The search for more flexibility
17 / 05 / 2013
CARGOLUX has had a consistent policy of investing in the best available freighter equipment, and so it was no surprise when it became the launch customer for the B747-8F.
It has been the carrier’s misfortune, however, to take delivery of the aircraft – the seventh arrived in March, the eighth is due this month (May), and the ninth one is due in the fourth quarter – during an unprecedented global slump in the air cargo market.
It is a slump that, if anything, got worse last year. Cargolux’s full-year 2012 results show a US$35.1m loss, compared to $18.3m in 2011, while revenues were down 6.9 per cent compared to a 8.4 per cent rise in 2011. The carrier had a $100m capital injection from its shareholders this year, with another $175m planned for 2014.
That being said, there is cautious optimism amongst its top management that the worst might now be over. Chairman Paul Helminger, who took office on 15 January, has said: “We now have clarity about where we want to be in five years’ time, and how we will get there”, while interim president and chief executive (CEO) Richard Forson (the board seem unable to decide if he will get the job permanently) points out that the $35.1m loss was a lot better than the $57m loss which was budgeted.
He reports a “marked pick-up” in the market at the end of 2012, which he says was carried forward into the first quarter of 2013. “Volumes were up eight per cent, which was two per cent ahead of budget, and we do see that positive trend continuing, at least for the next couple of months,” he says.
Despite this, the all-cargo carrier is not officially forecasting a return to profit until 2014, which suggests 2013 will also see a loss. “We are taking an extremely cautious app-roach,” is Forson’s comment on this. “If current trends con-tinue, we could make a small profit, but we would rather be cautious and budget for a small loss.”
On a sector-by-sector basis, the main worry is yields out of Asia, which Forson says are now as bad as ever. “Demand growth is now exceeding growth in capacity, but there is still a capacity overhang from previous years. We are able to fill our aircraft pretty well, but as demand picks up everyone is putting aircraft back in.” Better markets include the Americas, in both directions, and exports out of Europe, which have been buoyed by demands from China’s new middle class.
Before the global downturn, one might have expected China to be the key place for the early B747-8Fs to be deployed. As it is, recent routes to get them have been a mixed bunch. Yes, Xiamen, but also Latacunga in Ecuador, Dallas and Hanoi. Are these the kind of routes the B747-8F was originally intended for?
Forson insists they are. “A criticism that other people make of these aircraft is that they are hard to fill up, but we have been very successful at that,” he insists. “A lot of our station managers would like to have them on their routes, but as we have only seven, some of them have had to wait.”
As well as their greater payload, he says a key advantage of the aircraft is their ability to take outsize shipments through the nose door. This explains the deployment to Dallas, to serve the oil and gas industry.
Forson thinks that given the relatively small number of orders for the B747-8F, this will be a key advantage Cargolux has in the future.
“The B777 is an extremely valuable aircraft, but it doesn’t have the nose door. Also, there is a continuing tendency for cargo to get less dense. With so much belly capacity in the market, those operators are targeting the dense cargo, leaving less dense cargo for freighter operators. And you can’t optimise the B777 freighter with low density cargo.”
These comments about the B777F reflect a ‘root and branch’ review of strategy that Cargolux carried out last September and October, where the carrier considered but rejected adding a new aircraft type.
“A big argument for us was the interchangeability between the B747-400F and the B747-8F,” says Forson. “Crew can fly one type one day, and the other the next, which you can’t do with the B777.
The B777 also has different pallet sizes. You can’t move B747 pallets on a B777 without reconfiguring, and if you use B777 pallets on a B747 you don’t make best use of the space.”
By an interesting coincidence it was on 19 November, just after this review, that Qatar Airways decided to divest itself of the 35 per cent stake in Cargolux that it had taken in June 2011. “I don’t think there was a meeting of minds about the future direction of the company,” is Forson’s only comment on this.
The Luxembourg government stepped in to take temporary possession of the stake, and is now looking for a buyer. A long list of cargo carriers, including China’s HNA Group, Volga-Dnepr, Centurion, NCA and Silk Way have been rumoured to be interested.
Forson can’t comment on that, but he does say that the carrier is keeping an open mind about what role a new investor might play. “We would like to see what advantages any potential partner would bring, and we would look for a clear understanding on the shareholder part-icipation side,” he says.
Back with the carrier’s strategic review, the exercise last autumn that rejected the B777F did conclude that Cargolux needed to be more flexible in its use of capacity, and it has decided to do that by keeping five of its B747-400Fs – all of which will be fully paid off within five years – to operate alongside the 13 B747-8Fs that it will ultima-tely have.
“That will ensure that we can take capacity out and put it back in quickly,” reveals Forson. “Since the -400Fs will be paid off, we will be able to park them at relatively little expense.”
As part of its drive to become more competitive, the carrier has also been focusing on its wage bill, with a goal of cutting the cost of its unionised labour by 7.8 per cent. “Intensive discussions” in Forson’s words, are ongoing on this controversial topic.
“We are not touching base salaries and we want to avoid retrenchment, but we are looking to reduce extra benefits,” he says. “For example, we pay more than we are legally obliged to on overtime, and we would like to bring that back to the legally obliged level. In Luxembourg you also get yearly indexation of pay by law, but our staff also get additional pay-ments on top of these. We are asking them to freeze these.”
All of these measures are aimed at making Cargolux better equipped to deal with market volatility, but some might say its whole business model is still under question. With increasing belly capacity, a marked drift to sea freight, changing trade patterns, is there still room for a large freighter operation based in Europe?
Forson’s reply is that such doubts are normal in downturns, but he insists that, when the upturn comes, “everyone will be scrambling for capacity again”. He readily admits that “the days when you could fly to Asia purely on the revenue coming back are gone”, but sees plenty of other opportunities for a nimble, entrepreneurial cargo operator.
Recent new B747-400F routes to Ouagadougou, Tripoli and Port Harcourt, might be good examples. “What has made us the carrier we are is identifying such operations and taking advantage of them,” Forson says.“If we continuously followed everyone else, then we would not be adding any value.”