Lufthansa Cargo achieved its long-sought independence at the start of 1995. The business has not looked back since.
Kevin O'Toole/LONDON
WILHELM ALTHEN, chairman of Lufthansa Cargo, is clearly a happy man. For the past two decades, he has campaigned for air cargo to be treated as an independent business in its own right, rather than as a poor relation to the more glamorous passenger services.
At the start of the year, Althen got his wish. Lufthansa Cargo, the world's largest international airfreight operation, emerged from the German group's restructuring as a stand-alone company - albeit one wholly owned by Lufthansa. It is the first time that an airline has loosened the corporate reins on its cargo business and Althen clearly relishes his new found autonomy.
His arguments for wanting independence are plain enough. Air cargo is no longer just a case of filling belly holds. It has become a serious global business, bound up with the growing complexities of corporate logistics strategies. In short, it can no longer be managed as an afterthought.
"Every airline has to make the decision about whether to be a cargo company or a passenger carrier just selling space in aircraft belly holds," says Althen. Lufthansa has made its choice clear.
Rival airlines are watching with interest. Other big European cargo operators, such as Air France and KLM, have already signaled that they may follow suit if the experiment succeeds.
So far, it appears to be working. Lufthansa Cargo is showing healthy sales growth and profits as it approaches the end of its first year of independence.
With cargo and passenger services inextricably bound up, it had previously been impossible to tell how well the business was performing financially, says Althen, adding that Lufthansa was not alone in this.
"We had 20 years of discussions within Lufthansa over whether or not cargo was profitable, and now we will find out," he says.
The target is for a 3% return on sales, although that is unlikely to materialise in the first year, partly because of the weakness of the US dollar. On current standings, Althen predicts a return of around 1.2%.
Sales have continued to forge ahead, backed by steady traffic growth in an overdue stabilisation in cargo yields. Lufthansa ended 1994 with cargo revenues of around DM3 billion ($2 billion), but that should climb to DM3.5 billion this year and could reach DM4 billion in 1996. At these levels, cargo comes close to accounting for a quarter of Lufthansa's overall traffic sales.
Perhaps the most obvious change under the new regime is that cargo is no longer viewed as an add-on to the passenger division, but as its largest single customer.
Although Lufthansa Cargo has a fleet of dedicated freighters, including ten Boeing 747-200Fs and five McDonnell Douglas DC-8-73s, around 42% of freight tonnage travels in belly holds. The cargo business now negotiates a price for this capacity with the passenger division, with the current contract running at DM800 million a year.
Technically, Lufthansa Cargo is in the same position as any other outside contractor, although, as Althen says, it is highly implausible that the airline's belly space would be worth as much to anyone else.
Not all of the potential capacity is contracted for. Only around 60% of the airline's passenger destinations make sense for cargo, says Althen. On domestic German routes, for example, the demand for cargo is negligible.
On other routes cargo is an essential part of the mix, including intercontinental services, where cargo load factors run at up to 80%. "There is not a single intercontinental passenger flight making a profit without cargo revenue," says Althen. On these routes, the cargo business negotiates a price to book capacity and pays whether or not it is used.
The new form of contract provides the passenger division with a more predictable stream of income, while leaving cargo a free hand to conduct its own sales and marketing.
A GLOBAL NETWORK
Under the old ways of doing business, cargo marketing risked being an after-thought to the main passenger services. Althen quotes the example of advertising in the German national press. Cargo had to pay for one advertisement in every seven, in line with its share of group revenues, regardless of the fact that the media might be grossly inappropriate. "It didn't bring in one additional kilogram of cargo," he adds.
Althen says that the difference in customer bases was a fundamental argument in the board-level discussions about creating a new group structure for Lufthansa.
The cargo market is certainly more concentrated, with 60% of business in the hands of only some 40 big customers. Unlike passenger traffic, it also requires a more pro-active foreign-sales network, given that cargo loads rarely buy return tickets.
