“The freight business shows that consistent cost management also pays off during market recovery phases. After implementing intensive measures to improve its result, Lufthansa Cargowent on to record the best first-half result in its history – a truly remarkableperformance!†he said.
This performance – 830,000 tonnes of freight and mail – earned the cargo division an operating profit of 144 million euros for the first half of the year – some €278 million higher than during the same period of the previous year and comes at a time when most airlines are happy to simply make any profit at all, or even just narrow their losses from last year.
Asian tailwind
In a nod to the Asian market Lufthansa Cargo (LH) boss Carsten Spohr explained a key element of the carrier’s success: “We systematically seized market opportunities in the second quarter and invested in growth markets.†In the first six months of the year Asia had clearly re-staked it claim on being a global economic driver. “Volume growth was particularly pronounced into and out of Asia as well as to America. The transported volume in the Asia/Pacific traffic region grew by 24.6 per cent.â€Â
As a result the carrier has been slowly and steadily reactivating its MD-11 freighters that were parked at Victorville during last year’s crisis, with three back in service by end of this year and the fourth to follow sometime in 2011.
“Overall the development in Asia- Pacific is positive, carrying over from Q4 into 2010,†Lufthansa Cargo’s VP for Asia-Pacific Helge Krueger-Lorenzen tells Payload Asia. “We were somewhat surprised that the trend continued and that the recovery is more ‘V’ shaped than ‘L’ shaped.†Importantly, this is not purely about individual markets, but rather a general trend across the Asia-Pacific region from the Middle East across to Northeast Asia.
“There are of course differences, but in general we’re seeing strong growth in all of these markets,†he says.
The Indian surprise
Krueger-Lorenzen notes that India is the “single biggest surprise†after what he said was a “terrible 2009 in that yields were down in a way in India that I think we’ve seen few places.†But both tonnage and importantly, yield has recovered. The market is still very tight in terms of freighter capacity and this is part of the reason for doing well in that market he concedes.
“But also we see a lot more breadth in the commodities produced there. It’s not about garments any more, where end of April you have a market that dries up.†Now automotive, telecommunications and pharmaceutical – particularly generic drugs produced for the US market – are all important cargo drivers.
“So the market has changed in India and again it’s going very well, although we’re seeing a slight slowdown now, but it has carried over into July and I think we’re going to have 4-6 weeks normal season and the expectations are that from September it’s going to go up again.â€Â
Already this year LH has added capacity to the Indian market with an additional flight to Bangalore and Chennai as well as Mumbai and Hyderabad. This will likely be followed by the addition of New Delhi in Q4, he says adding that LH currently serves the market in a limited way via its unique Aerologic joint venture with DHL Express.
Although constrained by available lift capacity, Krueger-Lorenzen said he can envision having not just “two or three flights into Mumbai and Hyderabad, there could be more – but being cautiously optimistic we have to understand whether this is going to be a long-term trend or just a spike.â€Â
“India is interesting because you have a huge diversity of capacity providers and we have a fair share of the marketplace, as do other providers.†In particular he notes the formidable challenge offered up by Emirates which in some Indian markets has passenger flights twice daily to their Dubai hub. “That’s half a freighter everyday with a good spread over the week. They are a force to reckon with and even if they don’t have 20-30 freighters their size and their network isreally something.â€Â
Japanese conundrum
Japan, which still has thriving technology sector exports like LCD screens, and telecommunications, is an interesting market according to Krueger- Lorenzen, not because it’s necessarily characterised by tremendous growth like the developing economies of much of the Asian region, but by the shear fact there is a shortage of capacity – both ocean and air.
Japan Airlines (JAL) is pulling out all of its freighters from Q3 this year as part of its massive restructuring plan and other carriers like Nippon Cargo Airlines (NCA) are also somewhat restructuring their own capacity, he explains. Payload Asia understands from market sources that amount of capacity JAL may take out, could amount to as much as 36 B747 bellies.
