These are trying times for the big European freighter operators, faced with soaring fuel costs and growing competition from Asian carriers. The past year has, for example, seen expanded flights into Europe by such established players as Korean Air and Cathay Pacific, and new entrants such as Jade Cargo International,Great Wall and Jett8.

Against this, the European operators can seem a little leaden-footed. Not for them the massive surges in capacity and flood of new routes. Instead, they tend to stress caution and a focus on quality and service. But is this enough to stop them losing market share?

Foremost among Europe’s freighter operators is Cargolux, and its senior vice president sales and marketing Robert Van de Weg has nothing very cheerful to say on the growing Asian competition.

He admits that Asian carriers are introducing lower prices and putting pressure on yields. “It makes the European carriers and their hubs more vulnerable, that is certainly true,” he says. “We still have our growth plans, but I am not sure about the business models of all the other carriers. In the next five to ten years we will see big changes in the industry.”

That being said, Cargolux is not performing badly when compared to its European peers. In the first seven months of 2007, its traffic, measured in freight tonne kilometres, was up 5.8 per cent, according to the Association of European Airlines, better than four per cent for Air France and 2.7 per cent for Lufthansa.

In calendar 2006, its traffic was fl at but revenues rose 5.5 per cent to US$1.5 billion. If operating profit t was down 12.1 per cent to $263.4 million, that was because operating expenses soared 8.8 per cent,with fuel up 22 per cent.

The B747-8 green advantage
One key weapon that Cargolux has in the flight against the new competition is its fleet. It has always been a pioneer here, being the first carrier to purchase factory-built B747-400Fs back in the early 1990s, at a time when the aircraft was seen as a white elephant.

Now it is becoming the first carrier to transition to the next generation of freighters. It was the launch customer for the 747-8F, and now has a total of thirteen in total on order, two options and ten further purchase rights. The first is due to join the fl fleet in September 2009, two more before the end of that year, and then three in 2010, and two in each of the next three years.

Offering 18 tonnes extra capacity when compared to the 747-400F, the real advantage of the 747-8s will be their fuel efficiency. That, reckons Cargolux CEO Ulrich Ogiermann, won’t just save the carrier costs, but also give it an advantage in a world where shippers are increasingly looking at the climate change impact of their supply chains and seeking to reduce their CO₂ emissions.

“Shippers and end customers are going to be focusing more and more on the environmental friendliness of their suppliers, and operators of old aircraft are going to have a problem in five to six years,” he says.

“We will be able to say our 747-8s are 40-50 per cent more efficient than the -200 and 30 per cent more than the -400F. That will make all the difference Shippers will say, if I do need to use air, then at least I can use the most efficient air technology.”

An innovative financing approach Cargolux has taken an innovative approach to financing the new aircraft, and managing the disposal of its 747-400Fs. Of its 15 747-400Fs, eight have already been sold to lessors or other operators, either on a sale and lease back basis, or for forward delivery when the replacement747-8s are available.

Some of those sales have been handled by a joint venture – Freighter Leasing SA – that Cargolux set up in January in partnership with three finance institutions, which will also be helping it with the purchase of the 747-8s.

“The idea is to make arrangements for the disposal of the B747-400s now, when prices are holding up nicely, and not to leave it till the last moment,” says David Arendt, executive vice president and CFO of Cargolux. “We will also get some help to finance the new aircraft not just from lenders, but from financial partners who will take an equity risk.”

747 replacement yields capacity rise The e plan is for the 747-8s to replace the B747-400Fs one for one, though due to the extra payload of the 747-8Fs, this should still provide capacity growth of about 4-6 per cent, says Van de Weg. He points out that this figure can be adjusted up or down in response to market conditions, however, simply by adjusting the rate at which the B747-400Fs retire.

The routes the 747-8 will fly initially have not yet been finally decided, but the dictates of crewing and maximising aircraft utilisation will mean they are not just used on one or two routes at the start, but will fly part of the service to several destinations. Having said that, longer range routes, such as flights to Asia, where the 747-8s greater fuel efficiency will be used to best advantage, are likely to be early candidates.

Capacity growth of 4-6 per cent is roughly in line with the steady growth Cargolux has always tried to achieve. Traditionally Cargolux added one B747-400F a year, though it has supplemented this with additional aircraft, wet leased from Air Atlanta. The gap between the most recent -400F – the carrier’s fifteenth, which came in August – and the previous one, delivered November 2005, has been longer than usual, however. Aircraft number sixteen, the last B747-400F, will arrive next year.

On the wet lease front, Cargolux took delivery of a B747-400 freighter in January, and also has a B747-200F in service. Despite soaring fuel costs, Van de Weg says there is no plan to get rid of this latter aircraft. “We would lose our shirt if we used it in a traditional scheduled way, but it is useful for getting new routes going and for charter business. With our existing -400Fs flying 480 hours a month, we would otherwise find it hard to exploit such opportunities.”

