Lufthansa Cargo has spent the last six years breaking through old barriers. Under its new chairman Jean-Peter Jansen, the pace shows no sign of letting up

When Lufthansa Cargo (LHCargo) issued a press statement in November announcing a "value-driven restructuring programme", it got little more than polite attention from the media.

The statement announced that LH Cargo had decided to split its activities into three new business units - Global Cargo Handling Services, Global Freighter Operations and Global Cargo Net for the sales and management of its airport-to-airport business. Nothing to get too excited about there, one might think - just another corporate reshuffle.

This being LH Cargo, however, the statement was worth closer scrutiny. The world's largest carrier of international air freight (the USA's FedEx is bigger overall, but only due to its huge domestic traffic) has a history of producing quiet statements that turn out to have radical implications. Its new three-way structure is part of that tradition - an apparently innocent change that masks a potential revolution.

Going it alone

The most significant change was in 1995 when the Lufthansa Group took the apparently technical step of making its cargo operations not just a separate division, but a separate company. For Wilhelm Althen, its first chairman and the man who made LH Cargo what it is today, that step was fundamental to all that came next.

"My only disappointment is that it took 20 years to persuade my colleagues that we could never succeed as the unloved child of the passenger parent," he said just before retiring in December 1999. "But having made that step, it has given us a 20-year head start on all the competition."

The brave experiment very nearly came undone. In 1996, LH Cargo made a loss of DM60 million ($35 million) and critics gleefully said that cargo operations could not possibly make a profit. But in 1997, Althen bounced back with a DM194 million profit and an order for five new Boeing MD-11 freighters, a daring move for a carrier which already had a sizeable fleet of Boeing 747Fs.

When Boeing announced it was ending production of the MD-11 shortly thereafter, Lufthansa took six more. Cargo experts said that a freighter fleet of that size could never be viable and predicted financial disaster.

Undeterred, LH Cargo continued to move forward. In 1998 Althen unveiled Business Partnership, a programme of closer ties with freight forwarders. Then, for good measure, he announced that all LH Cargo products were to be converted to one of three levels of time-definite services with performance guarantees.

Even allowing that one of those levels was equivalent to the old standard air freight product, it was a bold move. Analysts predicted that customers would not be prepared to pay a premium for the new products and said the partnerships were mere window dressing for the relationships that already existed with major customers. Nevertheless, a host of airlines have since copied both ideas.

Hinting at much greater change ahead, Althen then retired, leading to an awkward interregnum. That did not stop LH Cargo unveiling what it claimed was the first true cargo airline alliance - with Singapore Airlines and SAS - and another even more radical alliance with Deutsche Post, the German Post Office, which itself had just taken over leading forwarders Danzas and AEI to become a new global logistics giant.

Since Deutsche Post and Lufthansa also each owned a 25% stake in express operator DHL, the two seemed poised to take control of it as well (in fact, Deutsche Post went on to do the job all by itself, boosting its stake in DHL to 51%). The criticism now was that LH Cargo and Deutsche Post were planning a sinister takeover of the air cargo industry, creating the ultimate forwarding, express and air freight operation.

It was at this point, in May last year, that Jean-Peter Jansen took over as chairman of LH Cargo. To the cargo industry he was an unknown commodity, even though he had served for a year and a half on the Lufthansa board.

His 25 years with Lufthansa has largely been with the parent airline, moving from an IT role in the technical division to maintenance and then into purchasing. It was as head of corporate purchasing and properties management from 1997 onwards that he was involved in the MD-11 freighter decision. "Because of that, the board thought it would be a good idea for me to make it happen," he jokes.

If Jansen lacks a cargo background, it has not taken long for him to become infected with the cargo culture, as well as something of Althen's zeal for embracing change. From his offices overlooking the freighter ramp at Frankfurt Airport, he speaks enthusiastically of the high level of commitment he has found in cargo employees. "That is unique and is something I have not seen before in my 25 years with this airline," he says. "Maybe it comes from the former situation, where cargo was an annex of the passenger side and cargo felt like an underdog, but people are genuinely proud to be working for LH Cargo."

One thing that is certain about the changes taking place is that the old rigid barriers between carrier, forwarder and express operator are breaking down. Althen's Business Partnership (working closer with forwarders) and time-definite services (becoming more like an express operator) were acknowledgements of that, but the new three-part structure takes the blurring of boundaries another step further.

"We looked at our situation and we saw that we had three different core competencies, each with their own markets, their own competitors and their own opportunities for growth," says Jansen. "What we are doing is freeing them to grow, but also forcing them to be competitive and contribute to profitability too."

Taking the Net unit first, one might see this as an attempt by LH Cargo to imitate the non asset-based flexibility of major forwarders, who can operate in any country and create global networks without being bound by traffic rights. Net will do the same by using the capacity of other operators. "If we can't fly from Japan to the USA with our own freighters, that should not prevent us offering our customers that capacity," says Jansen.

Pooling capacity

One way to break out of the box will be for Net to work with alliance partners Singapore Airlines and SAS on joint freighter routes. Such co-operation already exists in the other direction: some years back SAS gave up operating its own freighters in favour of sharing Lufthansa capacity to key markets such as Hong Kong and Tokyo.

Co-operation need not be confined to formal alliance partners, however. In fact, the first fruit of the new policy is a round-the-world flight to be launched on 25 March in partnership with Air New Zealand. While Air New Zealand is a Star Alliance carrier, it is one with which Lufthansa has had no real cargo relationship before. Lufthansa is supplying rights to New York and from Malaysia, along with an MD-11F to operate the three-times-a-week service. Air New Zealand will cover the transpacific legs from Los Angeles to Auckland and Auckland to Kuala Lumpur.

