Lufthansa Cargo boss Peter Gerber admits that the airline’s management did not foresee the air cargo boom of 2017: “We were wrong”.
To be fair to the chief executive and chairman of the executive board of Lufthansa Cargo, he was not alone in failing to appreciate that surge of cargo volumes from 2016’s fourth quarter would continue throughout 2017.
One year after forecasting a Lufthansa Cargo result of “slightly below zero” for 2017 and a positive balance sheet only in 2018, Gerber had the pleasant task of announcing a €292m turnaround from a €50m operating loss in 2016 to pre-tax and interest earnings of €242m last year.
With a compendium of financial slides, Gerber demonstrated to trade journalists that the airfreight market is now in recovery mode after the crisis of 2015 and most of 2016, with demand outstripping demand by a wide margin.
“The market came back, with the first positive month for Lufthansa Cargo in September 2016 and after that we had only positive results.”
The market downturn provided ”existential questions” which were answered by “the biggest restructuring in Lufthansa Cargo’s history,” in the form of “two pillars,” the C40 programme of restructuring and the Cargo Evolution market strategy.
Added Gerber: “We are now back on the path to success and back on the path to growth.”
With more than a hint of modesty, Gerber conceded that the cargo division had been “lucky,” firstly by withdrawing cargo capacity during the crisis and completing its restructuring before the market bounced back.
“With such perfect timing, two things matched nicely. Firstly, we had really cut costs and therefore have a competitive cost base again, and secondly we were very successful on the revenue side. These two things led to the €242m result.”
Dr Martin Schmitt, chief financial officer and labour director at Lufthansa Cargo, outlined the statistics for 2017 versus 2016, which saw belly and freighter available freight tonne-km (TKO) rise by 2.5%, while the demand in revenue freight tonne-km (TKT) rose by 6% and the average load factor grew by 2.3 percentage points to 69.1%.
Dr Schmitt, when asked about the prospects for this year, was cautious and suggested that he was quite confident of matching the €140m result in the budget for 2018, “and the rest, well we will see”.
Gerber made the point that, despite a smaller passenger and freighter fleet than Emirates in the UAE, Lufthansa Cargo was now the number one cargo carrier in terms of yield.
Turning to the future, Gerber spoke of the volatile airfreight market which experienced a global “capacity crunch” and consequent “skyrocketing yields” in the fourth quarter of 2017 and then posed the question: “What will happen in the upcoming years, what is next in airfreight?”
Given events over the past 18 months it was no surprise that Gerber said it would be difficult to predict the next year or so, adding that most forecasts were reliable only for the coming three months.
However, he does expect average yields to be lower in 2018, as there is unlikely to be a repeat of the huge surge in express volumes, although there will remain a close focus on revenue management.
So, are airfreight’s good times sustainable in the longer term or is it in a cyclical bubble, waiting to burst?
“We can talk about long term factors and one of the most important is global economic growth, which so far this year is especially strong, and for the moment there is nothing that makes me think this will change.
“But of course the world, with all its crises, is very volatile and it could change in an instant.”
Gerber said that a second important factor was the growth in the world’s population and the relative decline in those people living in poverty. China’s middle class is now estimated at close to 400m people, which is “nearly as much as all the people within the European Union, and all those people have demands”.
He added: “What they are used to is local sourcing, so they surf the internet and they buy via the net. All of us who buy via the net want our goods delivered three or four days later.
“It is only possible to fulfil these orders by airfreight. This is something that drives airfreight growth and that is why the airlines and the integrators are growing continuously with this e-commerce business.”
He also cited the acceleration in technological progress which means “new generations of innovation and new generations of products” are arriving ever more quickly to market,
“And when the time to market is fast, the only way of making money is by flying those goods. When you look at all these factors, it is quite reasonable to predict that there will be growth in the next three to six years.”
Again cautioning about the unexpected, Gerber repeated that it is “fair to predict, in the average, quite a substantial and solid growth in our industry for the next few years”.
Hype also helps airfreight, said the Lufthansa Cargo boss, citing the now famous ‘fidget spinner’ example, a here-today-gone-tomorrow gadget which managed to generate 38,000 tonnes of ex-China airfreight, according to one market analyst.
Turning to the airline’s multi-layered C40 programme, Gerber said that Lufthansa Cargo had so far achieved €72m of the targeted €80m in cost reductions, 75% of the planned 170 implementation measures, and completed in full the 35% reduction in jobs.
In terms of airline partnerships, Gerber said that the All Nippon Airways (ANA) tie-up was garnering “excellent results” due to the booming Japanese market, while the joint venture with United Airways in the US will start up this year and be a “big step forward” in opening up the opportunity for many more cargo connections.
The venture with Cathay Pacific, which started last year from Europe to Hong Kong, will this year serve the opposite trade lane and Gerber spoke of “doubling the success”.
On e-commerce fulfilment, Lufthansa is working on a new product for this booming segment which should be available before the end of 2018, although no further details were given.
A flavour of the e-commerce product perhaps came when Gerber was asked if Amazon was a friend or an enemy. He replied: “For the moment, we consider Amazon to be a customer,” adding that Lufthansa carries a lot of the e-tailer giant’s intercontinental traffic.
He said that Amazon will ask the market for solutions, and if the market is unable to provide sufficient answers, then Amazon may “work in a different way”.
On the “buzzword” digitisation, which he said means different things to different people, Gerber again spoke of “pillars”, three of them this time: automation of core processes increased connectivity to the biggest customers and new business models.
Part of this approach saw Lufthansa tackle the problem of regenerating its current cargo terminal at Frankfurt after the carrier abandoned plans for a newbuild, state of the art Lufthansa Cargo Centre neo (LCCneo).
That idea has been replaced by LCCevo, which boils down to a modular “step by step renewal” of the current facility, and one of the first steps is the new production planning system, plus a new handling system which has already been implemented and a rapid rate response service which used algorithms on the spot market.
The terminal also has a new cool chain centre with all the latest technology.
The airline is also implementing an e-freight strategy that digitises as many paper-based and manual form-filling processes as possible, pushing them to the cloud to eradicate errors and save costs.
Frankfurt Airport south has experience severe congestion in recent months. Lufthansa Cargo, located to the north of Europe’s number one freight hub, has been relatively unaffected by those travails but is not complacent.
With rising volumes fuelled by e-commerce, the streamlining of processes at the Frankfurt cargo terminal will be completed by 2019 and provide an additional 20% capacity, said Gerber.
Regarding the all-cargo aircraft fleet, currently five Boeing 777 and 12 MD-11 freighters, Gerber repeated the Lufthansa group’s environmentally-friendly policy of replacing planes when they are 25 years old.
“We got the last production line MD-11 freighters and this means that the roll-over needs to be done by 2024 or 2025 at the latest. We are looking into the possibility of doing this earlier and I am quite optimistic that we will see something in that respect.”
The replacement aircraft will be B777Fs and if Lufthansa Cargo wants to replace, but not increase, the total capacity of the dozen MD-11Fs then it will need seven new B777 freighters. That figure is based on the equation that each B777F has the capacity ratio of 1.6 MD-11F.
The 7:12 replacement ratio is the current plan and “bottom line”, but Gerber confirmed that additional increases in demand would “see the possibilities change”.
There is also the prospect, still being assessed, for Lufthansa to place additional B777F uplift within its ”success story” Aerologic joint venture with partner DHL, the latter having already added two of the same freighter class for its own exclusive use.
Lufthansa Cargo may have been wrong about 2017 but is preparing for growth in 2018 and beyond.