The most critical success factor in this latest move by Europe’s largest cargo carrier is “mindset”, Michael Goentgens, director of communications for Lufthansa Cargo told Payload Asia. “We will not act as competitors anymore on the routes between HK and Europe but as one team with joint sales approaches to the market.
“We will coordinate our activities very closely and this is a major change compared to rather loose alliances (such as WOW in the past),” he added.
This latest tie-up with ‘friendly competition’ repeats a similar strategy that has been employed by the German carrier with both Japan’s ANA Cargo and United Cargo, although it appears this time around the tryst could mean a deeper relationship.
“Joint sales on both aircraft families will be automated and that includes a close cooperation in IT aspects. We do also want to off er customers one stop shopping in as many locations as possible – so we want to have handling in one facility at an airport wherever possible,” Goentgens added.
The need to innovate
Also abundantly clear is the need to continue thinking outside the box, given the global lethargy in the global air cargo market that continues to stifle growth and profitability in the industry.
Th e fact that the prolonged downturn, one that has emanated from depressed demand and voracious over-capacity, has even caught up with arguably one of the most successful cargo carriers in the business is testament enough for the need to innovate and take the business to a new level.
While undoubtedly pressing on the minds of Lufthansa management for some time, the situation became more visible as last year progressed – with a strong first quarter quickly giving way as demand in the global air cargo markets Lufthansa Cargo charts new course around the turbulence weakened steadily. On top of this, there was turbulence in the Chinese market and a very strong US dollar, which aff ected export-driven industries in the US in particular.
Th e numerous strikes of both the pilots’ union and cabin attendants’ union led to further reductions in transported cargo volumes and revenues. With an impairment for the LCCneo project (with the construction of a new logistics centre in Frankfurt having been postponed in spring 2015 for two years initially), 2015’s adjusted EBIT (earnings before interest and taxes) of €74 million was down 40 per cent on the previous year’s €123 million.
Staying on course
While announcing the results in March, chairman and CEO Peter Gerber stressed that the company would stick with the Lufthansa Cargo 2020 future strategy in spite of the decline in profits: “We have set the right course, and the first plants of Lufthansa Cargo 2020 are starting to bear fruit”, said Gerber.
“With our new Boeing 777Fs, we are flying more efficiently and saving more fuel than ever before in our company’s history. Th e cooperation with ANA has gotten off to a superb start and we will be working very closely with another strong airline, United Airlines, in the future. We are also marketing the cargo capacities of Eurowings long-haul flights, which Lufthansa Cargo’s recent agreement with Cathay Pacific on “far reaching cargo cooperation,” between the largest cargo hub in Europe and the largest in Asia and indeed the world, is the latest plank in the German carrier’s evolving global strategy to deal with the changing market. Donald Urquhart reports.
makes our network even more appealing.” Gerber also emphasised the successful revamp of the IT landscape: “Th is has been an important requirement to getting us working efficiently and successfully.
Th is step has also been a milestone in our eff orts towards achieving a fully digitised air cargo business.”
More planks
Growth is also being supported through another plank, that being a focus on off ering an innovative product range. Besides enhancing the existing product portfolio, including the highly competitive standard freight market, the company will also address a completely new market segment by addressing the transport needs of individuals.
Th rough the myAirCargo product, passengers and private individuals will now be able to send any kind of personal item via air freight, quickly, simply and cost-eff ectively.
“Lufthansa Cargo has often been a pioneer in the past when it comes to developing and launching new products and services”, said Gerber. “We want to live up to this again with myAirCargo.”
Continued cost cutting is another plank in Lufthansa’s strategy as a basis for further success, in what is expected to be a continually challenging market environment going forward. In order to remain competitive, the Lufthansa Cargo Board initiated the C40 cost-cutting programme in the autumn of last year.
It aims to reduce annual costs by at least 40 million euros by 2018 with a focus on staff and service provider costs.
“We clearly have to further strengthen our competitiveness on the cost side as well if we are to be in a position to grow profitably again in our core business”, said Martin Schmitt, Board member finance and human resources.
The carrier also plans to further leverage its key position in Europe, with Gerber saying: “We have a superb base in Frankfurt Airport. Nowhere else on our continent are air cargo volumes higher than here in the heart of Europe.”