Joint freighter operations are not the only way to break free from traffic rights, however. LH Cargo has also taken over the entire belly capacity of Spanair, and Jansen says Net is actively looking to do the same for other belly carriers, whether associated with Lufthansa or not. "It makes sense. As a cargo company with unique products and competencies, we can add value to belly carriers in a way they could not do on their own. It's also a way to grow our network. It is, as the Americans say, a win/win situation."

It hardly needs saying that LH Cargo can also draw on six years experience of having exactly the same relationship with its own parent carrier. It buys Lufthansa's entire belly capacity under a multi-year contract that Jansen says takes account of all the variables, such as new passenger routes which might be unprofitable for cargo. "After six years, we have become quite good at this calculation," he says. "We deal with each other at arms length, but in a co-operative way, and we can do the same for other carriers too."

If Net represents LH Cargo reaching out beyond its own network, Freighter Operations could be a kind of mirror image. With the late Michael Chowdry of Atlas Air having proved that there is a lucrative contract market for freighters, Jansen sees no reason why LH Cargo should not participate. "After all, the core competency of Freighter Operations is exactly that: flying ACMI for Net."

Bigger is better

Jansen is sure that Lufthansa can be competitive in the field: "To be competitive you need volume - the cost curve stabilises after 10-12 aircraft, as I know from my old job. We now have eight 747-200s and 14 MD-11s. That gives us the volume to achieve real critical mass." He openly admits that such a fleet would have been almost impossible to achieve had LH Cargo not become an independent company in 1995.

"The Lufthansa board would never have approved the freighter purchases if we had still been part of the passenger airline. But because Cargo made its own profit, we could make that investment decision."

For whom might LH Cargo operate its freighters? Alliance partners such as SAS are the obvious answer, but a more creative idea is forwarders. Jansen notes the growing interest of the larger forwarders in having their own dedicated freighter routes and has created a weekly 747F route from Frankfurt to Atlanta for forwarders Schenker and Kühne & Nagel, which it calls Southern Connex.

More such routes can be expected to emerge. Initially, to avoid conflicts of interest, such contracts will be channelled through the Net business unit rather than Freighter Operations. But Jansen sees no reason why Net should not eventually market itself directly to forwarders. "And I welcome forwarders in the asset business. It will make them understand some of our headaches."

The final unit - Ground Handling - is perhaps the least radical in air cargo terms, as the industry has long been used to airlines handling for other carriers. Both KLM and AMR tried to create independent handling operations, only to sell them because other carriers were not convinced of their neutrality. Jansen shrugs off these precedents. "It is an area where we have real worldwide coverage, competence and people knowledge. Other people are making money out of it, so why shouldn't we?"

Time will tell if the new structure will realise all this potential, or prove largely cosmetic. In the meantime, the keenest focus on LH Cargo will be on its relationship with Deutsche Post, Danzas AEI and DHL. A lot of questions remain to be answered about this shadowy alliance, and they are questions that could be fundamental to the air cargo industry. What do the three intend?

Jansen's initial response is to point to the long history of co-operation between the three - Lufthansa has been flying postal flights for Deutsche Post since it was founded and it and DHL have used each other's capacity for years. Jansen, like Althen before him, sits on DHL's board.

He does not deny, though, that something bigger is in the pipeline. A working group of representatives from the three units finished deliberations in January and has recommended five specific areas where they can work together. Jansen will not go into further details, but says: "I personally believe there are major opportunities to go commonly to customers with a common product, and that we will be taking them further this year, but this is a sensitive area, and I don't want to raise any hopes."

There are also Aerologic and e-Logic, two joint ventures formed in May by Deutsche Post and Lufthansa. Aerologic's aim is to "pool the holdings" of the two companies in DHL. However, as it only came into existence in January - well after Deutsche Post had assumed a controlling stake in DHL in its own right - one can only speculate if it also has some larger purpose. E-Logic is aimed at identifying e-business opportunities, but it too remains shrouded in mystery.

Jansen is happy to use the "v word" - vertical integration, or integration between forwarders and carriers, still a big taboo for much of the air cargo industry - though he insists he is not prejudging what form integration might take.

"The next few years will see a sharp concentration - and that will include vertical integration - but how it will happen is a little more in the fog," he says. "It may be like FedEx and UPS integrating everything into one system, or it may be a series of flexible alliances, with forwarders, postal services, airlines and express operators competing in some areas and working together in others."

He points out that LH Cargo has a foot in both camps, through its relationship with Deutsche Post on the one hand, and its Business Partnerships on the other. "Everyone agrees that we are now establishing something that was not there before, and we are moving forward step by step."

Jansen concludes: "The future may not be clear, but one way or the other, we intend to remain at the leading edge of it."


Coming to cargo

1976 Jansen joins Lufthansa's technical division in an information technology role, becoming deputy manager of the Atlas aircraft maintenance co-operation in 1979 and rising to become head of product management for the venture by 1987. 1989 Takes charge of the Hamburg maintenance base. 1993 Takes charge of project management for the Lufthansa Group's newly created operations division. 1995 Heads commercial fleet management and in 1997 takes on corporate purchasing and properties management at Deutsche Lufthansa. May 2000 Becomes chairman of Lufthansa Cargo executive board.

Source: Airline Business