Peter Conway/LUXEMBOURG Cargolux defies the conventional wisdom that freighters can't be profitable. In doing so, it illustrates the potential for cargo when freed from the restraints of the passenger business

a piece of conventional wisdom about air cargo runs as follows. Freighters lose money and are only profitable in support of belly capacity. No matter how good your service, your prices will always be undercut by those selling incremental belly capacity. If you must operate freighters, it is best to lease or convert a retired passenger aircraft. Under no circumstances can the massive investment in brand new freighters be justified. If that is true, then Cargolux is anything but conventional.

Founded by five enthusiasts in 1970, Cargolux stunned the air freight world eight years later by buying one of the first Boeing 747-200F freighters. Among other things, it was the first operator to Hong Kong. In 1990, it took another gamble, signing up as one of three launch customers for the production-line 747-400F. Many airlines still regard the $180 million list price as too expensive. Faced with the fall in the market due to the Gulf War, the other launch customers (Air France and Lufthansa) balked, but Cargolux went ahead with operations in 1993.

Cargolux now has the world's largest 747-400F fleet - with 10 in service and two on order. It flies all over the world and continues to make money despite being in a market with a 2.8% annual decline in yields. Last year operating profits dipped slightly to $10 million despite 21% growth in traffic, but that remains a respectable result in a tough year, especially on the North Atlantic.

In short, Cargolux is the air cargo carrier that should not exist. So why does it? It seems that given proper investment and freedom from the restraints of passenger divisions, and ideally from traffic rights as well, cargo can be a perfectly profitable business.

Investment is undoubtedly one element of Cargolux's success. Its decision to go for new aircraft surprises many in cargo, but president Heiner Wilkens can quote chapter and verse about the 747-400F's fuel efficiency and high utilisation. His bold innovation was to go for an all -400F fleet and get rid of three remaining 747-200s last year. "With a unified fleet, our costs will come down considerably," he says.

A second strength of Cargolux is that it is a pure cargo airline. That means that it can fly to destinations demanded by the major freight forwarders and, more importantly, by the major global manufacturers which are the ultimate customer. "We have the privilege of putting our aircraft on the big cargo streams across the globe," says Wilkens. He contrasts this with cargo departments on passenger airlines. "If all of a sudden you are flying to Baku and your sales team have to chase every kilo in a poor cargo market, it takes away their dedication."

Location also helps. Cargolux is the largest carrier based in the tiny European principality of Luxembourg. National carrier, Luxair, is effectively a regional operator. "When the Luxembourg Government negotiates rights with, say Taiwan, it is for Cargolux and not other airlines, and they are only negotiating for cargo rights, which is often easier," says Wilkens. Luxembourg's central location in Europe often means that cargo rights in the opposite direction are also attractive. China Airlines and El Al both use it as a freighter hub.

Without a major flag carrier or passenger base to protect, Luxembourg has long been an open market. "In a sense, we have always been in a deregulated market," Wilkens says. "We always had to fight for business even when other national carriers were protected." This, he says, has given Cargolux a different mindset. "I discovered a new pleasure when I came here five years ago because there is such an entrepreneurial spirit."

By being able to fly where its customers want, Cargolux can also get a high level of commitment from its forwarder customers, with advance bookings unthinkable to other carriers. Dr Ulrich Ogiermann, Cargolux senior vice- president sales and marketing, says around 40-50% of tonnage is accounted for by long term block allocations from forwarders, with space and prices typically fixed for six months at a time.

Panalpina partnership

Many other airlines - Lufthansa, Air France, KLM, Singapore Airlines - like to talk about partnership with forwarders, but with one forwarder customer - the Swiss-based giant Panalpina - Cargolux has gone further. It is little known in the industry, that when Cargolux started freighter services to Sïo Paulo in 1996, it was because Panalpina agreed to take half the space on the flights.

Panalpina was also behind the launch of flights to Mexico City in the 1980s (to service the Volkswagen factory there) and persuaded Cargolux to start flights to the little known Alabama airport of Huntsville in 1989. Huntsville became so successful for Panalpina that it now flies seven 747F round trips a week to the airport in its own right, an impressive total even by the standards of Lufthansa or Air France. Cargolux still operates the aircraft on Panalpina's behalf, but the forwarder controls the flights in every other respect, even leasing its own freighter (dubbed "The Spirit of Panalpina") from Colarado-based Atlas Air on the route.

The relationship is so close that Panalpina president Bruno Sidler has been heard to boast that it was Panalpina's support that gave Cargolux the confidence to expand its fleet in the mid-1990s. But both sides usually play down the relationship, with Cargolux in particular afraid of compromising its neutrality with other customers.

"Panalpina is a big player, but nowhere near as big as people think - less than 20% of our business," insists Wilkens. However, even that figure compares with a maximum of 2% of its business that Lufthansa says is accounted for by any one customer. Wilkens admits that some customers express concern about the relationship, but he insists that it is open to any other customer to share risk with Cargolux the way that Panalpina does. Pushed to think of any other customer that does so, however, Ogiermann can only think of one African route, now discontinued, that it operated with support from forwarder Kühne and Nagel.

