What next for Lufthansa Cargo?

Lufthansa Cargo, once considered the Gold Standard for combination carriers, has faced increasing challenges in the last decade. In a wide-ranging interview in German financial daily Handelsblatt, cargo boss Peter Gerber talked about both the current situation and Lufthansa Cargo’s plans for the future.

Some of the challenges have been industry-wide – wars, recession, terrorism, flat or declining air freight demand – and have not disproportionately affected Lufthansa. Others, particularly the increased competition from carriers based in the Middle East, Turkey, and Russia have affected the Asia-Europe trade lane specifically, with Lufthansa and other European carriers being hit hard.

As we reported last week, Mr. Gerber said that, following three difficult quarters, Lufthansa Cargo would reduce both staff and main-deck capacity as part of a cost-cutting program called “C40,” under which it hopes to “to reduce spending on personnel and services by €40 million per year.” Mr. Gerber would not be drawn out on the number of jobs to be cut, but he was quite specific about aircraft, saying: “We are removing two MD11 cargo planes from the fleet, one from active operations and another from our reserve capacity.”

However, there was much more of interest in the interview, and we start with Mr. Gerber’s comments about a subject that, along with yield, is one of our pet peeves here at Cargo Facts. Much has been made recently about declining cargo load factors, as if (like declining yields) this was automatically A Bad Thing. Mr. Gerber put it in perspective when he said: “Cargo load factor is not particularly meaningful, because it includes a lot of belly space available on routes that have little or no air freight volume. Theoretically, we could load cargo onto every Lufthansa passenger plane. But from some sites, like Philadelphia or Boston, air freight is seldom shipped. From a cargo perspective, these planes are almost always empty, but still are included in the statistics.”

This echoes our view that load factor is relevant only when applied to routes where cargo is important. Often, those routes are flown by passenger aircraft, so belly load factor can be important. But with passenger demand far outstripping freight demand over the last decade, cargo load factor has become a much less relevant measure of the health of our industry than it once was.

But, as might be expected, Mr. Gerber did use capacity issues to take a shot at his Middle East-based rivals. When asked who was injecting capacity into the market, he replied: “Basically, airlines from the Persian Gulf with their state subsidies. They are expanding vigorously in the passenger business, so a great deal of freight capacity in airplane bellies comes onto the market. And in some cases, fleets of planes devoted exclusively to cargo are also being built. What is more, the Chinese increased their capacity. But they, of course, are suffering greatly from the economic slowdown in their home market.”

Regarding the impact of the seemingly incessant strikes by Lufthansa employees, he said they were particularly damaging. While the carrier’s Frankfurt hub offered the cargo arm a dense network of connections on which there was valuable belly capacity, “when these capacities are canceled because of strikes, that hurts.” He also pointed out that for about half of air cargo, the choice of carrier is made three days or less before takeoff, “so when shippers hear the word ‘strike,’ they immediately rebook, especially on routes where there is sufficient capacity.”

There was more that we will not go into detail about here – Mr. Gerber’s hope that the current wave of terrorist activity would not lead to curtailment of the free flow of goods and passengers, and his desire for governments in Europe to take a firmer stance against unfair competition (i.e. state subsidies for airlines) – but his final comments about the future of the industry were very interesting.

First, he discussed a new kind of customer that was becoming ever more important: “We are witnessing a growing influence of consumers on logistics. It is well-known that the end customer is ordering more and more on the Internet. The order can be placed directly with Amazon, but also with a so-called consolidator who assembles freight packages. A few years ago, this function didn’t even exist in such a form. For us, this means we also have to deal with entirely new and different customers.”

And would Lufthansa Cargo ever consider becoming more than a carrier? Enter the logistics business and have customers order goods from Lufthansa, which Lufthansa would then ship from its own warehouses? “I wouldn’t go that far – because storing goods at an airport is extremely expensive. But I wouldn’t rule that out in the future – that we will be more directly involved with end customers.”