107 2 Slovakia 808 4 67 35 22 47 Finland 68,597 10,066 10,548 1459 3,810 2,591 Sweden n/a : : : : : 467,784 82,550 121,915 52374 : 26,008 Source: Eurostat

In addition to the flown cargo shown in the above table, nearly 8,300 weekly truck- flight frequencies connecting 890 city pairs were offered in the Intra-Europe market in

Cranfield University: Quarterly Report Q2 2008 for DG TREN 23 May 2005.4 These are mostly between airports and operated by airlines, providing additional feed to their long-haul flights. The major air cargo origins and destinations between EU and third countries are shown in the table below. The selected countries accounted for 62% of total air trade in 2007 (and for UK 74%). The UAE is included because it is a staging point for significant flows between Europe (and Africa) and Asia largely due to the success of the Emirates hub at Dubai. Thus of the one million tonnes or so to/from Europe, the majority will be transshipped at Dubai to/from Asia points.

Total air cargo tonnes carried between EU and third countries by major flow, 2007

Total US East Asia South Asia UAE EU 27 9,395,708 2,470,768 1,789,084 503,315 1,081,492 EU 13 7,434,101 1,716,062 1,531,854 336,496 858,242 Belgium 863,059 209,182 52,888 47,849 76,461 Bulgaria 4,484 0 : 452 0 Czech Republic 19,947 2,886 1,455 37 4,837 Denmark 1,054 0 248 101 0 Germany 2,663,189 643,179 494,416 158,597 405,908 Estonia 16,728 : 0 0 0 Ireland 46,267 34,306 11 0 8,656 Greece 29,090 6,283 4,105 235 6,200 Spain 230,885 60,014 16,940 0 6,928 France 1,240,468 316,490 335,626 64,334 85,537 Italy n/a : : : : Cyprus 8,441 0 0 0 2,156 Latvia 2,545 32 : 9 0 Lithuania 5,946 0 40 : 654 Luxembourg 634,814 113,767 61,006 8,263 80,255 Hungary 35,063 1,274 10,164 0 1,192 Malta 2,643 11 : : 21 Netherlands 1,448,255 303,719 429,432 32,491 173,654 Austria 162,096 15,977 88,274 17,723 14,561 Poland 18,320 8,764 1,054 0 2 Portugal 45,464 5,728 268 0 0 Romania 4,466 684 0 0 133 Slovenia 3,244 : : : 255 Slovakia 1,455 : 40 121 0 Finland 70,515 7,416 48,888 7,004 83 Sweden n/a : : : : United Kingdom 1,837,269 741,055 244,229 166,099 214,000 Source: Eurostat

Overall Asia generates more air cargo than it receives as imports. This is because imports of European plant and equipment are more than offset by the volume of exports of textiles as well as consumer goods from China and other Asian countries.

4 Source: Boeing World Air Cargo Forecasts, 2006/07.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 24 Textiles was considered to be the largest single commodity exported from Asia (16% of total) with manufacturers moving the other way (12%). Documents and small packages was thought by Boeing to be the largest single category of US exports to Europe with 13% of the total, with industrial machinery the largest commodity in the opposite direction with 11%. Europe imports a growing tonnage of perishables by air, with the largest source estimated at around 100,000 tonnes in 2002. Israel and USA were next with around 50,000 t followed by Ghana and South Africa.

3.3 Air cargo operators Around 85% of air cargo is carried by carriers that combine passenger and cargo transport (combination carriers). They have the advantage, at least on longer sectors, of having a considerable space in the lower deck of the aircraft for air cargo. The following table shows the payload that is available for air cargo after allowing for sufficient space in the hold for a full load of passengers’ checked bags.

Percentage of total payload available for cargo by aircraft type Total Cargo tonnes @ % total

payload (t)* 167 kg/cu.m** payload B767-200 29 10 35.4 B767-300 36 14 38.2 B787-8 42 17 40.6 A330-200 43 17 39.0 B777-200 51 20 38.7 A340-300 51 20 39.9 B747-400 64 20 32.2 B777-300 65 27 41.5 B747-8 71 22 31.5 A380-800 73 16 21.3 * five hour sector

** weight payload: volume in cubic metres available after allowing for full load of passengers

Source: Cranfield and aircraft manufacturers

Over half of the combination carrier cargo traffic is carried on passenger flights with just under half on freighters. Specialist only carry just above 7% of world international traffic, with the European based Cargolux the largest. Polar of the US (itself now 49% owned by DHL) is part of a group that includes , a company that leases freighter aircraft to the other operators in the following table.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 25 World International air cargo traffic by air cargo carrier in 2007

