EU carriers continue to struggle

In the European Union, just four airline groups – Air France-KLM, Cargolux, IAG, and Lufthansa – carry almost 90% of the cargo flown by EU-based carriers.

Historically, these have been some of the most respected and successful airlines in the world, but history doesn’t stand still, and all of these once-mighty cargo operations have struggled in the last few years as competition from new carriers in the Middle East, Turkey, and Russia has eaten into their market share and weakened their pricing power.

All-cargo carrier Cargolux responded by selling a 35% stake to Henan Civil Aviation Development & Investment Co (HNCA, an investment arm of China’s Henan province), and switching to a Luxembourg/China dual hub strategy. Cargolux is not publicly traded, and does not publish the same detailed traffic and financial data as the other three, but as far as can be told, its strategy seems to be working. In 2014, the last period for which data are available, Cargolux’s revenue was up 10.1%, volume (in tonnes) was up 9.9%, and traffic (in RTKs flown) was up 11.2%.

IAG, the parent of British Airways and Iberia, last year terminated its long-standing ACMI contract with Atlas Air for three 747-8Fs, and said it would focus on the bellies of its passenger fleet, supplemented by block space agreements with other carriers for limited main-deck capacity, and a continuing agreement with DHL express for intra-Europe feeder support. So far, this decision seems to be working. We say “seems to be” because IAG does not provide EBIT data for its cargo operations, nor data on cargo capacity or load factor. But available data show revenue up despite a small decline in traffic, and statements from the Group’s Cargo division show a new optimism.

Lufthansa has responded to the challenges of the last few years by renewing its commitment to a major main-deck operation. It recently took delivery of its fifth 777F, has retained fourteen of its MD-11Fs, and says it has no plans to shrink its fleet. Through the first quarter of 2015, this strategy appeared to be, if not wildly successful, at least adequate. The Lufthansa Group’s Cargo division remained profitable despite falling demand, and while it was clear that things were not going well, at least they were not going badly. As can be seen in the chart, that changed in the second quarter, with an operating (EBIT) loss of €68 million – down from a €20 million profit in 2Q14. Lufthansa did not directly address the operating loss in its quarterly report, but did say: “Competition on global airfreight markets remains intense. Airlines from the Middle East and Turkey especially are increasing their freight capacities, particularly due to their many new passenger aircraft.”

And then there is Air France-KLM, where, regardless of the strategy its cargo department adopts, operating losses continue to increase. The chart says all that needs to be said – revenue down, volume down, traffic down, load factor down… As to strategy, AF-KLM continues to pare its freighter fleet, planning to operate just two 777Fs and three 747-400ERFs by sometime in 2016. However, AF-KLM has reversed its former strategy of concentrating on carrying only profitable cargo, and has now instructed its sales force to “raise the load factor and volumes, through extremely aggressive pricing policies.”