Pilot Strikes Jeopardize LH Cargo’s Modernization Plans

Mounting costs as result of Lufthansa cockpit crew’s continuous strikes reduces the funds available to spend on infrastructure projects, fleet expansion or renewal plans and other aims to secure the future of the airline in an increasingly challenging environment. The first victim of the strike actions could be Lufthansa Cargo’s projected distribution center LCCneo. This gloomy option was indicated at the carrier’s annual press conference last Thursday in Frankfurt.

The shockwaves sent by Lufthansa’s continuously striking pilots to both the 120,000 staff of the carrier and the broader public could now cause main projects to be cancelled. Ranking first on this list of intentions and possibly carried to the grave is Lufthansa Cargo’s planned state-of-the-art distribution center LCCneo at Rhine-Main airport. The facility, estimated to cost €700 million is a centerpiece of the cargo carrier’s future growth strategy 2020 and a pillar for continuous product quality improvements. When asked by CargoForwarder Global about the facility’s fate CEO Peter Gerber admitted that its finances are not yet secured. “This will ultimately be decided next summer by our board,” the manager responded. He added to this that the many pilot strikes “don’t make the financing of larger projects any easier.” According to estimates, Lufthansa lost roughly €300 million so far due to the twelve walkouts within one year, not to mention the customers that turned their back on the carrier for good.

50% of LH Cargo’s volumes are flown in the holds of the passenger fleet

However, one positive aspect is that LH Cargo’s freighter ops were hardly influenced by the strikes. “So far, we didn’t have any cancellations,” stated head of communications, Michael Goentgens last Thursday. But parallel to this “we have no means of influencing strike-caused passenger flight cancellations which also hurt our business substantially since about 50 percent of our entire volumes are flown in the lower deck compartments of Lufthansa’s passenger fleet,” emphasized Peter Gerber.

Sandwich situation
If this wasn’t bad enough, the situation can even get worse, if pilots continue their fight against the carrier’s management in the executive’s effort to cut back some of the pilot’s numerous privileges, granted by a more than decade old work agreement. But ever since the environment in aviation has radically changed, with the Gulf airlines snatching away large portions of Lufthansa’s intercontinental traffic and - at the lower end - an increasing number of Ryanairs, Easyjets, Norwegians and Co. are aggressively attacking LH and other legacy carriers on their European home turf, operating with much lower production costs. 
Therefore, LH has to revise its business model to remain competitive, no matter if supported or opposed by their highly privileged flight deck crews, organized together in a tiny union named Vereinigung Cockpit - VC.
The current situation is that further walkouts will continuously limit Lufthansa’s scope of action, negatively influencing the carrier’s financial opportunities. Therefore, fears that LH Cargo’s LCCneo might be a first prominent victim of the airline’s weaker earnings have a well-founded justification.

CEO Peter Gerber
CEO Peter Gerber

What about the 6th Triple Seven?
A further sacrifice, not mentioned or put on the agenda by Herr Gerber, might be the carrier’s fleet renewal. If so, which up to now is just speculative, it could affect converting five options on Boeing 777 freighters into firm orders. Currently, LH Cargo operates five of these Boeing variants. “Latest next September we have to decide on purchasing a sixth Triple Seven Freighter or refrain from obtaining the aircraft,” is all what CEO Gerber said.

“Satisfying results”
Shortly before, the airline’s cargo helmsman and the company’s CFO Martin Schmitt had presented the financial and operational results achieved in fiscal 2014. According to the figures, LH Cargo posted an operating profit of €100.3 million – plus 26.5% year-on-year. The 2014 margin went up 0.9%, reaching 4.1 percent, but volumes decreased by 2.7% totaling 1,669 million tons. Also revenues went slightly down (0.3%), standing at €2,435 bn. So did the load factor (-0.2%) reaching 69.7%.
Commenting on the figures Peter Gerber spoke of a “good result we achieved in challenging conditions.” He went on to say: “A strong focus on top quality, high-performance products (i.e. pharma, perishables, express or valuables) and flexible capacity management played a key role” (in upping the profit), “along with Lufthansa Cargo’s strength in sales.”
He emphasized that it is for the first time since 2010 that his airline was able to increase its year-on-year profit.
According to Martin Schmitt, mainly two factors contributed to the satisfying outcome 

  • strict cost management that reduced expenditures of 2.5%
  • the savings program SCORE.
CFO Martin Schmitt
CFO Martin Schmitt

LH Cargo will further SCORE
The SCORE scheme’s parameters will remain effective at Lufthansa Cargo despite the program’s official ending in 2015, he announced.
Furthermore, Schmitt stressed the 4 – since February of this year 5 – Triple Seven freighter’s contribution to the bottom line, which enabled savings of €34.4 million due to higher productivity and lower fuel consumption compared with the airline’s MD-11Fs of which 14 remain in service, with 2 P2F converted aircraft parked in the desert.     

No plans to step out of freighter ops
In his presentation CEO Gerber stressed the importance of freighters for his company’s business model that today and in future times will play a vital role on main intercontinental lanes. He underlined this necessity with figures provided by consulting firm Seabury that forecast the need of main deck capacity despite the continuous growth of lower deck capacity by increased numbers of passenger aircraft coming into ops. Until 2025 “trade lanes between Far East and Europe will need additional freighter operations due to high industrial growth rates, whereas Europe-North America will need less,” he said.
By sticking to freighters LH Cargo is following a different strategy than its European rivals AF-KL Cargo or IAG Cargo that have already (IAG) stepped out of main deck capacity or announced doing so (AF-KL-MP).  

Another joint venture ante portas
Touching the last December commenced joint venture with ANA Cargo on routes from Japan to Europe he lauded first results, with 300 additional shipments having been booked on either LH Cargo or ANA Cargo. In summer, stage two of this pact based on metal neutrality and so far unique in the cargo world will be launched, offering the market joint air transports in the opposite direction from West to East. Most likely by then or latest in autumn his airline will join forces with a second joint venture partner, presumably United Airlines Cargo, to mutually capture additional traffic flying across the North Atlantic. However, at the annual press conference Herr Gerber declined to name his airline’s next future close ally.

Heiner Siegmund 

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