Indeed, Lufthansa Cargo remains Europe’s top air cargo operator with volume declining just 2.4 per cent to 1.6 million tonnes last year, year-on-year, while yields contracted by 0.7 per cent and the load factor fell by 3.4 percentage points to 66.3 per cent, well above the industry average. Th e Lufthansa Group subsidiary contributed 7.3 per cent to total revenue last year compared to Catering, 7.4 per cent; MRO, 10.2 per cent; and the passenger airline business, 74.3 per cent.
Reality bites
But Gerber is clearly realistic, noting that the operating environment will be “an extremely challenging market environment in the years ahead.” Th e reality was driven home in the first quarter this year which saw Lufthansa’s Logistics division – which includes the cargo division, the Aerologic jointventure and ULD lessor Jettainer – slipped into the red with an EBIT loss of €19 million compared with a positive €52 million in the same quarter last year.
Revenue at the division fell more than 21 per cent to €480 million while capacity dropped 1.6 per cent and RTKs dropped 4.8 per cent. Cargo load factors were 67.6 per cent and total operating income fell 23.8 per cent to €493 million.
“Lufthansa Cargo is under severe pressure,” said the group’s CFO Simone Menne bluntly. “We only expect earnings to improve again in the fourth quarter,” she added on an optimistic note.
Confronted by this nearly unheard of loss, Menne said that Lufthansa Cargo was taking additional steps to reduce costs and that it was reviewing its business model and fleet strategy, including the use of full freighters.
“We will look into the strategy and consider the size of the freighter fleet, and further measures of the cargo business model. We are now looking at every single cost item. We have four MD-11Fs that are nearly fully depreciated. We will look at our cargo strategy during the year, including our fleet,” Menne said. No date had been given for the results of this review.
The growth focus
For 2016 Lufthansa will increase cargo capacity slightly as a result of growth in belly capacity with new passenger aircraft coming onboard, but this will be partly off set by reduced freighter capacity with two MD-11s being parked.
Meanwhile, Lufthansa Cargo continues with its multi-plank strategy which also includes keeping a sharp focus on promising markets and adjusting capacity as needed.
Earlier this year in Mumbai, Lufthansa Cargo board member responsible for product and sales Alexis von Hoensbroech noted the Indian market continues to be a healthy market for the cargo carrier. Lufthansa currently off ers freighter services to Delhi once per week, Hyderabad three times per week, Chennai twice per week, Bengaluru twice per week and Mumbai five times per week.
Von Hoensbroech noted that while the carrier might consider adding capacity to Delhi, but “our flexibility to deploy additional freighters is fairly limited [given the lay-up of MD-11s].”
And then there is the issue of competition. “We are generally quite happy with our network, but we have to acknowledge that the competitive pressure in India is getting higher and higher because of the Gulf carriers that are flooding the market with capacity,” said von Hoensbroech.
“Last year, the India market grew by 7.0 per cent but we were a little bit less than flat and that’s clearly a sign of the increasing competition, so it’s not easy to simply add freighter after freighter. “Th at said, if I look at the most recent figures there is growth again on our own services in India and the best argument for additional frequencies is growth and profitability,” he added.
And with its new summer schedule in eff ect, a weekly MD-11F service from Frankfurt to Moscow Domodedovo has been added that connects the Russian capital with Ashgabat and Baku. Th e carrier will also fly an MD-11F to Doha once a week and there will now be a direct flight from Frankfurt to Seattle utilising an AeroLogic B777F which will then fly on to Los Angeles before returning to Frankfurt.
Lufthansa Cargo will bring in a larger B777F aircraft for freighter flights from Frankfurt to Tokyo and Seoul (six times a week) and Beijing (four times a week) which began end-March.
Frankfurt and Hong Kong will be linked by daily flights and in addition to the Saturday connection with an AeroLogic B777F and Lufthansa’s cargo arm will also fly an MD-11F to the south coast of China six times a week, instead of four. Th e frequency to Ho Chi Minh City doubles from one to two weekly services.
A range of new belly hold services have also been rolled out as result of service changes on the passenger network, including: Panama City five times a week since the beginning of March with an A340 and also San José, California from July.
Lufthansa has also been selling the cargo capacity of the Eurowings longhaul fleet with an A330 already serving Varadero, Punta Cana and Puerto Plata from Cologne. Th ailand’s Phuket and Bangkok were added from the end of March, along with Cancun and Mauritius from May, Boston from June and Miami from September.
Frequencies to Shanghai will also increase, with Austrian Airlines serving the Chinese metropolis from Vienna five times a week initially from April and then daily with a B777 from May.