Moving closer

Despite the reluctance of other forwarders to share risk, there are signs that this could be the future for air cargo. Lufthansa Cargo has been moving closer to major forwarders in recent years, first with its Business Partnership programme inaugurated in 1998, and last month by announcing an alliance with Deutsche Post, owner of major global forwarders Danzas and AEI. Kühne & Nagel and Schenker have shared 747Fs across the Atlantic in the past year.

Paul Jackson, chairman of consultants Triangle Management Services, says that the practice will become more common in air cargo. "Freighters are never going to develop until they are part of the supply chain. To do that you need vertical integration of some kind," he says. "Freighters need to fly at the times shippers such as Intel and Dell want and to fly at night into low-cost airports convenient to their production facilities."

There is a danger in integration, however, that controlling its own flights could make Panalpina a rival to an airline such as Cargolux, or reduce it to the status of subcontractor. Indeed, Panalpina already does both to some extent. In April last year, it formed a joint venture called SwissGlobal Cargo with the cargo arm of Swissair (SAirLogistics) and put in all of its capacity-guaranteeing ventures, including Huntsville.

SwissGlobal is not only a hybrid between a carrier and a forwarder charter department: it even has its own air operator's licence. Late last year, it started its first major new route, a round-the-world freighter from Luxembourg to Hong Kong, to Victorville (a former military airport near Los Angeles), on to Huntsville and home, using a leased Atlas freighter.

This venture competes with some Cargolux routes and even does something new, namely carries cargo across the Pacific. Wilkens does not deny potential conflict, but he insists that it is manageable. "As they grow and we grow, the likelihood we will compete in one or other part of the world is increasing," he says. "We both see that and neither of us like it, but we accept it. The important thing is that it is in both our interests - both ours and Panalpina's - to remain neutral and to be seen to be neutral, so we have a very clear understanding."

There is a further complication in that Cargolux also has a close relationship with Panalpina's SwissGlobal partner, SAirLogistics. In 1997 SAir bought from Lufthansa its 25% stake in Cargolux and raised the holding to 33.7% the following year. It was more than just a passive investment.

SAir looked at Cargolux as a cost-effective way of getting maindeck cargo capacity. In the two years since buying the stake it has reduced its own leased freighter fleet from three McDonnell Douglas DC-10s to one and has instead looked to Cargolux. While no specific routes have started for SAir, Ogiermann says it has enabled frequencies to be boosted to seven times a week into Hong Kong. He adds that the extra volumes are almost equivalent to the annual capacity of a 747-400F. That roughly equates to 10% of Cargolux's freight traffic - which last year rose to nearly 380,000t. Wilkens confirms that such support was a factor in Cargolux's decision to exercise its last two -400F options.

One inevitable question raised by the Swissair connection is whether it brings Cargolux further into the web of SwissGlobal. Wilkens insists the two relationships are unconnected, but sometimes has a hard time persuading other customers of that. "This is a discussion we often have with other forwarders," he says. "But it is our firm intention to be unbiased in the marketplace."


Could Cargolux be on course for dramatic growth of its 747 fleet? With full liberalisation of traffic rights, Ogiermann believes it could happen: "It would give us access to markets we can only dream of now. We could triple our volumes at least." Getting such freedom depends on bigger forces than Cargolux controls, of course, but Wilkens is an active campaigner for at least a relaxation in the rules for cargo. He points out that while Cargolux is barred from the transpacific market, no one blinks at cargo travelling from Japan to Los Angeles on Maersk Line, a Danish shipping company. Nor is it logical that Panalpina can set up a US subsidiary, but Cargolux cannot.

In the absence of a broader liberalisation deal, Wilkens hopes to get cargo and passenger discussions decoupled. "It is deep in people's minds that aviation is all the same market, whether passenger or cargo, and both need to be regulated. But passenger and cargo are different. Passenger is a consumer product, whereas we are part of the supply chain or production line. We are in effect an intercontinental conveyor belt. By playing the protectionist card for cargo, countries are harming trade, their own export industries."

Wilkens points to India, for example. "They are very restricted on the passenger front, but on air cargo they declared open skies years ago and have benefited immensely from it." He also hopes to persuade the European and US authorities to decouple cargo and passenger agreements, a move which has already gathered some momentum, especially in the UK. He hints that the cargo arms of some passenger carriers also support the move. A breakthrough might take a couple of years, but he sees signs of hope. "The current situation is illogical, and [the USA] seems to be waking up and seeing that." In a broader sense, he sees hope in the increasing calls for cargo rights to come under the aegis of the World Trade Organisation.

Wilkens also supports his UK counterparts on another issue - the US ban on carriers wet-leasing foreign aircraft. Having wet-leased an Atlas freighter himself in 1999 (when caught out by the failure of Southern Air Transport), Wilkens is aware of the benefits of leasing out aircraft and is keen for a slice.

"Would we get into that market? Absolutely," he says, pointing out that Cargolux already wet-leases a 747F to Argentinian cargo airline STAF for flights to Miami. It is allowed to because the once-a-week flights are considered charters by the US authorities, but he can see no reason why Cargolux should not be allowed to lease aircraft for scheduled flights too. "After all, Atlas couldn't survive if the rest of the world had the same regulations as the USA," he says.

Wet-leasing or not, Wilkens remains upbeat about the future. "The growth rates all show that cargo is growing faster than passenger, so as I always tell our people, in the long run our jobs are safe. We only have to do it right: that is the only challenge".

Source: Airline Business