Lufthansa Cargo readies for recovery after 'very red' 2009

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Last year the global cargo business suffered a sudden and unprecedented collapse in volumes, threatening catastrophe for freight airlines that had been enjoying a consistent period of almost limitless growth.

For Lufthansa Cargo, the second largest "combination cargo airline" (carrying both maindeck and belly freight) after Air France/KLM, the collapse threatened to spell disaster. Operating a fleet of Boeing MD-11Fs from Frankfurt and a sister to Lufthansa's passenger division, the carrier has a relatively high cost base and its stated primary focus is on quality rather than low prices.

"The air-freight industry lost five years of growth in 2009," says Lufthansa Cargo's chief executive Carsten Spohr.

RAPID RESPONSE

As demand dried up, volumes fell by a tenth while cargo rates plummeted 12%, so Lufthansa Cargo had to respond quickly. Four of its 19 MD-11Fs were quickly withdrawn, joining some 180 widebody freighters now in desert storage. On some routes - particularly between Europe and the USA - yields fell 30-40% on previous years, says Spohr.

Lufthansa Cargo cut fleet capacity by 18%, but even this did not match the levels of volume collapse at the start of the crisis.

"We couldn't shrink as much as the volume declines," says Spohr, as the carrier needed to be ready for the bottoming out and eventual recovery.

The airline moved quickly to cut overheads, introducing short-time working and a "headcount reduction programme". Management "went without part of their salary to help", says Spohr.

By the end of the year Lufthansa Cargo had lost €1 billion ($1.4 billion) worth of revenue, leaving the top line down by one-third compared with 2008, at €1.95 billion. But the cost-cutting programme was even more successful than management had expected, with a 23% reduction worth over €600 million offsetting two-thirds of the revenue decline. Overall, unit costs (per available tonne/km) declined 9% last year.

But this did not prevent the carrier suffering what Spohr calls a "very red result" and its worst-ever year by far, as 2008's €164 million profit turned to a loss of €171 million.

Last year was a complex one for cargo industry fortunes when examined by quarter. For the first two quarters the market was in freefall, as the cargo airlines fought to stir up demand and keep their shrunken fleets busy by drastic pricing cuts.

Then came turnaround, as empty inventories around the world needed restocking.

"In the third quarter yield management came back - we could reject non-profitable enquiries," says Spohr.

As carriers with depleted capacity struggled to cope with the rapid surge in demand, rates soared. Spohr says that one big freight-forwarding customer told him that 2009 saw the lowest and highest rates ever between Frankfurt and Hong Kong. These high rates infuriated some customers, but Spohr points out that in 2009 "there was one month of crisis for forwarders and 11 months of crisis for the airlines".

While the industry is reluctant to declare that recovery has begun, signs from the early part of this year have been good. January 2010 International Air Transport Association figures show system-wide air freight up 28% on the previous January. Unsurprisingly it was Asia-Pacific that saw the biggest jump, up 39%.

But Spohr remains cautious and although preparations are under way to return two MD-11Fs to service, a final decision will not be taken until there is further evidence of recovery.

The cost reduction drive continues, with a 10% (per revenue tonne/km) drop targeted in 2010, along with a 20% increase in revenues. "We are prepared for a double-digit increase in volumes this year and are optimistic we can achieve this," says Spohr.

He is reluctant to be specific about the timing, but sees a move back into the black "at the latest in 2011, perhaps sooner if the good start to 2010 continues".

While Lufthansa Cargo has modest growth plans for 2010, its Leipzig-based AeroLogic 50/50 joint venture with DHL is planning to double its Boeing 777F fleet to eight aircraft and add at least three new destinations.

The carrier is also well placed to benefit from Chinese freight growth, through its Shenzhen-based Jade Cargo International arm. Lufthansa holds a 25% stake in the Boeing 747-400F operator, which enjoyed its first profitable year in 2009.