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Lufthansa eyes growth amid challenges

By Martin Roebuck on January 31, 2014

The airfreight market may be on the up again, but this is not a time to be operating freighters out of Europe – unless, perhaps, you are Lufthansa Cargo.

Lufthansa received its first freighter in 13 years, a Boeing 777F, in November 2013 – “a very emotional moment for us,” Andreas Otto, member of the executive board, product and sales, admitted as he showed a video of the inaugural flight to JFK at a cargo media briefing in Frankfurt. The second in a series of five 777s is already with the carrier, with the third arriving in early March and the fourth set for delivery in August.

By the latter date, Lufthansa will have to decide whether to exercise its option for five more of the type.

“The 777 is the best cargo aircraft in the industry but also most expensive, so it’s a question of how many our shareholder will let us have,” Otto said. “No European operator can fly anything except the 777 profitably with prices higher than US$80-90 per barrel.”

LC’s profits fell sharply in the first three quarters of 2013 to €43 million (US$58 million), continuing a downward trend from €310 million (US$418 million) in full-year 2010 to €249 million (US$336 million) in 2011 and €104 (US$140 million) in 2012. But, contrasting Lufthansa’s fortunes with those of key rivals on the Europe-Asia trade lane, Otto described Air France-KLM as “a big disaster” after clocking up a €184 million (US$248 million) loss in the first three quarters of the last year. Given the recently announced further shrinkage in its freighter fleet, he said AF-KLM “won’t have the critical mass to perform in future.”

Singapore Airlines was also pulling out freighter capacity and had continued losing money over the same nine-month period. Cargolux had received new aircraft but the exodus of senior management created “doubts around its future,” he suggested.

However, Otto reserved his sharpest judgement for IAG Cargo, after the carrier brought an early end to its freighter contract. Three wet-leased B747-400Fs are to be returned to Atlas Air and IAG will instead purchase capacity from Qatar Airways on the Hong Kong-London route, while covering other freighter sectors as best it can with belly-hold capacity.

“We always questioned how BA could afford to run three freighters out of Europe, but now we know there was some vanity [behind this]. They were never profitable,” Otto said.

With EVA Airways and Aeroflot withdrawing freighters, Air Cargo Germany going bust and World Airways in Chapter 11, Otto said he was witnessing “the biggest consolidation since I’ve been part of this industry”.

Yet, in a conference with 200 cargo customers ahead of the media event, Lufthansa had asked shippers whether they needed freighter services in and out of Europe, and if they were willing to pay an appropriate rate.

“They said that in the right circumstances, yes, because the increase in belly-hold capacity cannot replace what they need,” Otto said.

The upbeat message of the Frankfurt presentation was “Here Comes the Growth Again.”

Global Insight has forecast that GDP is growing faster this year in every region of the world than in 2013, with a global growth rate of 3.2 percent worldwide. Otto said that airfreight historically outgrows GDP growth by 1.5 to 2 percent.

Although it is not present in the intra-Asia and trans-Pacific markets, Lufthansa Cargo is looking for a 5 percent increase in 2014, without a significant increase in capacity. It took out two of its 18 MD-11 freighters last year, counterbalancing the first two B777s. Another two MD-11s will be parked up from the start of the summer schedule, but could be restored to service for peak season if required, Otto said.

He charted many challenges facing Lufthansa, including emissions trading, the delay in implementing a Single European Sky, fuel costs, the night curfew at Frankfurt Airport and stronger competition from Amsterdam Schiphol, which is now growing more strongly than Lufthansa’s home hub.

“We must improve the competitiveness of Frankfurt,” Otto said, spotlighting the airport’s relative weakness in perishables handling. Products such as flowers flew to Schiphol even if they were destined for the German market, he pointed out.