The ACN Interview: Cargolux, a new model airline
06 / 12 / 2016
Cargolux’s new president and chief executive has commissioned a strategic review of the European all-cargo airline, to establish whether the current business model is sustainable and also to position the carrier for the twist and turns of a volatile industry.
Richard Forson, who took on the role in August this year after the surprise resignation of Dirk Reich for personal reasons, has also warned staff that “some hard decisions” will be taken to ensure that Cargolux is fit for purpose against “extremely aggressive” competitors.
“The mission is: Can we survive as a main deck carrier within the rate environment that we undergo now?” he says.
Speaking to Harald Ehren, editor of DVZ, Air Cargo News’ sister publication in Germany, Forson says that his management team will undertake the review to establish “whether the airline is sustainable or not in terms of its current environment, but more importantly to position it for business in the 21st century in the industry”.
And if airfreight rates continue to decline that could mean “diversification into other areas of business, maybe unrelated to air”, says Forson, adding: “All of that will have to be considered, if we get to a point where there is agreement that rates are not going to increase in the future.
“If you don’t reinvent yourself as a business on a continuous basis, sooner or later you are going to run into a brick wall.”
Forson was also clear that diversification would not involve elbowing out its traditional customer base: “It’s not going to mean competition with the forwarders.”
Forson, a former executive vice-president and chief financial officer at Cargolux, says: “The competitive scenario is significantly different to what it was 10 years ago. We have some extremely aggressive players in the market.
“We operate on a different set of regulations, so there are certain factors that are preferable to other carriers around the world that are really not preferable to us.”
He continues: “We have to come up with a strategy that is understandable right down to the lowest ranks within the organisation, with everybody knowing exactly what our strategy is, to achieve the results that I want to deliver to the shareholders and to the directors as well.”
Forson is a realist about the air cargo industry: “Unfortunately, the heyday era of the late 1990s and early 2000s is gone and it will not return.”
The call for a strategic review reflects the fact that a number of freighter operators, including former major shareholder Qatar Airways, are now operating at Cargolux’s home hub in Luxembourg’s Findel airport, “replicating its business model”.
Europe’s cargo carriers face restrictions in state aid, emissions control and anti-trust regimes says Forson, adding: “Whereas our major competitors based in east Asia and the [Middle East] Gulf regions don’t have those kinds of restrictions.
“We might have a level playing field against European carriers, but compared with the rest of the world, it’s not an even playing field at all.”
Referencing the “famous” Chapter 11 process in the US, where insolvent companies can continue trading with legal protection from creditors, Forson adds: “You can restructure your costs, come back out and continue operating. In the US it’s taken for granted. It’s not a big issue for them.”
Asked whether Cargolux Italia, its Italian offshoot based at Malpensa with four Boeing 747-400 freighters, would be included in the strategic blue sky thinking, Forson says that the “low cost producer of capacity” would also be subject to a review.
He went on to observe positively that Cargolux Italia has certain flying rights, especially into Asia, “that we don’t enjoy as Cargolux, so that’s an added benefit as well, but on the cost front it does give me a certain advantage vis-à-vis the costs of Luxembourg”.
He adds: “Luxembourg is a high cost jurisdiction, whereas in Italy we have a much better cost benefit. And that’s why we put four aircraft in there.
“It runs its own air operator certificate (AOC), has its own management structure, but we also do a lot of services for them, so there is no duplication, otherwise it would be a waste of money.”
One of Dirk Reich’s big projects was Cargolux China, 35% owned by the European carrier and the rest by Chinese interests, hubbed out of Zhengzhou and due to launch with three B747-400Fs in 2017, rising to five freighters within three years and focused on transpacific and intra-Asia routes.
Forson is in favour of the China airline, as defined by his predecessor: “The Far East is going to be the largest economic region in the world within the next five to 10 years. And so extending our footprint in China is a strategic move.”
Closer to home, Forson gives more details on his plans for the carrier, and digitisation is a major theme: “I’m looking for a step change in the way we do business to make much more use of technology within our business, especially in the way in which we interface with our customers, and to make it a lot simpler for customers to do business with us.
“If you look at everything around you today, it’s digitalised. That’s how people are communicating. That’s why I want to move in that direction, because that represents the future: The digitalisation of information.
“It becomes simpler then to service the needs of your clients because everything is digitalised and in the digital world very few things are impossible to achieve.
“For Cargolux, this means looking again at all our business processes comprehensively and simplifying as much as we can and it also means automation of a lot of the processes that we do today.”
