Lufthansa Cargo is at a crossroads.
All things considered, the Lufthansa Group had a good first quarter. Revenue was almost flat with the previous year’s quarter (in an environment of falling fuel surcharges), operating income (EBIT) went from a loss of €144 million in 1Q15 to a profit of €66 million this year, and the pattern of reduction in net loss continued, with the Group coming close to break-even.
But what is true for the Lufthansa Group as a whole is definitely not true for its cargo operations, as the company’s Logistics segment took a steep dive, tumbling from an operating profit of €52 million in 1Q15 to a loss of €19 million in the first quarter of this year. And with no easing of external conditions in sight, Lufthansa CFO Simone Menne says the company will have to look in the mirror: “”During the year, we will look into the strategy, have considerations about size of freighter fleet and further measures.”
How bad is the current situation? Consider the following first-quarter financial and operational data:
- Revenue: down 21.8% y-o-y to €480 million
- EBIT: down from a profit of €52 million to an operating loss of €19 million
- Cargo traffic: down 4.8% to 1.92 billion RTKs
- Cargo capacity: down 1.6% to 2.84 billion ATKs
- Cargo load factor: down 2.3 percentage points to 67.6%
Nor was salvation to be found by including traffic carried by subsidiary carriers. Including all subsidiaries, Lufthansa’s Group cargo traffic was down 6.2% to 2.26 billion RTKs and load factor dropped 3.5 points to 66.1%
Now what? As mentioned above, CFO Menne made it clear in her remarks following the first-quarter earnings call that the answer must come from within, saying the company did not expect earnings to improve until the fourth quarter, and then only because the fourth quarter of 2015 was hit by serious strikes. Regarding specific measures, for the most part she was vague on details, saying things like “we will look into the strategy.” But she was clear about one thing: the freighter fleet is no longer sacred.
It was not that long ago, with European rivals Air France-KLM and IAG savagely cutting their freighter fleets, that Lufthansa said it intended to remain a serious cargo player, and that, other than minor adjustments, it would maintain its fleet of MD-11 and 777 freighters. But today, Ms. Menne made it clear that the size of the fleet would now come under consideration.
Lufthansa Cargo currently operates five 777Fs and twelve MD-11Fs, and Cargo Facts does not expect massive retirements tomorrow. But given the seemingly unstoppable increases in belly capacity, the likely continuing difficult revenue and yield environment, and the relentless competition from carriers based in the Persian Gulf, Turkey, Russia, and Luxembourg, we would be surprised if Lufthansa does not soon begin parking MD-11Fs. Ms. Menne hinted as much, saying: “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.”
But parking freighters is not going to be enough. Air France-KLM has reduced its freighter fleet from almost twenty only three years ago to just eight now, and will soon be down to five, but this has done nothing to stem the flow of red ink in its cargo division. Nor will hand-wringing and complaining about unfair competition help.
The world of air freight is undergoing a fundamental change, and those who don’t adapt to the new world will continue to see their traffic fall and their losses mount.