Cargolux: The Saga Continues

Just when it appeared that Starship Cargolux was on a steady course “to boldly go where no man has gone before” – that is, to go to China and implement a dual hub strategy – there is a new plot twist: President and CEO Dirk Reich is out, and will be replaced by current CFO Richard Forson.

Reich took the helm at the most difficult time in Cargolux’s history and piloted the carrier through two difficult years, leading it back to profitability in 2015, successfully negotiating a new labor contract with intransigent unions, guiding it through the implementation of a second hub in Zhengzhou (as required under the terms of the sale of a 35% share in the carrier to an investment arm of China’s Henan provincial government), and paving the way for the launch of the new Cargolux China joint-venture airline.

And now, he is leaving.

The company this morning said he “has decided to leave Cargolux for personal reasons and has asked the Board of Directors for the early termination of his contract.” Of course, all company press releases cite “personal reasons” when a senior executive quits or is fired, but in this case there may be some truth in it. A report in The Loadstar quotes a source at Cargolux as saying Mr Reich’s decision was related to health problems, and that he wanted to stop commuting from his home in Switzerland.

On the other hand, there is no shortage of reports in the Luxembourg media that he was pushed out by the Cargolux board and the Luxembourg government (which, ultimately, is in control at Cargolux).

At the heart these reports is speculation that the “success” of the Zhengzhou hub has come at an unaffordable price. That in order to fill the freighters flying back and forth between Zhengzhou and Luxembourg, Cargolux has had to offer unsustainably low rates, leading to a reported $20 million loss in the first half of this year.

Cargo Facts has no knowledge of the accuracy of that $20 million figure, but several sources have confirmed that Cargolux is indeed offering very low rates ex-China. To what extent these low rates are offset by subsidies from the local government (an arm of which, remember, has a 35% share in Cargolux) is unclear, but what is clear is that a lot of cargo that would otherwise have flown to Europe from other origins in China is being trucked to Zhengzhou and loaded onto Cargolux freighters.

Given that the decision to sell a 35% stake to Henan Civil Aviation and Investment Co, with the dual-hub strategy as a requirement, was made by the Luxembourg Government and the Cargolux board before Mr Reich was hired, problems that have grown out of that decision cannot really be placed on his desk. And, regardless of what is happening in China, Cargolux must look closer to home for the root of the profitability problem.

Competition in the air freight industry is fiercer than ever, and any carrier that hopes to succeed must balance its efforts on the sales side with equal vigilance on the cost side. But the political environment in Luxembourg makes this very difficult. One needs only to look back to the year prior to sale of the stake to HNCA for evidence of this. When the Luxembourg government took over the stake in Cargolux formerly held by the bankrupt SwissAir, it went looking for a buyer, and soon found one in Qatar Airways. But what seemed like a perfect partnership soon unraveled, with Qatar boss Akbar Al Baker making no secret of his frustration at trying to run a profitable airline in the protectionist environment of Luxembourg.

Whatever the reason for Mr Reich’s departure, we wish him well. Likewise, we hope that incoming CEO Richard Forson can pilot Cargolux through the current storm and back into sunny skies.