Trends towards globalisation will only emphasise the differences, believes Althen. As traditional core customers such as Siemens or Volkswagen have opened manufacturing plants around the world, so Lufthansa Cargo has had to follow with an increasingly global network.
Alongside the home base in Frankfurt, a series of regional hubs has been opened up with joint-venture partners. For example, South America is served from Miami, Florida, in partnership with Challenge Air, as well as from a base in Sao Paulo, Brazil. The Pacific Rim is served from Bangkok in co-operation with Thai Airways. Moscow, Nairobi and Sharjah in the United Arab Emirates are other hubs.
Recent additions include the setting up of a joint-venture company to serve India with a fleet of Boeing 727-200 freighters, as well as a co-operation deal with South African Airways.
In all, the business now serves up to 500 destinations, but further partnerships will follow, says Althen, adding that the cargo operation is now free to form its own alliances independently of the passenger division.
In particular, he stresses the need to tap into the fast-growing intra-Asian freight market. In its latest long-term cargo forecast, Boeing predicts that the region will record annual growth rates of 8.6% over the next 20 years. While that is modest compared with the 14% averaged over the past two decades, it will outstrip the world average by a couple of percentage points.
Carriers in the Asia-Pacific have already set out their ambitions to grow in cargo. Korean Air, which came close to 20% cargo growth last year, has made clear its goal to leapfrog Air France and Lufthansa into first place among the major airlines within the next decade.
Singapore Airlines, aided by the new $150 million cargo centre now in place at Changi, and with two further 747-400F freighters on order, is also climbing the league. The airline plans to raise cargo from one-fifth to one-quarter of its revenues over the next five years.
Althen is not yet too concerned about ceding Lufthansa's lead. The airline has continued to increase its own market share so far this year with growth in the region of 10%, but Althen warns that consolidation is on its way.
"Ten years from now there will be only two or three airline groupings working together and if we do our job well in the next few years we'll be among them," he says.
Structural shifts in the marketplace are also driving the change. The traditional freight-forwarding business remains under attack from the rapidly expanding express-delivery services.
The progress of express integrators such as DHL and FedEx within the US domestic market has been breathtaking. They have risen from virtually nothing to claim a 60% share of US freight within the space of a couple of decades.
The same thing is expected to take place internationally over the next couple of decades, with express-delivery services growing from the present 5% to account for nearly one-third of international cargo markets within the next 20 years.
EXPRESS GROWTH
Lufthansa, helped by its connection with DHL, has been keeping pace with the change. The target had been to see 30% of business coming from express services by the end of the decade. That milestone was passed earlier this year.
With the express business now established and beginning to mature, Althen is already looking for the next market shift. He believes that it will be through the growth of what he calls the cargo contractor. These operators will not just arrange freight-forwarding, but will take a much closer role in helping to run their customers' logistics chains.
What the future role of the cargo airline will be in this business is uncertain, but Althen is certain that the emphasis will be on a closer partnership with the end customer and a demand for quality, on time, service.
Unlike the passenger business, which has had to come to terms with the fact that much of its future growth will be through low-yielding tourist travel, Althen says that the cargo business offers, for some at least, a chance to capture higher yields. "Our customer is ready and willing to pay for increased quality," he says.
Lufthansa's UK operation, for example, set out two years ago to tap into new express markets, getting closer to the end customer in the process. Yield has almost doubled over that time, an achievement, which Lufthansa itself finds hard to believe.
The UK arm is also helping to pioneer a drive to raise quality, publishing delivery standards for the first time, as well as trying to improve the level of training and qualifications among staff.
It is a sign, perhaps, that Althen's long-running campaign to raise the status and professionalism of the cargo business is at last making its mark. He proudly points out that the Lufthansa's cargo business has received its first job applications from employees working in the passenger division. Not too long ago, such a move would have been regarded as a punishment rather than an opportunity.
Source: Flight International
