The German carrier’s logistics division made a combined €50m loss in 2016, as its cargo airline business pushed ahead with a C40 cost-cutting and efficiency program that will save €80m per year, shed 800 jobs and put the cargo division back in the black in 2018 and return to “normal” profitability from 2019.
That was the message from Peter Gerber, Lufthansa Cargo's chief executive and executive board chairman, when outlining the carrier’s strategy as the carrier also considers a freighter fleet renewal, the options for a new cargo terminal at home hub Frankfurt, the threat from Middle East Gulf rivals and a “very volatile” air cargo sector.
Gerber said that the 2016 loss was due mainly to restructuring costs around the C40 program and the signing of a maintenance contract for its five Boeing 777 freighters now that their engineering “cost honeymoon” is over.
While 2016 saw an “extremely hard” first half, Lufthansa discerned “quite good signs” in the last quarter which has continued into 2017.
Operationally, Lufthansa Cargo “came close to zero” rather than a loss last year, said Gerber, adding that he espied a “glimpse of hope” for end of 2016 and 2017, emphasizing that the division loss was more about “reinvesting for the future and engineering”.
Lufthansa Cargo's evolution is packed in four parts: a cost cutting and efficiency drive (C40), looking for new products, airline partnerships and digitization.
C40 is ongoing and two new products were launched last year: MyAirCargo and td.Basic. MyAirCargo, aimed at passengers wanting to fly their shopping home, has been at the smaller range of expectations, said Gerber, while td.Basic has 'suffered' as customer used higher yield products instead: "It is a nice problem to have," he added.
The established joint venture with Japan’s ANA has now moved beyond the operational agreement to IT integration.
Then there is a joint venture with Cathay Pacific, currently operating from Hong Kong to Europe but set to go in the reverse direction within 2017, while the two airlines have now moved into each other's terminal at Frankfurt and Hong Kong.
Negotiations with US carrier United are in the final phase and expected to conclude in a few weeks, with a launch this year. The “one-cargo” link with Swiss, owned by the Lufthansa parent group, will bring together “two strong brands”, said Gerber, calling the combination a “cornerstone” project for the German carrier.
Digitization at Lufthansa Cargo is firstly about bringing the carriers internal IT “into the 21st Century” and then onto the next layer in dealing directly with the customer.
“Today, we see a lot of transnational business with phones and sheets of paper,” said Gerber, who added that it was important to “plug into the systems of our partners” while the third layer will look at “cloud data” alternatives and the potential arrival of “digital forwarders”.
Gerber said of the four-pronged strategy: “We need to take these steps, in order to stay in the Champions League.”
The effect of digitization on the forwarder industry is now being debated, but Gerber was firm on Lufthansa Cargo’s current business relationship structure.
“The freight forwarders are our valued customers and will remain valued customers. If the market changes, then we will adjust, but I don’t see that happening yet."
He added that digitization is “always a threat to the middleman” and that in ocean freight 50% of the shippers deal directly with the container ship operators, but Lufthansa has not taken any steps in that direction.
“We have a department of industry development that is always talking with the end customer about their needs, but the business is always with the freight forwarder or together with the freight forwarder.”
Lufthansa will continue to operate freighters, said Gerber, who outlined the investment possibilities, which could include additional B777Fs, either fresh off the Boeing production line, second hand or leased.
The carrier currently operates 12 MD-11 freighters, with two more of the 90 tonne capacity tri-jets parked and up for sale, and a third set to join them this year. The two-engine B777F has a capacity of around 105 tonnes.
Gerber said: “We are happy with the MD-11s,” adding that a decision on how to transition from the MD-11Fs to replacement main deck capacity will be made within the next 12-15 months, saying: “The view of the whole group in decision and the B777F is the only product for us to fly,” this dismissing any chance of a four engine Boeing 747-8F darkening its hangar doors.
“I do not see a role for the B747-8F. We decided on the B777 for two reasons: we are in the middle of Europe which means we can fly to every location in the world. And 105 tonnes is the perfect capacity and if we have more capacity to fill there is a problem with the yield and prices.”
But the current market conditions and fuel price are not sufficient to force an immediate decision on the fate of the MD-11Fs. Said Gerber: “The MD-11s are not that old, as we got the last of the production freighters in 2000, and 15 years is no age for a freighter plane. In terms of fuel costs, there is no crisis in flying the MD-11s.”
He added: “Lufthansa will always fly freighters and we need these freighters but the question is the best way to roll them over and to consider the financial financial alternatives.
“There are ten big players in the airline business and nine of them operate freighters. The only one that does not is IAG but it uses Qatar Airways freighters.
“It is a fairy tale or alternative fact that everybody is getting out of freighters. Everyone is flying freighters and the big players are increasing their fleets.”
It is interesting to note that Lufthansa is a joint venture partner with DHL in Aerologic, which also operates B777Fs. Gerber said of this “successful business” that talks are taking place with DHL on “how to develop it further”.
It was almost two years ago that the carrier put its planned new showpiece Lufthansa Cargo Centre neo (LCCneo) project at Frankfurt on hold due to financial and cargo growth reasons.
A final decision on LCCneo is unlikely until next year, at the earliest, and Gerber spoke of “alternative planning” which could see modular increments tailored to freight market segments rather than a one-size fits all “big building”.
One ‘benefit’ of the cargo downturn last year is that the present Frankfurt terminal has sufficient capacity to accommodate Cathay Pacific, although there will be some modernization of the facility.
The question of hidden subsidies and level playing fields came to the fore when Gerber was questioned about the Middle East Gulf carriers.
While acknowledging that airlines have to be competitive in their own right, hence Lufthansa Cargo’s C40 program, Gerber said that competition “has to be fair and with no subsidies,” referencing the “heavy subsidies of the [Middle East] Gulf carriers”.
Gerber said that the European Commission in Brussels, bundling up the traffic rights of member states in talks with the Gulf carriers, should negotiate with regard to the World Trade Organizations international standards, adding: “They (Gulf state carriers] should not get additional traffic rights and already have more than expected.”
There is a slight irony in that the Lufthansa parent group in February this year signed a non-equity partnership with Etihad in the UAE, with an initial focus on in-flight catering and aircraft maintenance. Although cargo is not on the menu at this stage it could be looked at in the future, conceded Gerber.
So when will Lufthansa Cargo be making money again was one bald question to the cargo boss.
“One simple truth is that the market is very volatile and my experience of the last three years is that when things are bad people see the end of airfreight and when there are better times, people say it has a bright future.
“The markets will get better but they always do, and our cost cutting and efficiency program, the biggest in Lufthansa’s history, will see us come back into the black in 2018, and in 2019 we will be back to normal and maybe, maybe, even earlier.”