Airfreight IT systems provider CHAMP, in which Cargolux is a 49% shareholder, is key to that digitisation process, says Forson: “I want to leverage that shareholding so that they are not only a supplier. They are going to become my strategic partner. It will bring us forward on the technology side, and also make better use of community systems as well.”
Asked whether his training as an accountant made him more inclined to cuts costs rather than focus on new products, Forson was quick to dispel this impression.
“What I tell people is that cost cutting, or cost optimisation as I would call it, is not something you do during times of crisis. Cost optimisation is a continuous process that should be part of any business strategy that you follow.
“It doesn’t mean to say that when times are good, you can be free with your money. No, there is always a focus on cost at the end of the day.
“During crisis situations maybe there is even an enhanced focus on cost. But cost cutting is necessary in any business, irrespective of whether the business is booming or whether there is a significant lack of demand in the market.”
He continues: “But that doesn’t mean that we forget about the customer, that we forget about the development of new products, or we forget about the development of new markets.
“There is a cost benefit analysis that always has to be done. And if someone comes to the table and says ‘I have a new product I think the market will be interested in’, then it’s a process of analysis.
“It always gets reduced to numbers at the end of the day. Sometimes you do take decisions that are strategic decisions that are not purely number-based.
“The whole process of digitalisation and focusing on IT capabilities will cost money. It doesn’t come for nothing, but it makes life easier for customers.”
Digitisation and a greater reliance on computerised processes may have implications for the Luxembourg workforce. How will Forson present those challenges to the unions?
“There will always be a level of tension between trade unions and management. And in Luxembourg it is of particular importance to maintain social peace, but for me social peace is not that you get everything you want all the time.”
He adds: “The process that we are going through now also includes a culture change project which we have already launched in the organisation: It’s for the employees to embrace change, change for the good of the company.”
Forson also states: “Yes, our employees are valuable assets to the company, but they must also realise that going through this process will require, not may, but will require some hard decisions to be made at the end of the day. What these hard decisions are – I can’t go into specifics now because we are still doing the analysis.”
This should not be interpreted as retrenchment, says Forson. “Only by being sustainable can I offer employment to the people of Luxembourg.”
Forson said that the one “major element” of the strategic review is to be better able to deal with the volatility within the industry.
“That’s crucial. Sustainability is the other priority. I don’t want to be caught in a position where things will go bad, or the business is under threat or at risk.
“That is a major strategic thrust: How we deal with this volatility and to what extent or how strong do we need to be able to ignore or to achieve this.”
Last but not least, Cargolux wants to ensure that it optimises its share of the demand in the marketplace: “But that does not mean market share at any price. There has to be added value for Cargolux as well.”
Qatar Airways, former 35% stakeholder in Cargolux, has flying rights out Luxembourg which it retained after selling its stake in 2012. How big a threat is that?
“I have to embrace the fact that I operate in a very competitive environment. A lot of people forget the fact that not only does Qatar compete with us out of Luxembourg, but it competes with us all over the world.
“Everywhere we fly, they fly as well with their freighters and, more importantly, they also have belly capacity, which is a major advantage to the combination carriers.
“If we stop flying to the market we basically disappear. A combination carrier can stop main deck freight capacity in the market and still maintain a presence through belly capacity.”
How will Cargolux differentiate itself in what is becoming an ever crowded airfreight market?
Forson answers: “It becomes more and more challenging, because more and more of the products that you carry today are becoming commoditised: What might be a unique product today is a commodity tomorrow.
“Pharmaceuticals are a good example. Today everybody is making investments in something which may be a commodity in three or four years, which everybody offers in the market, and so the premium rates disappear,” although he adds that pharma still has its niche in airfreight.
Forson also views rail freight between Asia and Europe, plus deep sea container lines, as genuine threats to airfreight.
“They both have cooling and refrigeration, the same things we have to offer. The only difference is time-to-market. But if you would have asked someone ten years ago, ‘Do you ever foresee sea as being a rival?’ they would have said, ‘no, you are joking’.
“And you can already see trains running between Asia and Europe and a single train is equivalent to many, many 747 flights. So, it’s a potential threat on the radar.”
The global economy has also changed and Forson says that Cargolux is not immune to what happens anywhere on the globe: “Ultimately it will have an impact on us, and for that you have to react quickly and to embrace whatever change is required in order to be able to do business.”
Forson concludes: “So, those are the challenges for Cargolux as we go forward in the 21st century. And for myself my goal is to ensure that Cargolux is in a much better position to compete in the 21st century, taking into account the competitive environment, the regulatory environment and any other boundary condition that is applicable.”