Cargolux 1 – Is the Zhengzhou Experiment Navigating into Troubled Waters?

This statement, delivered by Paul Helminger, the Chairman of the Luxembourg-based carrier, was coupled to another from CV’s Chairman, whereby the necessity of outsourcing additional freighters to Cargolux Italia should be brought back onto the table.

But, is this really the problem behind the financial misery?
It seems obvious that a $100 million problem is not going to be solved by cheaper pilots in Italy, so what is the real issue? CargoForwarder Global received information that the word in Luxemburg is that the problem really lies with the deal Helminger and his managers made with their Chinese partners in the Henan (HNCA) province.

A study made by consultants Roland Berger, commissioned by the Cargolux management, shows that the new Luxembourg - Chinese joint venture carrier based in Zhengzhou would lose (on top of all the start-up costs associated with a new airline in aircraft, staff, training and the necessary investment before the company even starts operations) several hundred million dollars on scheduled operations within the first five years and that a further five years would be at “break even” at the best.

HNCA promises to Beijing
The story is that Henan province’s leaders gained subsidies in the billions from the central government in Beijing in order to be able to extend and update the Zhengzhou area infrastructure to support the “go west” strategy for job creation and economic development. It is said that this was coupled to Zhengzhou’s promise to Beijing that they (HNCA) would ensure that cargo would be diverted into the region ensuring that it then became a leading air cargo distribution centre within China. It is also understood this commitment was based on tonnage throughput, and had nothing to do with revenues or profitability.

So far, so good!
Cargolux and HNCA had reached an agreement that the new “Chinese Cargolux,” (project title) based in Zhengzhou would be 51 percent owned by HNCA, 25 percent by Cargolux and the remaining 24 percent by one or two yet unnamed investors.
This in essence would indicate that the P+L would then be shared equally among the partners, depending on their percentage ownership. Our information is that another European airline was also in discussion before Cargolux with the Henan leaders for the same concept and that their Board of Directors after studying the proposals gave instructions to turn the deal down. Cargolux, it appears, came to a different result. 
If this feasibility study is accurate, then that would mean that CV would be at least for the coming five years after commencement of services having to share 25% of considerable losses in the scheduled flights of above mentioned venture. And as Board Chairman Helminger states, they need an additional $100 million per year in the coming years, on top of an unrealistic, in today’s market, forecast of an 80 million annual profit, how much longer can this farce go on?

The report is said to highlight the fact that there would be the need to position a minimum of five Boeing 747Fs into the region in order for the operation to make sense in the long term.

A barrel without a bottom?
If this is then the real reason behind Helminger’s story of last week that the carrier needs around US$ 100 million per annum extra in the coming years it’s time that the board put the whole story on the table before Cargolux itself is ruined and it’s very proud and market leading position is put in jeopardy.

If the Henan government were indeed tied to a promise to their central government for billions, and if the study mentioned above were totally correct with regards to the projected losses to be incurred by CV and their Chinese partners in the coming years, then this would turn out to be a “bottomless barrel” for Cargolux, skeptics fear, with no indication as to what this venture would bring, if at all, in the future. Henan has nothing to lose. They keep the central government’s cash flow while Cargolux provides the tons they would commit to at a major loss.

Speculation? - who knows?
However, there is another important aspect to all this. Surely from the European Commission standpoint it could be seen that Cargolux were government subsidized in the region of multiple-million dollars for this joint venture. But even if CV’s partner HNCA would cover all financial losses the unspoken question is if these expenditures correspond to the definition of subsidies that Cargolux would benefit from because where would they manage to fund this themselves out of their 25 percent holding?
How then would other European carriers react to all of this?

Surely this would be fuel onto the fire considering the present complaints being lodged by some American carriers regarding alleged subsidies from Middle East governments to airlines located in the region and all the well documented problems of AF/KL and Martinair as examples.

John Mc Donagh