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Income halves but Lufthansa turns corner

By control on March 21, 2013

Despite a difficult first two trading months in 2013, Lufthansa Cargo claims it has pulled through the worst and expects an improvement in its fortunes this year.

Presenting the company’s annual results in Frankfurt, LC’s chairman and CEO, Karl Ulrich Garnadt, says volumes fell by a further 9.7 percent year-over-year in January and February, following an 8.5 percent loss of traffic in 2012.

“March looks a little better, and economic indicators worldwide show a better second half,” Garnadt says.

A business climate study and German procurement managers’ index, both reliable benchmarks in the past for the airfreight industry’s prospects, were both pointing in the right direction.

“We don’t feel we can increase capacity yet,” Garnadt says.

But he indicated a likely 1 to 2 percent expansion of capacity this year. Right now, the Lufthansa fleet is not flying at full capacity and the first two of five B777 freighters on order will be delivered this fall.

LC saw operating income fall to US$134 million (104 million euros) in 2012, down from US$321 million (249 million euros) the previous year. This performance was “a clear decline but more than respectable in a shrinking market,” Garnadt says.

Revenue was down from US$3.79 billion (2.94 billion euros) to US$3.47 billion (2.69 billion euros). LC lost market share throughout the year, largely as a result of disciplined capacity management and a conscious decision to focus on profitable trade lanes.

“We adjusted capacity by more than the market demanded,” Garnadt says. “We remained in triple-digit profit, and we consider that to be a success.”

Although LC’s results contrasted favorably with heavy losses at Air France-KLM Cargo and Singapore Airlines Cargo, Garnadt said he feared a “two- or three-class society” was forming in global aviation. Lufthansa’s year-over-year volumes had remained consistently below the average for International Air Transport Association member airlines through 2012. But this disguised huge regional differences, with Asian carriers recording double-digit losses while Middle Eastern operators were growing at great speed.

“We may be paying the price [as European carriers] for underestimating trends, and have missed out on opportunities,” Garnadt admits.

LC sees quality as a competitive differentiator, and he says customer satisfaction was at its highest-ever level in 2012. More than 90 percent of shipments flew as planned and the carrier’s fleet of 18 MD-11 freighters was the most punctual worldwide.

A mixed freighter fleet will operate until at least 2020. The MD-11s could easily be used for another 10-12 years, Garnadt says Although declining to comment on where the new 777Fs would be deployed, he saw China returning to growth, and there was “still life in India.”

Signs of recovery in Thailand and Indonesia showed great potential, but Garnadt is hesitant about ramping up services to southeast Asia, commenting that it was an “extremely competitive market with the Gulf carriers offering considerable capacity.” He was more positive about prospects for trans-Atlantic traffic.

Construction of a new 1.6-million-tonne cargo center at Frankfurt, dubbed LCCneo, begins at the end of 2013. The biggest capital investment in LC’s history, the facility will cost more than US$645 million (500 million euros) and is scheduled for completion in 2018-19.

The project goes ahead despite the night flying ban imposed at the airport, but will be 20 percent smaller than originally planned. LC will transfer some business to Munich.

Lufthansa is meanwhile opposing a proposed increase in charges by airport operator Fraport.

“Efficient infrastructure has its price, but we have expressed our concern,” Garnadt says. “Frankfurt is an excellent location but is not necessarily the most competitive.”