Shahe Ouzounian/LONDON and FRANKFURT, Brent Hannon/TAIPEI
ACCORDING TO Wilhelm Althen, chairman of the executive board of Lufthansa Cargo, the revolutionary break in January 1995 with the passenger side of Lufthansa's business was "-a process that hasn't just been about the last three years, it's a 20 year old road to independence. Now we have a management with total focus on cargo, investing in freighters, systems, facilities and communications which has allowed us to move to enhance our services to resemble the quality of the integrators - but in partnership with forwarders as the airport to airport part of a through-flowing transportation system," Althen adds.
One important difference between the express, integrated door-to-door carriers (such as UPS) and Lufthansa Cargo is the fact that the latter has no weight limitation on shipments - it is truly a cargo airline.
The use of freighters is an integral part of service delivery, already nearly 60% of traffic is carried aboard Lufthansa Cargo's fleet of 12 Boeing 747-200 freighters as opposed to the mainline bellyhold capacity. "This will rise to 70% within two years, with the delivery of eight Boeing MD-11 freighters," says Althen. Freighters have always been a feature of Lufthansa's operations, since cargo has been considered as an important service. As a by-product for the passenger side, cargo has been and still is crucial - not one intercontinental sector would be profitable without cargo's contribution," he says.
Lufthansa was the first airline to deploy jet freighters across the Atlantic, and in the early 1970s helped Boeing design the 747-200 freighter. In 1974, Althen was tasked by then Lufthansa chairman, Dr Herbert Culmann, to look into creating a charter subsidiary - German Cargo Services (GCS,) to take on the new competition. It was launched in 1977 with a fleet of four ex-Lufthansa Boeing 707 freighters flown by crews from the parent. "It was a great chance to learn about freighters, and when we came to replace the 707s with McDonnell Douglas DC-8-73s, none of the Lufthansa crews wanted to fly them, so we had a great opportunity to revise our union agreement, allowing us to hire pilots directly and apply more flexible hours, which made them 30% cheaper."
SEPARATION
So began a learning curve and gradual separation from the parent, bringing a host of cost benefits, market focus as well as an entrepreneurial spirit to Lufthansa Cargo today, which few of the other major combination carriers have managed to bring about in their own cargo departments. "They are still managed in passenger terms, there is under investment, the culture is wrong, as are the priorities for management," Althen says.
In the 1980s, GCS was always profitable while Lufthansa's own 747 freighter operations were making losses. "The last step we took was to effectively move all of Lufthansa's freighter operations into GCS under the banner of Lufthansa Cargo Airlines," says Althen.
This adjustment to the means by which Lufthansa used its cargo fleet came in the context of a far greater and more important change - the separation of all Lufthansa's cargo activities to the new company, which was spearheaded by Althen.
"Passenger and cargo are two different markets, and we defined four very important considerations which are the foundations of Lufthansa Cargo," he says. "First, the cargo business is one-way, the passenger side is round trip. Next, totally different marketing strategies are required for the two products, for the passenger business there are millions of decision makers, but for cargo, just 100 customers account for 80% of our traffic. Yet before separation, cargo contributed 25% of the costs of advertising for the whole airline. This was unacceptable," he says.
"Thirdly, cargo is guided by a rational decision-making process, whereas the passenger is making an emotional decision to fly one airline or another. Finally - and most importantly - the cargo market is experiencing the fastest growth and the high-yield, guaranteed-delivery, time-definite sector is growing even more quickly, while on the passenger side it is low-yield leisure traffic that has the highest rate of growth," Althen adds.
Althen and his team began a process to bring the quality of service up to levels that were common for the integrators, culminating in a new ground breaking portfolio of services and partnerships. On 1 April, Lufthansa Cargo launched a trio of graded-category time-definite services, customised to differing individual shipper needs. The ability to offer such high levels of service was previously unheard of in the confused world of the combination passenger-cargo airline.
The carrier has invested in a host of the most sophisticated tracking and barcoding systems in the industry. "EDP [electronic data processing] is essential if you want to be a serious player in the high growth, time definite, sector," says Althen, adding that the large investment required would probably have been rejected by the typical board of a combination carrier.
Like the integrators, the carrier has set up a system of hubs and spokes, with the 747 freighters flying "trunk" services, sometimes tied into local, lower cost operators, such as Lufthansa Cargo India, or alliance partners, feeding from the spokes. Major hubs now exist in Cologne, Frankfurt, Miami, Moscow, Nairobi, Sao Paulo and Sharjah.
Althen notes that the operation of dedicated, all-cargo aircraft is a must. "There are a huge number of reasons for freighters - first, the cargo market has different requirements to the passenger side. It is growing more quickly, while you can not count on belly capacity because everything from extra fuel reserves to in-flight entertainment systems eat into what is available in the hold," he says. He also points out that while Lufthansa has been a major operator of 747 combis in the past, this chapter is now closed. "They don't make economic sense anymore," he says.
CARGO FOCUS
"The integrators are growing at double digit rates and they are profitable," says Althen, and while 1996 saw large losses for Lufthansa Cargo, it has turned the corner. Results for the first three quarters of 1997 show a healthy DM100 million profit ($55.3 million), earned on carrying a record 1,690 million tonnes of cargo and mail and, more importantly, yields improved by 10%. With the new service portfolio, the carrier expects even better returns in the future, with new guaranteed services carrying surcharges of up to 45% over usual cargo rates. Althen feels that Lufthansa Cargo is now well positioned to tackle the dual problems of declining yields and excess capacity which afflict the general cargo market.
EVA Airways is a rapidly expanding Asian airline with a strong focus in cargo, driven by its founder Evergreen Marine, which is the world's largest operator of container ships. The Taiwanese carrier was set up in 1989, and now reaps some 30% of its revenue from the cargo business, and expects to boost that figure to 50% within 10 years.