“This isn’t to say other carriers aren’t strong in Japan, you’ve got Korean Air, for instance, upgrading their capacity, but for us this has changed the way we’re perceived.†In reacting to the capacity vacuum LH has upped its lift in the market from April this year with six flights out of Narita and three out of Osaka in a combined operation that will see another capacity boost from 1 September to go to B747 flights out of Narita and upping the Osaka flights to five. And, all the Narita flights, save one, will be fully dedicated to Frankfurt, not shared, while the Osaka flights will share with Tianjin.
“So we’re going to have a well spread product and will be very well positioned and we can see the customer base is already seeking solutions now for the winter time. We’re very happy to havethis product,†Krueger-Lorenzen says.
As a joint venture partner with JAL, LH in maintaining some of JAL’s “very attractive†slots, will make capacity available for the Japanese carrier to enable it to continue offer uplift, “but it depends on their own situation and whether they want the capacity and how much they want.†The problem for JAL, analysts have pointed out, is that once it vacates the cargo market, it will be very difficult to gain back its market share.
“The thing you see in the airline industry is that at any given time the industry is very mobile – you can now see for instance Air France going back to Narita along with KLM and some of its Combies returning to Narita.†They go back to fill the holes created by JAL’s departure, which also attracts new entrants like AirBridgeCargo (ABC) who quickly and aggressively fill the holes and are equally aggressive on the pricing side.
The Korean miracle
Looking back only a couple of years it’s hard to believe that Lufthansa Cargo was, by 2007/08, almost completely out of the Korean market. “The only thing that really held us in Korea was our cooperation with Jade – they provided us space on their Incheon-Tianjin flights,†according to Krueger-Lorenzen.
But South Korea was surprisingly one of the bright lights shining through last year’s doom and gloom. It was one of the few markets that actually grew during the crisis, largely a result of the dynamism of the Korean economy which saw electronics giants LG and Samsung performing well in spite of the crisis.
As the world’s largest cargo carrier, Korean Air Cargo naturally dominates its home market by serving amongst others, these two key shippers.
“Our share is small and will remain small,†Krueger-Lorenzen says. He estimates LH’s share of the market to be about two per cent, but with additional capacity going in, this could rise to 3-3.5 per cent. “But that’s still small, so it’s not that difficult to go into a market and join in when you’re that small.†Also of benefit he says, is the fact that the German economy is one of the strongest in Europe.
As a side note, Krueger-Lorenzen observed that the clear evidence of the Korea’s dynamism last year could be seen from the corporate travel on Lufthansa’s passenger side in which it turned from “essentially being a European airline flying European passengers into Korea to being a European carrier flying Koreans in and out of Korea.†More than 70 per of the passengers are Koreans with Europeans accounting for only 30 per cent, these days.
And so with volumes and yield performing well – something Krueger- Lorenzen credits Korean Air Cargo’s professionalism for helping to maintain and drive yields up in the Northeast Asian market – Lufthansa is adding capacity.
LH has brought back one of its own MD-11s – that with Aerologic going out of Incheon and Pudong to Liepzig and Frankfurt means LH will have seven flights a week jointly with DHL Express (Aerologic) on weekdays and its own two individual flights on weekends, flying Incheon, Pudong and Frankfurt.
“The Aerologic operation into Korea is really the big turnaround in terms of capacity provision.†This was the resultof aircraft five and six of Aerologic that came into operation in June and August,to be followed by two more aircraft inQ4, although not final decision has beenreached as to what routes they will fly.
The China factor
The situation in China, is slightly different again, as there has been not so much recovery, as even during the crisis the domestic market still flourished and international cargo did more to some degree. But now international tonnage is growing again, but not to the same extent as other markets. LH has been somewhat hampered in its ability to tap this growth because of capacity constraints.