RTK (m) % total Cargolux 5,482 Nippon Cargo 1,873 Polar Air 1,817 Volga-Dnepr 123 CAL Israel 383 Astar (USA) 47 Cielos Peru 44 Total all cargo airlines 10,532 7.1 FedEx 6,507 UPS 5,077 DHL (incl. EAT) 590 TNT Belgium 433 Total Integrators 10,997 7.4

IATA all-cargo flights (not included above) 57,759 38.9 IATA passenger flights 69,014 46.5 World total 148,302 100.0 Source: IATA WATS 2008

Integrator traffic reported to IATA amounted to just over 7% of the world total. This would increase substantially if US domestic traffic were included. Internationally, the major integrators use their own aircraft to carry traffic between their main regional hubs, with international feeder routes often contracted out to local operators, and thus may appear under other categories in the table. Integrators also make use of other scheduled airlines to reach other points on their network. For example, DHL is a significant customer of British Airways. DHL has also joined up with Lufthansa to form a 50:50 air cargo operator, AeroLogic, which will operate at least 14 B777-200F freighters from a Leipzig Airport base from summer 2009. The so-called ‘wet leasing’ of freighter aircraft by operators such as Atlas and ABX to mainly combination carriers has expanded rapidly from the early 1990s. This market is commonly called the ACMI sector, since the lessor provides Aircraft, Crew, Maintenance and Insurance, leaving the lessee to market, handle and administer the flights without the high costs of owning and operating a small freighter fleet. Boeing estimated that this market carried around 11 billion freight tonne-kms in 2005. With the high growth of air cargo traffic from China, some airlines have taken the opportunity to set up joint ventures there: Lufthansa and Shenzhen Airlines formed Jade Airlines in 2004 to operate A300 freighter services from Guangzhou base (Shenzhen Airlines taking 51%, Lufthansa 25% and a German government agency, KfW, 24%). In May 2005 SIA Cargo took a 25% stake in Great Wall Airlines, based in Shanghai, with a Singapore government subsidiary holding 24% and China Great Wall Industry with 51%. Finally, Cathay Pacific has a 17.6% stake in Air China and its wholly owned subsidiary, Air China Cargo, operating five B747Fs. Eight combination carriers accounted for 93% of the total freight traffic carried by AEA carriers in 2007 (see the table below). Air France and KLM still report separately, but their combined freight traffic would have given them a 34% share of

Cranfield University: Quarterly Report Q2 2008 for DG TREN 26 AEA traffic, followed by Lufthansa and Swiss together carrying 25%. These two groups have almost 60% of the AEA share of what is mostly a long-haul market.5

Total AEA scheduled freight traffic by top 9 airlines, 2007

FTKs (m) % Lufthansa 8,346 22.2 Air France 6,137 16.3 Cargolux 5,480 14.6 KLM 4,954 13.2 British Airways 4,518 12.0 Alitalia 1,660 4.4 1,490 4.0 Swiss International 1,160 3.1 Iberia 1,121 3.0 Total above 34,865 92.8 Total AEA 37,564 100.0

The long-haul freight markets to/from Europe are of course highly competitive, especially to/from Asia. According to Eurostat, in 2005 non-EU carriers accounted for around 64% of total freight and mail traffic.6 Non-EU airlines included Korean Air, Cathay Pacific, Singapore Airlines (all in the top five international air freight operators) in addition to Emirates and the major integrators. The AEA carriers had a 57% share of North American traffic. This was considerably higher than their Far East share because of the limited involvement in air cargo by many of the US majors, and the higher cargo capacities that the AEA carriers tend to have on their passenger flights.

3.4 Regulatory trends Air cargo is carried within the EU by airlines that are majority 50% owned by EU/EEA/Swiss nationals, in compliance with EU regulations in particular those governing technical competence and financial fitness. Integrators whose main place of business is outside the EU contract their capacity through EU owned airlines such as European Air Transport (DHL). Long-haul cargo route rights are mostly granted under bilateral agreements between EU and third countries, or as in the case of all US routes through the 2007 EU-US open skies agreement. The European Commission is gradually bringing individual ASAs into a common format with respect to nationality clauses through ‘horizontal agreements’. The EU-US agreement grants unlimited 3rd to 6th freedom unlimited rights to both sides but only grants 7th freedoms to European cargo carriers, reflecting the fact that US carriers have access to the internal EU market through their 5th freedoms. A second stage negotiation is under way that will address the unequal investment opportunities open to airlines of each party.

5 AEA long-haul FTKs were 95% of total 2007 FTKs. 6 Freight and mail transport by air in the EU in 2005, 79/2007, Eurostat.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 27 In 2007, the US Department of Justice conducted an investigation into the way airlines set fuel surcharges in both the passenger and cargo markets. It concluded that anti-competitive activity had taken place in both markets, but especially on the cargo side. Many of the world’s major network carriers outside the US were involved, including a number of EU airlines. Fines were imposed on these airlines, for example British Airways paying USD100m for passenger and USD200m for cargo surcharges. Air France’s cargo fine was USD210m. A class action was also started in the US seeking compensation for shippers and consolidators that incurred extra costs as a result of the above alleged anti-competitive pricing activities.

