Freighter futures

LET’S face it, 2012 was a rather dismal year for freighter operators. Never mind a sharp bounce-back: most main deck carriers would have probably settled for a slow recovery.
Instead they have been hit by a double whammy of continued global economic weakness and continued growth in belly capacity.

For industry bellwether Lufthansa Cargo that translated into an 8.3 per cent decline in traffic in the first three quarters of 2012, weakness that looks to have continued into the fourth quarter.
Certainly Lufthansa Cargo chairman, Karl Ulrich Garnadt (right), cannot point to any signs of recovery, and says there was even bad news in the weakening of German exports from September onwards – previously one of the few sources of strength in the market.

“We have seen no peak season, and we have weeks where there is still a downward development year-on-year,” he says. The best he can say is that the market is “maybe levelling out a bit”, though he also points improvements in the purchasing manufacturer’s index in China and the key IFO industrial indicator in Germany, as possible glimmers of hope for the months ahead.

Making this dismal picture even worse for freighter operators in 2012 was the continued rise in passenger operations, which led to more long-haul belly capacity coming onto the market.
Lufthansa may not have seen such a rapid rise in this respect as carriers like Emirates or Qatar Airways, but it still had some belly capacity growth in the first three quarters of the year.
That meant that in order to trim cargo capacity to market conditions it had to make substantial cuts in freighter operations. They were down as much as 10 per cent year-on-year in the first three quarters of 2012, resulting in an overall capacity cut (ie including belly capacity too) of 7.9 per cent.

Some have looked at this pro-longed weakness in air cargo and the continued growth of belly capacity and wondered if freighter operations are under threat in the longer term. For all the short-term gloom, Garnadt does not agree with them. 

“The air cargo business is very volatile and that will continue to be the case, but we expect the air cargo market to return to growth in the medium-term,” he says. “I can also see no reason why air cargo will not continue to play an important role in logistics concepts around the world.”

Nor does he expect any radical change in the mix between frei-ghter and belly capacity – currently around 50/50 – at Lufthansa Cargo.
In fact, he notes that from the current winter schedule, passenger capacity has now contracted slightly at the German airline, allowing the cargo division to bring its MD-11 fleet back up to full utilisation in the fourth quarter.
He expects this trend to continue, with the share of cargo carried by freighters edging up in the coming year or two.

As for other carriers, Garnadt concedes that large deliveries of passenger wide-bodies such as the B777 are eating away at the freighter market, but says the real issue is that older freighters are no longer viable and many carriers don’t have the resources to invest in expensive newer ones. 

Lufthansa Cargo does not intend to be among them. It has five B777-200LRFs on order, part of  a  US$15bn+ofleet renewal over the next few years that will also see many passenger ‘planes replaced.

Garnadt, who has had experience of capacity planning in both passenger and cargo departments, reckons similar factors apply to both sectors now. 

“Older aircraft are no longer feasible, and for cargo this is a big change,” he says. 

“In the 1990s, fuel burn did not play such a decisive role and noise emissions were not such an issue. But now they are both important, and so converting retired passenger aircraft into freighters does not make sense.”

He also casts some doubt on the viability of all-cargo airlines, the kind of carriers that used to be the backbone of the air cargo business. “The com-bination carrier model is the only one I believe has a future in traditional airfreight,” he says.
“You need a regular, reliable passenger net-work and then to use the dedicated freighter fleet to flexibly respond to market changes. We fly freighters to wherever passenger capacity is not sufficient or to places with no passenger network – such as Hyderabad. The benefit of freighters is that you can react to new opportunities in this way.”

One example is Tel Aviv, which has been receiving four Lufthansa MD-11F calls a week since the end of October. Garnadt says it is a high-demand route, but also that passenger services had been switched from wide-body to narrow-body aircraft.
Lufthansa Cargo perhaps also needed somewhere to deploy capacity that it had pulled out of China, having cancelled its freighter service to Chongqing at the end of the summer schedule due to weak demand.

A ‘big hubris’ is Garnadt’s description of the latter mar-ket. “One carrier started service there and then everyone else rushed in and discovered there were not sufficient loads,” he says.
He also takes a forthright line on the demise of Jade Cargo International, the joint venture between Lufthansa Cargo and Shenzhen Airlines, which flew its last flight in December 2011.

“It is a sign of how much overcapacity there was that the market did not even notice that its six freighters were no longer in the market,” he says, adding that “it was not the only joint ven-ture in China to go out of the market”, further citing: “a certain limit to how far partners in China wanted to eng-age regarding the capital required.”

Back home, Lufthansa seems to have made a tentative start on renewing its frei-ghter fleet, but to be hedging its bets about the longer term picture. Currently it has 18 MD-11Fs and shares eight B777Fs with DHL in the AeroLogic joint venture. Garnadt confirms that the five B777Fs on order were originally planned as expansion for this fleet.

But, given current market conditions, he has yet to decide what will happen when the first two arrive in the fourth quarter of 2013 (with two more due in 2014 and the fifth in 2015).
“Our current thinking is to use them to replace the [ageing] MD-11Fs, but if the market has come back by then we would have the choice to use them for growth,” he says. He sounds quite happy to have the luxury of waiting until next year to make that decision, however.

Meantime, Garnadt insists the MD-11F remains a very viable aircraft.  As the manager in charge of network plann-ing at Lufthansa Cargo from 1995-1998, he was responsible for their introduction, and he still sees them as a good fit to the kind of routes Luft-hansa Cargo wants to fly.

“They are an efficient air-craft and have extremely high operational stability,” he says. “The first one was delivered to us in 1998, and 14 of them came straight off the production line, so they are not too old.
In the long-term, maintenance costs for them will go up but, on the other hand, they are written down, so we have the flexibility to ground them without [incremental] loss if the market then goes down.”

He gives just a glimpse that Lufty may be thinking beyond the MD-11Fs, however, when he describes the five B777Fs on order as “the initial stage of our fleet renewal plan”. Challenged on this he says no further orders are envisaged yet. 

But he also concedes that “just as the MD-11F was a big step forward in fuel efficiency from the B747-200, the B777 gives us the next technological leap, a very similar improvement in fuel consumption”. 

That makes it hard not to imagine the German carrier opting for an all B777 fleet in the medium-term.