The cargo division's current performance is almost double the industry average, says EVA's Solomon Lin, deputy junior vice-president, cargo management department, who cites a Boeing study which states that cargo provides an average 16-17% of revenue for airlines that carry both passengers and cargo. EVA's fleet reflects this emphasis: around half of its 32-strong fleet have maindeck freight-carrying ability - 10 747-400 combis and five MD-11 freighters, plus four MD-11Fs on order.
The airline is a big fan of the combi concept, and has already put two of its five all-passenger 747-400s through Boeing Wichita for modification to combi.
When EVA signed a memorandum of understanding in 1995 for four Boeing 777-200s, it examined the possibility of taking a combi version of the aircraft to meet its demand for a smaller combi type to use on Asian regional routes. The 777 acquisition has been superseded by a recent commitment for up to 12 Airbus A340-500/600s, and Lin says that EVA could have a requirment to take some as combis, should Airbus develop such a version.
EVA's top cargo routes connect Singapore and Taipei to San Francisco and Los Angeles, and Singapore and Taipei to New York Newark via Seattle. It has daily combi flights to those destinations, which provide flexibility on the heavily travelled routes, where they are used together with freighters and all-passenger aircraft. On the Taipei-Los Angeles route, for example, EVA operates a daily combi flight, a daily 747-400 passenger flight, and a six-times a week MD-11 freighter service.
The 747-400 combis can carry seven upper deck pallets, plus 270 passengers, allowing EVA to move 35,000-40,000kg of cargo, compared with just 10,000kg in the belly of an all-passenger 747-400.
Combis offer three advantages, says Lin. Firstly, much business is time-sensitive high-tech cargo. Electronics companies will pay a premium for daily express services, which reduce their inventory risks. Secondly, most high tech cargo is packed on wooden skids, which require upper-deck loading. Finally, because the cargo is high-yield, EVA does not need to drop prices to compete for passengers. "We can maintain a reasonable fare level," says Lin.
As a combi operator, EVA's cargo and passenger departments must work together. "How much cargo you can carry depends on how many passengers you have," says Lin. "When we take the cargo bookings we have to monitor closely loadings with the passenger side for precise control over our cargo flow."
EVA Airways' cargo department operates separately from Evergreen Marine,with very few sea/air cargo combinations. It may happen in the future, if direct shipping from mainland China ever becomes a reality, says Lin, pointing to the success enjoyed by Korean Air and Asiana Airlines in moving cargo by ship from China into the South Korean port of Pusan, then shipping it by air.
Lufthansa is not alone in Europe undergoing a large scale "change process" to the means by which it manages cargo: "We have spent £250 million-plus in the biggest single investment outside of aircraft acquisitions," says Kevin Hatton, managing director of British Airways World Cargo, referring to the construction at London's Heathrow Airport of the new World Cargocentre which opens in January 1999. Alongside, Hatton has presided over a cultural and systems revolution which, timed to coincide with the opening of the massive complex, should result in improved customer service levels and cost efficiencies.
FINANCIAL TARGETS
"We have a clear role," says Hatton. "It is to contribute to BA's bottom line, meeting financial targets set by corporate BA and making a return to our shareholders while investing in our business." A key development this year has been the introduction of bar-code software and hardware, with 52 stations already geared up for this IT revolution, which will assist the carrier deliver improved service levels to its customers.
"We have lots of widebody lift, an extensive network and high frequencies - it's a pretty comprehensive offering," he says, characterising BA's network as "the crown jewels" of the business. "Where we differ from the majority of carriers," he continues, "is that we are not going for a separate structure for cargo. What we have is a formula to work with our passenger colleagues, where we pay for the capacity provided by the mainline fleet." Hatton says this is probably more akin to "the KLM model rather than Lufthansa". He says the process is maturing well.
Cargo is now involved in all new route evaluations, fleet planning and frequency changes, as well any decisions about cabin modifications and weights on BA aircraft. As an example, he describes how "seat-blocking" is now used on some flights to Hong Kong and Singapore to allow for additional cargo capacity. "It's just a means of improving overall yields for the flights involved," he says.
BA World Cargo acquires the capacity available from the mainline fleet and has become a BA customer - we now have a good trading relationship, which even includes having BA as a customer for non-AOG [aircraft on ground] items," says Hatton. Unlike Lufthansa Cargo, BA World Cargo is dependent on lift from British Airways, although a 747 freighter is on full time wet-lease for a thrice-weekly schedule to Hong Kong, alongside part time charters on an Airbus A300B4F and DC-8 freighters to Israel and Africa, respectively, all of which are based at London Stansted Airport. "We only deploy freighters where they are profitable," says Hatton. "We believe in the ability to flex in and out of markets with this kind of extra capacity," he adds.
BA STANCE
Although BA once operated its own dedicated freighters (the last one, a 747-200F, was sold in 1982) and combis, the airline no longer sees a need for such investments. "None of our customers has asked us for a 'freighter'," says Hatton, whose main focus is gearing up World Cargo to be ready for the new building at Heathrow. This is going on alongside implementing the "Change Programme" to improve and streamline all the processes in handling and moving freight. Fundamental elements of the programme include the introduction of the bar-code system.
"We have launched the customer participation programme and all the major freight forwarders are buying in to the concept," says Hatton. "We've found a lot of enthusiasm, even from those who are willing but not able to gear up their own systems to work with us just yet," he says, adding that "transparency is something that is needed in this business, and we're finding even where there's systems incompatibility with a forwarder, there is a willingness to go for the same high standards." Hatton feels that "technology can be viewed as a panacea sometimes, but the solutions are there if all the partners work together and communicate," a sentiment echoed by Lufthansa Cargo's Althen.
Source: Flight International
