Lufthansa Cargo’s gambit for growth
22 / 03 / 2016
Lufthansa Cargo boss Peter Gerber, a keen chess player, has presented his next moves after a chequered 2015 saw the carrier’s reputation for reliability among the freight forwarders damaged by a series of cabin crew strikes in peak season.
Lufthansa Cargo is still a profitable business, and remains Europe’s market leader combination carrier, but it generated adjusted 2015 earnings before interest and tax of €74m, down 40% on prior year and thus cause for some deep end-game thinking on how to recapture lost ground.
The gambit response has many layers and will see the launch of an “innovative” standard airfreight product in the coming months, plus the MyAirCargo service for Lufthansa passengers to export expensive goods bought abroad on their travels but too cumbersome to lug on the return flight home.
Lufthansa Cargo has already placed some strategic pieces on the airfreight board, such as the joint venture (JV) with ANA between Europe and Japan, and the "partnership" — not yet a JV for legal reasons — with United of the US on the North Atlantic. There is also the bellyhold sales component for low cost sister carrier Eurowings to minor cargo outposts.
Gerber, chairman and chief executive of German carrier’s cargo arm, said that 2015 was a “roller-coaster” year with an early boost from the US west coast box port dispute followed by a downturn and “really horrible” quarters comparable to the bad times of 2008.
And while Lufthansa was not alone, Air France-KLM had an even worse time, Gerber pointed to additional freight space pumped in by Middle East rivals which saw total global capacity up by 6% and sluggish demand growth of 2.5%, according to IATA statistics.
The Lufthansa crew strikes incurred direct costs of €30m for cargo but there were extra losses — possibly €10m from bellyhold volumes — as forwarders shifted their freight elsewhere and entertained “doubts about our reliability” in the high season, said Gerber.
"We got a lot of unfriendly calls, and I can understand every single customer on that. I believed that it damaged us a lot, for weeks and months, especially during the high season."
Speaking in a suitably chess-themed room, Gerber said of the market: “Yields are falling, or rather dropping, and the only good message is that our cargo yield is above the market yield, so we have sustained our premium, but if you look at the beginning of 2016 it is not getting better, it is getting worse.”
Lufthansa Cargo’s cost cutting 20-20 programme to make sustainable savings of €40m per year remains “clearly on-track, despite the problems in the market and overcapacity”, helped by the introduction of a fifth B777 freighter, an aircraft with an average 15 hours utilisation per day.
“Our plan for the network is to shift the triple seven more and more to the eastern part of the world because this helps them to display their advantages in productivity."
The airline has deferred an option on five more B777Fs, but will look again at the order book when fuel prices ascent to a point when Lufthansa Cargo will push a button on the Boeing conveyor belt for a delivery two years later.
The carrier also has an active fleet of 12 MD-11Fs, described as "a perfect airplane" in a lower fuel cost environment. Two more MD-11Fs are currently resting in the desert and are likely to remain there, despite the low fuel price, because of market overcapacity.
Gerber said that the carrier’s IT handling programme, completed at the end of 2015, was "a big step forward and is the basis for all other things that we are doing now for our sales system and e-cargo".
"It is critical for success in the years ahead," he said.
In April 2015, the cargo team delayed by at least two years a decision on whether to build a showpiece terminal, the Lufthansa Cargo Centre neo (LCCneo), at home hub Frankfurt, a construction project that would take six years to complete.
Gerber instead emphasised the "continuous modernisation" of the existing terminal, which includes the ‘smartgate’ investment, providing a 3D picture of freight consignments that makes for more efficient loading of aircraft.
The cargo team will go to the main airline board next year, armed not just with the existing LCCneo plans but possibly with "alternative concepts" which seems to suggest a further step in future-proofing cargo terminal design.
Turning to the focus for 2016, Gerber said that it would be on "products", launching at least two of them in 2016, to regain what it considers Lufthansa Cargo’s role as an innovator.
MyAirCargo is described as a "fast, easy and economic shipment of personal goods", aimed at Lufthansa passengers to ship their belongings around world, door to door, with a weight break of 600kg or possibly higher. It will launch in the summer, but will undergo trials with airline staff — a potential 100,000 customer base — from April.
Said Gerber: "We clearly need partners. We will fly airport to airport and for the other aspects we have partners with contracts. We have forwarders to do this for us," adding, "we will integrate the services."
While not mentioned by Gerber, a successful e-commerce product – promoted on company apps for passengers – would heighten the profile of airfreight to the flying public in a positive way, something that could help in the broader political debate over environmental issues.
The second debut product will be "in the field of standard cargo" said Gerber, elaborating very little, except to say that it will be launched "in the middle of the year" and that "our customers are waiting for it".
There will also be a growth in the network on demand charter business, a return to a prior business product, although Lufthansa will be able to respond more quickly than in the past.
The cargo boss admitted that Lufthansa Cargo’s focus on specialist products may have seen standard cargo "neglected", adding: "Therefore we are working very hard on innovation" in this part of the portfolio: "It is not really ready yet and so we have to work on its concrete features".
The chess player has made his move.