Logic would surely dictate that when you are in the middle of an unprecedented industry downturn, it’s not a particularly good idea to start up a new airline and pump more capacity into the very market you are pulling back from. But that is exactly what took place in an expansive new hangar in a historic German city one sunny Friday inJune. Donald Urquhart has the story from Leipzig.

In a bold but largely unavoidable move, a new cargo airline has taken flight in what is arguably the harshest market conditions in the history of air cargo. AeroLogic, the new child of global heavyweights DHL Express and Lufthansa Cargo was officially launched at its Leipzig hub last month after two years of extensive planning.

The joint venture all-cargo carrier is unique in that it sees the capacity of what will ultimately be an eight-plane fleet of 103-tonne B777 freighters shared between the two express and cargo partners.

Speaking at the launch, executives of both companies took pains to emphasise that while the cargo and express markets were in varying degrees of serious depression, the future promised to be much brighter and the raison d’être of the new entity was as valid as ever. And the carrierwill break-even in 2010, they said.

Long term view
Asked on a number of occasions why, in the midst of an economic crisis was DHL starting a new cargo airline, Deutsche Post DHL CEO, Frank Appel replied there were “three compelling reasons”.

In a complex business with expensive assets, long term planning is crucial, he noted. “Secondly, the aircraft being used are the latest, most modern freighters and as such are the most environmentally friendly available and will also contribute to our commitment to reduce Co2 gasses by 30 per cent by 2020.”

And thirdly, “we are convinced the express market will grow in the medium term and so we must continually invest in this business in order to provide better service to our customers.”

He added that the new carrier, which combines the strengths of DHL and Lufthansa’s expertise in time definite delivery in air cargo, will create “enormous growth opportunities” for the two partner’s services to Asia.

“In light of the inevitably recovering market, the strengthening of vital trade lanes through the cost-efficient, shared use of the most modern freighter aircraft currently available must be viewed as a smart investment,” Appel said.

Similarly, Lufthansa Cargo’s CEO Carsten Spohr noted that the novel approach of sharing costs and capacity was an ideal way of expanding in a “lowrisk” fashion.

“We invest not just for one or two years, but for the long term,” Spohr said. “Whether we need additional capacity this month or next we could not know this two years ago when we were planning this. The logic is the right one and we are convinced of this low-risk model. We are investing for the long term.”

“The new airline shows a strong commitment of both partners to extend their services for their customers and to establish a new strong global player in the industry,” said Lufthansa CEO, WolfgangMayrhuber.

Eye on Asia
The carrier was set up specifically to tap the growing Europe-Asia trade, which the partners say is expected to grow by approximately five per cent annually in the mid-term. Three more of the leased B777Fs will be delivered this year with another four in 2010 which the carrier said will enable it to extend direct connections to most of Asia’s major metropolitan areas.

While the early services will focus on Singapore and Hong Kong, Aerologic has China – Shanghai and Beijing – along with Japan at the top of its list of priorities and ultimately a Frankfurt-US (either New York or Chicago) is in the cards.

In the meantime, the first aircraft, which was delivered by Boeing in early June, will serve DHL’s express network on weekdays ex-Leipzig to Bahrain, Singapore, Delhi, Leipzig while Lufthansa Cargo will make use of the aircraft for its peak weekend traffic flying Leipzig-Tashkent-Hong Kong-Tashkent- Leipzig.

The original plans have been slightly scaled back, as the original announcement of AeroLogic’s formation included a fleet of 11 aircraft, but the partners noted that should demand warrant it “it is very easy to scale up, but for now we’re quite happy that we can satisfy the customer demands from the eight that are on order already.”

The carrier does have idle capacity on hand should demand outpace its capacity, as two MD-11s that were used in the existing cooperation between Lufthansa Cargo and DHL have been returned to the cargo carrier and have been parked, joining the four freighters Lufthansa grounded – two at Frankfurt and two at Leipzig – from its total fleet of 19 MD-11s earlier this year as result of the slowdown. “Our MD-11 fleet will act as a buffer for future growth,” added Spohr.