The fifteenth B747-400F was initially covering for C and D-checks on the other aircraft, something Cargolux has had a lot of in the last two years. However, these were due to finish in late October, leaving the aircraft free to start a new twice weekly route to Ho Chi Minh City in Vietnam from the end of October. The aircraft also added an additional Hong Kong flight, bringing frequencies on that route to 14 a week. This despite reports from other carriers of over-capacity on Chinese routes.

No problem with China over-capacity Van de Weg admits that the market was temporarily unsettled by a massive flood of new capacity – he estimates an increase of as much as 25 per cent in the first half of the year – but he reckons this will soon be absorbed by continuing strong growth both in the Pearl and Yangtze River Deltas.

“After this year’s peak season is finished, there may still be a bit of a hangover, but it won’t be as bad as last year, and the supply imbalance will soon be fully sweated out,” he says. He also points out that the over-capacity problem has been worse for the new entrants than for incumbents. “We had in place existing contracts, so we have not been so badly affected.”

Apart from the Hong Kong flights, Cargolux flies daily to Shanghai, a route it has been operating since 1999, and twice a week to Beijing and Xiamen, a service launched in January 2006.

The new Vietnam route was inspired by the growth in manufacturing in that country. “We see a good trend there,” says Van de Weg. “It is taking over a similar role to China and lots of companies are relocating to there.”

He also sees some growth for the future out of Thailand, and maybe out of Malaysia, but says the former tiger economies of Japan, Taiwan and Singapore are essentially fl at from an air cargo point of view. “The best days of these countries as a manufacturing base are over,” he says. “They are still stable and we may see some growth in the future, but there will be no return double digit growth.”

Not all eggs in China basket Important though Asia is to Cargolux, as to all other carriers, it has not gambled everything on that market, and has always been careful to maintain a balance of capacity to other regions. Indeed, with Asian competition intensifying, some of these sectors have been given more of a focus recently.

An example is Africa. Until 2004, Cargolux had just with three weekly flights to Johannesburg and one to Accra, all returning via Nairobi to carry perishables to European markets. Since then it has gradually boosted frequencies, and now has ten weekly flights, flying to Lagos in Nigeria, Ndjamena in Chad and Kinshasa in the Congo.

“It is not that we have reduced Asian capacity and redeployed it to Africa, or that we are not growing in Asia too, but we have grown more to Africa,” says Van de Weg. “We are seeing good economic development there, particularly in southbound traffic. There are investments in energy industries, and also more wealth, a growing middle class. But this is still a relatively small market. It is not a big boom area.”

More and more of the investment in Africa is coming from Asia, and European carriers such as Cargolux are facing competition for Africa traffic from Dubai-based carriers. Cargo from Asia that traditionally has transited European hubs to get to Africa now has the option of taking this shorter route.

Van de Weg admits there is more competition, but says that much of the oil and gas industry traffic is bulky, and so needs the nose-door loading capability of its B747-400Fs, rather than the belly capacity or regional freighter capacity largely operated out of Dubai. Cargolux can also draw in Africabound traffic from such oil industry heartlands as Houston and Calgary, an advantage its Middle Eastern rivals do not have. “You need a system in place to support destinations such as Lagos and Kinshasa,” he says.

Oil industry traffic apart, Cargolux’s transatlantic routes are somewhat problematic at present. The fall of the Dollar against the Euro should in theory spur exports from North America, for example, but Van de Weg says that the decline in the US manufacturing base means the impact has been relatively muted so far.

The Euro/Dollar game
Meanwhile, exports from Europe are more vulnerable to the high dollar: “In general it has not been a good summer on transatlantic routes, and the picture there is quite worrying. The market to the US West Coast in particular has been quite rough.”

The rise of the Euro against the Dollar might also be expected to have some impact on exports from Europe to Asia – where volumes are already as little as a quarter those in the opposite direction. Yet here Cargolux was reporting something of a surge in traffic earlier this year, with Asian demand for German machinery and equipment, and Italian fashion goods growing steadily, if not spectacularly,despite a strong Euro.

Middle East no pot of gold Cargolux’s strategy for dealing with imbalance has always been to stop in Middle Eastern and Central Asian airports on the way to the Far East, and here it calls at a long list of places, ranging from Damascus to Tehran and Doha to Baku.

Van de Weg says demand remains strong on these routes, with transit cargo from the US once more an important market, and this allows Cargolux to“play more cool than the carriers that go non-stop to Asia”.

But he also insists the Middle East is not a pot of gold. “Once you add the costs of making the stop, including the extra crew and the loss of three hours operating time, it is sometimes better to fly direct to Asia instead, even if the load is only 40 tonnes,” he says.

Latest addition to the Cargolux roster in the region was Almaty, added on 30 August as a stop in both directions on one of the Hong Kong frequencies.“We see a lot of purchasing activity there, with shops opening and wealth accumulating,” says Van de Weg. “It is the same as the Middle East was ten to fifteen years ago.”

Once the EU-US open skies deal comes into effect in March 2008, it will also have the right to fly from anywhere in the European Union to anywhere in the US, but Van de Weg is cagey about how these rights might be used. “We are looking at it, but it is too early to say what we might do.”