3.5 Cargo financial results Of the airlines carrying air cargo, only the cargo specialists publish detailed financial statements including a balance sheet, especially when they are publicly owned. Integrators also publish such information but it is for all their operations including a sizeable ground transport component. It is thus not comparable with the air cargo airlines. The combination carriers that carry both air cargo and passengers have sometimes established separate cargo subsidiaries (eg Lufthansa) and thus required to report profitability. However, where a passenger airline has a cargo division, profits are rarely broken down into the passenger and cargo business.

Major air cargo operator operating margins, 2007/08

Average

Atlas Air

Cargolux

ABX Airlines

SAS Cargo

LH Cargo 2006/07 2007/08 AF Cargo

SQ Cargo

-4.0 -2.0 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Operating margin (%)

Source: Air Transport Intelligence and airline annual reports

The chart above shows the air cargo specialist operating margin for 2006/07 and 2007/08, with some stabilisation of fuel prices preventing much change margins at just above 3%. Singapore Airlines Cargo reversed its operating loss in 2006/07, while improved its financial result. On the other hand Cargolux, which has been consistently profitable, recorded an operating loss because of a provision for anti-trust fines of USD155m (included as an operating expense).

Cranfield University: Quarterly Report Q2 2008 for DG TREN 28 World airline operating margins (%) by type of carrier Cargo All %pts airlines airlines difference 2003 1.9 0.9 1.0 2004 6.9 2.6 4.3 2005 6.4 2.5 3.9 2006 8.1 4.2 3.9 2007 5.9 5.3 0.6 Source: Airline Business

Cargo specialists have tended to be more profitable than all combination carriers, clearly seen in the table above, although the difference narrowed sharply in 2007.

3.6 Airports Frankfurt/Main was the largest air freight airport in the EU in 2007, but only 12% of its traffic was intra-EU. This is because it serves as a Lufthansa long-haul cargo hub, with considerable cargo truck feed from other EU airports. Total air freight handled by top 20 EU airports, 2007

Total tonnes % Intra-EU Frankfurt/Main 2,160,230 12 Amsterdam 1,498,511 7 London Heathrow 1,392,599 8 Paris CDG 1,356,235 15 Brussels 767,332 37 Luxembourg 702,604 10 Cologne/Bonn 699,554 57 Liège 489,009 44 Madrid 266,330 29 Nottingham/East 245,845 77 Midlands Munich 230,714 13 Vienna 225,324 28 London Stansted 195,774 37 London Gatwick 175,428 5 Manchester 164,548 19 Frankfurt-Hahn 136,725 5 Helsinki 134,726 48 Ostend 109,821 7 Leipzig/Halle 101,878 61 Dublin 98,412 63 Total above 11,151,599 21 Total all EU airports 12,351,508 24

Source: Eurostat

Cranfield University: Quarterly Report Q2 2008 for DG TREN 29 Amsterdam, Heathrow and Paris operate in a similar way serving as cargo hubs for KLM, British Airways and Air France respectively. Notably, those airports with a high share of intra-EU traffic were also major European hubs for the integrators such as DHL (eg East Midlands and Brussels), FedEx (Paris CDG and Stansted), UPS (Cologne/Bonn) and TNT (Liège).

3.7 Aircraft In addition to the considerable space and payload available on passenger flights, many combination carriers have sizeable freighter fleets, as well as the integrators and other cargo specialists. The table below shows that 42% of the world freighter fleet is composed on large widebodies, defined as greater than 80 tonnes payload. This would include MD11s, B747s and Antonov 30s, and in the future A380Fs.

World freighter fleet by size category, 2007

Aircraft % Standard body (< 45t) 470 23.7 Medium widebody (45-80t) 680 34.3 Large widebody (> 80t) 830 41.9 Total aircraft 1,980 100.0 Source: Boeing Current Market Outlook, 2007

Airbus forecast air freight traffic to increase by 5.8% a year between 2006 and 2026. This leads to a requirement for 2,901 passenger aircraft conversions and 877 new freighters out of a total freighter fleet of 4,249 aircraft in 2026 (including 471 aircraft that were flying in 2006) Boeing forecast somewhat higher freight traffic growth (6.1% a year over the next 20 years) and an increase in the world freighter fleet from 1,980 aircraft in 2006 to 3,350 in 2026, with only 870 of the additional fleet required new and 3,350 converted from passenger aircraft. Around 40% of the future freighter capacity will be based in Asia. New aircraft will include B777F and B747-8F from Boeing and A330F, A350F and A380F from Airbus.

Cranfield University: Quarterly Report Q2 2008 for DG TREN 30