Nothing much had been heard from Alexis von Hoensbroech since he became LH Cargo’s Board Member Product and Sales in December 2014, following predecessor Andreas Otto’s departure to Austrian Airlines. Now however, the manager landed his first major scoop by surprising the industry with an ambitious new pricing mechanism, publicly announced last Wednesday (we reported).
The scheme consists of 2 elements: a fixed net rate complemented by a unified Airfreight Surcharge which combines both fuel and security demands. Air transportation won’t become any cheaper
because the basic rate will be increased substantially while the air freight surcharge is lowered remarkably. Therefore, at the end of the day it’s a more or less financial zero-sum game for the
The race is on
The tariff system developed jointly by Lufthansa Cargo and its affiliate Swiss World Cargo contrasts the all-in regime favoured by 10 carriers, offering the market very transparent transport prices, holds manager von Hoensbroech.
So the race is on. It will be interesting to see which model succeeds in the long run – the all-in scheme favored by the Gulf carriers, SAS, IAG Cargo and some others or Lufthansa Cargo’s and partner Swiss WorldCargo’s blend of basic transport rates and unified (fuel / security) Airfreight Surcharge.
Positive feedback from the market
According to first market reactions the odds are not bad that the latter could prevail. “We’ve asked about 100 major customers what they think of the new system we intend to introduce,” explained Alexis. The outcome: Their reactions were mostly encouraging or at least neutral. Only some of them told the Lufthansa questioners they would have preferred all-in rates, the manager notes.
Easy to understand principles
The basics of the new approach that both Lufthansa Cargo and its sister Swiss WorldCargo will first introduce on 25 October when the winter schedule starts are quite simple. The carriers will demand an individual net rate for transporting goods on given trade lanes – for instance €1.00 per kilogram, by adding to this sum an Airfreight Surcharge of – say – €0.60. Thus, charging a total price of €1.60 per kg. The prices vary depending on routes served by LH and Swiss. Alexis emphasizes that the surcharge’s final level will be announced only about 2 weeks before the system will be put in practice.
Who bears the financial risks?
Von Hoensbroech points out that the surcharge calculations are not carved in stone but are subject to changes, depending on external factors such as rising or decreasing fuel costs, modified airport charges, inter alia. “Components which are beyond our influence,” he stresses.
But how can forwarding agents, particularly those that have committed themselves by signing long-term capacity agreements, be sure that the price set-up remains stable for the term of their contracts? Alexis pulls a new option from his sleeve: “We offer our clients certain flat rates for the full duration of the contract which puts the risk of additional costs caused by sudden fuel price increases or other unavoidable expenditures entirely on our shoulders,” he states. Forwarders will have to pay a small risk add-on to the airline for getting this price stability.
Finally, it’s up to the forwarders to decide if they would like to pay this risk add-on or take the risk themselves.
LH Cargo considers hedging fuel
Hoensbroech points out that LH Cargo might decide on hedging fuel if many customers make use of this fixed price model.
So far only the Lufthansa passenger aircraft are included in the company’s hedging policy, not the fleet of currently 19 operating all-cargo aircraft. Should they go for the hedging solution it would reduce the volatility of external costs and hence lead to more price stability over longer periods, ultimately reducing the risk of financial fluctuations for both – carrier and customers.
Does Brussels Cargo jump on the bandwagon?
The manager holds that in comparison to the all-in system “our model is much clearer to the market participants.”
It took his team months to come up with the solution now presented publicly. Thoroughness has obviously come before rapidness. “It is quite easy and quick to develop the initial idea of such a pricing system,” explains Alexis. “But it takes time to align all processes. This is extremely important to us as we do of course want to go live with a system that works perfectly well.”
At the same time affiliate Swiss WorldCargo was working on the same topic. “It’s interesting to note that individually each of us came up with similar schemes at the end of the day which we both are convinced will persuade the markets,” he emphasizes. “We did of course align the models in a joint project over the recent weeks and months.”
In addition to Swiss and LH Cargo the new pricing system also applies to Austrian Airlines whose air freight capacity is entirely managed by Lufthansa Cargo.
Next candidate might be Brussels Airlines Cargo, von Hoensbroech indicates. “Of course, we are mutually discussing this issue but they haven’t taken a final decision on this topic yet,” he explains. From a legal point of view Brussels Airlines’ joining of the mechanism is no problem because all carriers that are part of the Lufthansa Group enjoy anti-trust immunity.
The markets decide
This does not apply to other combinations such as the route joint venture signed between Japanese carrier ANA Cargo and German airline LH Cargo. “In fact, we talk about pricing policies within the framework of our JV but pacts like the one between ANA and LH Cargo are generally exempt from adapting a unified global pricing model,” Alexis points out.
Final question to the manager: Will his scheme win the tariff race? “I’m convinced we developed a very competitive mechanism but it’s ultimately the market that has to decide.”