As to when that growth might return, Appel noted that the air cargo and express business was always an “early indicator, but we don’t have a long pipeline that gives us visibility – we don’t have an order book like other industries so we cannot see.”

“The April numbers appear to indicate the bottom of the economic curve has been reached, but we still do not see animprovement,” he added.

Long range flexibility
As to why AeroLogic was not using the 9,000km long haul capability of the B777 freighter to maximum potential by having stops in Bahrain for instance, DHL Express executive VP Global Network and Operations, Charlie Dobbie said there was no change to the carrier’s strategy as “the concept of having long range at our disposal is still very true.”

“The reason we have that schedule is because it maximises the payload and also service for our customers. We run those routes currently with Lufthansa Cargo with the MD11s and we’ve been doing so for many years and they’ve been very successful so there’s no need to change the routes at this point. But with this aircraft we have the flexibility to do the non-stop should we require it and indeed we are looking at some plansto do that as we speak.”

Complexity and advantage
Although nearly a year and half ago Lufthansa Cargo had cited teething problems in pilot trials, saying the different business models didn’t quite gel, Spohr said they were able to overcome the obstacles in a short period of time which included issues as seemingly blasé as how to load the aircraft from the perspective of two different cargo requirements, what equipment to use, which IT system to use, etc.

“Despite the complexities it was still possible to get this together,” he said, adding that “it was very constructive cooperation,” which no doubt was aided by an ongoing partnership that has been active for a number of years.

But, as the saying goes, tall fences make good neighbours: “We have rules to make sure no party is disadvantaged. “We did agree on a basic split on aircraft usage but we have a flexible mechanism. If demand increases or decreases we will change the split, but it depends on flights and destinations,” Spohr said.

“The risk is reduced and there is a better opportunity to use the capacity of the aircraft. Currently we also buy capacity from other carriers but now we can really optimise the capacity we have,” he added.

And according to DHL’s Dobbie, the two different types of cargo the partners typically carry also helps capacity utilisation. “Typically our express material is light and slightly more volumetric and the Lufthansa Cargo material typically is more dense and heavy and so even on the aircraft loading itself we have a great opportunity to maximise the capacity and utilisation,” he said.

The new carrier will succeed, said Spohr, not simply because of the combination of the competence of both the express and pure cargo operations, but the capabilities of the new aircraft. Compared with the MD-11s that comprise Lufthansa Cargo’s freighter fleet, the B777 freighter can carry 15 per cent more payload over a 30 per cent longer range and it has a 20 per cent smaller Co2 emissions footprint as well.

“This means more non-stop possibilities, more payload with a cheaper cost structure and greater environmentalefficiency,” said Spohr.

Leipzig Hub benefits
Another plus is the location of AeroLogic’s hub at Leipzig, which was developed for DHL after it made the decision to shift its key European sorting hub out of Brussels. As Appel notes, Leipzig is centrally located in Europe and is also in a strategic location due to its proximity to Eastern Europe, “in what will have enormous growth in the future.”

But the icing on the cake is clearly the lack of flight restrictions, particularly the absence of any night curfews. “The 24-hour operations are something we wish for at ‘another’ location,” added Spohr wryly.

Indeed for Lufthansa Cargo the issue of night curfews has become a major thorn in its side as a court ruling, due any day, is threatening an outright ban on its night flights at its congested Frankfurt hub. In 2007 plans to expand the airport were approved by the local state government, but one condition was that flight movements were limited to an average of 17 per night between 11 PM and 5 AM to keep noise pollution to a minimum.

But Lufthansa has said it alone would require an average of 23 flights per night by 2020 for passenger transportation and cargo flights. A spokesman said that should the ban be upheld the carrier will have one last appeal to a Federal court, which coincidentally is located in Leipzig. He would not be drawn on as to whether a move to Leipzig could be in the cards for the cargo division, but did note that option would involve inefficiencies of splitting its hub activities.

As for AeroLogic, the carrier will at some point also make use of Frankfurt but for now it will operate solely out of Leipzig “to keep the complexity to a minimum,” said Spohr. “As the fleet grows we will also operate out of Frankfurt and there could also be a third location to provide greater flexibility.”