“If you look at Air China for instance, their growth is tremendous,†says Krueger-Lorenzen. “It’s been a very robust market for us this year and it has also seen a recovery on rates – of course the north and east are a little different from Hong Kong where even in the summer it has been very steady and it will have a strong 4th quarter, a true peak I expect.â€Â
In the north and east it’s a bit of different story though, with the market performing more poorly in Beijing while Tianjin is slightly better and Pudong better Tianjin. “The north is pretty lackluster, that’s why rates in Pudong and especially Beijing are going down to a single digit level,†he says noting that the problem is being acerbated by some carriers that are very aggressively pricing, pushing rates down to as low as RMB3-4++ (US$0.44-0.59) per kilogram, “and that’s not very profitable!â€Â.
“I’ve know this industry for a long time, but it’s still an irrational one when it comes to the margins,†he says wryly.
He is more optimistic about Tianjin however and from June LH began flying two flights as week into Tianjin (shared with Osaka) with a continuous ramp-up to six flights by November. “That will change our operation and even if shared, that’s a really good product,†he says adding that with the Lufthansa joint venture with the Tianjin AirCargo Terminal (TAT) it creates a “good combination of product, flying and ground handling.â€Â
The service is doing well, he says. “You wouldn’t expect this out of the north or east, that in June you would start out well, but it’s going very well and we’re seeing strong support out of Germany and the neighboring countries as well.â€Â
With aircraft coming back on stream LH will put additional capacity into Shanghai Pudong with three additional flights, but in the short-term he’s not looking at any new destinations, “however we do understand that the paradigm is changing in China.â€Â
“What we constantly hear from our customers is that there is a shortage of qualified workers and increased salaries and it seems to be triggering a shift in production, even though salaries are comparatively low to Europe. But in relative terms in comparison to India or even some locations in Southeast Asia, they appear to be somewhat higher.â€Â
“So what you see is the government orchestrating shifts inland or to the west and even in the medium-term I think you’re going to see some change in the way freighter aircraft are going to be put in, but as long as you don’t see freighter aircraft yielding better rates, it’s going to be difficult,†he adds.
China inbounds used to be a huge issue, but according to Krueger-Lorenzen, the problem is receding and there will be more relative growth out of Europe to China, than out of China, he says. Overall LH expects ex-China growth to be in the area of 5-7 per cent, per annum over the next year while ex-Germany and neighbouring countries will see 8-9 per cent growth.
This is being driven by two factors: A lower euro which makes European products more affordable; and changes in consumption in China. “They have more income now and can afford to buy European products. There’s lots of machinery going there and that’s a big part of the German economy. So I think the time is over where you have half-full flights going into Pudong or Beijing.â€Â
Hong Kong is a different story he notes, as typically carriers need to route flights over the Middle East, or India to fill up, even if rates are low, because it’s not such a strong consumer market.
The Pearl River Delta export hubs of Shenzhen and Guangzhou have regained their volumes as exports to North America and Europe regain their footing, and for this market LH shares capacity with Jade’s services there.
As to whether Krueger-Lorenzen expects the long running problem of carriers flooding the China market with capacity, he says: “I think it will happen because it’s a reflex in this industry that if you have an option, you go to China immediately, because the market is so vast and large and there is options out there at any given time.â€Â
Upstarts, like the recent Cargo Germany, often start with one aircraft, and then quickly two, three and four and “most often they target China because that’s the place you can very quickly contract maybe a single forwarder with 60 tonnes and then maybe go with another 50 tonnes in the spot market – that’s the way it works in China,†he says.
Looking ahead
Looking ahead Krueger-Lorenzen said ‘cautious optimism’ will be the watchword for the remainder of the year. “We have been cautious all year because after the experience of last year we just didn’t know if this was sustainable and I think this sentiment has carried over.
“Even as we speak – and this is a pretty positive year for growth – we just don’t know how it’s going to turn out next year,†he adds noting there are still very real concerns over the European and US economies, high unemployment, government belt-tightening, currency issues in the Mediterranean area and the end of government stimulus packages. “But we remain cautiously optimistic,â€Âhe adds.