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April 2003
Lufthansa Cargo: Leading The Way
Just recently, Lufthansa Cargo announced that the last year has been the best ever. The cargo carrier achieved a pre-tax profit of 582.3 million euros in 2002. This is especially remarkable as the aviation industry is going through very hard times. So, it looks like they really understand their business at Lufthansa Cargo. A report by Michael Meier.
Good news in bad times Right now, good news from the airline industry are quite seldom. There are a lot of factors which are making it an extremely tough business. A lot of the airlines are posting losses, not only in their passenger sector but also in their cargo operations. But as always, there are some companies which make the best out of the conditions to surprise the industry with good news now and then.
Lufthansa Cargo is one of these companies. Long ago, a lot of measures have been implemented to modify the strategy and to strengthen the company for the difficult times. Thanks to these adjustments, the carrier was able to bring down the costs while price levels stayed more or less unchanged in comparison to earlier years. Furthermore, the airline is more and more going for specialised freight - with additional services and higher freight revenues. But beside all the operational factors, this result would not have been possible without another significant action. Lufthansa Cargo sold its 25 per cent stake in DHL International Ltd. to Deutsche Post World Net. This sale resulted in tax-free book profits of over 400 million euros, which had an extremely positive impact on the final result. The sale of the stake in DHL sure was adding some extra cash into the books of Lufthansa Cargo, but as stated above, huge efforts have been taken to strengthen the company's position and to defend its role as the market leader in international scheduled air cargo traffic. In this report, we will shed some light on certain aspects, but let's start were it all begun.
Lufthansa Cargo was officially founded at November 30, 1994, as an independent logistics company within the Lufthansa group. Already before, Lufthansa was a large cargo carrier with an impressive fleet of freighters, but the cargo division of the company was an integrated part of the passenger airline. More than 25 years ago, in 1972, Lufthansa became the world's first airline to operate the Boeing 747 freighter. By this time, Lufthansa was already operating the passenger version out of the 747 family. Based on the experiences with the so-called Jumbo Jet, the cargo variant was developed jointly with the Boeing Company. Sales for the 747F were slow in the beginning and for two years, Lufthansa Cargo was the only customer of the "Cargonaut", as the airline called their 747 freighters. At that time, many experts did not believe that there is a significant market for such a plane. But there were some people at German airline who invested into this new market which became a major business during the years. The risk has paid up and Lufthansa Cargo is the world leader in its market today.
Leading the way And the innovative thinking has not been lost during all the years since 1972. Many times, Lufthansa Cargo was leading the way, setting standards for the industry. In 1994, Lufthansa was the first airline to spin-off its cargo operations into an independent company. Soon, other carriers like Singapore Airlines, Swissair and many others followed the example and created a trend to outsource their cargo and other parts of the operations into separate business units. But Lufthansa Cargo has also been a pacemaker in the development of new products such as the time-defined services or special packages for valuable goods. Another innovation was the introduction of an alliance for air cargo carriers to offer a more complete global network. Today, Lufthansa Cargo, which is headquartered in Frankfurt, has more than 5'400 employees and is operating a fleet of 22 freighters, beside the belly capacity of its parent-company Lufthansa. In 2002, the airline transported 1.63 million tons of freight and mail. It offered 10,748 million freight tonne-kilometres. The airline was generating 2.35 billion euros in revenues which resulted into the profit record.
Despite the fact that the last year was very successful, the carrier is taking huge efforts to keep its role as an industry leader and to maintain the current profit level. In 2002, Lufthansa Cargo has relaunched its brand and certain core products. Now more than ever, Lufthansa Cargo is focused on its customers and their needs. They came back to their base, to what they really know how to do. Flying freight, from airport to airport. Previously, Lufthansa Cargo wanted to become more of a full service provider which offers door-to-door transportation of goods. These services will now be provided in partnerships with other transportation companies.
It's another attempt of the new Lufthansa Cargo strategy to strengthen the focus to the more expensive, added-value products. These products require much more work and accurateness, but the yield is also much higher and therefore more interesting for the airline. These premium products include special time defined services with guaranteed transportation times, such as the express product td.Flash or td.X for large shipments. The carrier is also very well recognized for transporting live animals of all kind. As an example, in 2000, the airline has flown almost all the horses to Australia for the Olympic Games in Sydney. Lufthansa Cargo is offering many more innovative products and service packages, but it would take too long to go into the detail for each service. The product portfolio is driven by constant relaunches and updates. Furthermore, the airline will do adjustments to harmonize its products with the ones of the partners in the new WOW alliance.
The base for the new airline grouping has been laid in 2000, with the foundation of "New Global Cargo". Two years later, in April 2002, the alliance took flight with the fancy name WOW. The initial partners included Lufthansa Cargo, SAS Cargo and Singapore Airlines Cargo. In the meantime, Japan Airlines Cargo has joined the team as the fourth member. With this addition, WOW now has a network with more than 520 destinations in 103 countries. The combined fleet consists of 43 freighters and more than 700 passenger airplanes with cargo holds. Impressive numbers, but the four partners and its customers should also have some benefit from WOW. With Japan Airlines Cargo as a fourth partner, the WOW alliance will establish a major presence in Japan. The inclusion of Japan Airlines Cargo will significantly expand the alliance network in northern Asia and strengthen the worldwide network. Sure, a huge network is very important for every airline and the forwarders. To get the complete service from one partner is much easier. And to allow a smooth transition of shipments between the partners, there have already been adjustments in the schedules, especially after the arrival of the fourth member. Within the last months, it was the top priority to integrate Japan Airlines Cargo into the alliance.
Right now, the alliance has no new partners on the shortlist. There is still a lot to do in order to harmonise the products, networks and services of the four existing partners. But there sure are some interested airlines who would wish to join the group, and not only members of Lufthansa's Star Alliance. One day, WOW will sure take more members, but it shines not to be a top priority right now. While WOW is being built up, its competitors are not sleeping. Soon after the announcement of "New Global Cargo", another cargo alliance has been founded. SkyTeam Cargo, which claims to be the biggest cargo alliance, has a combined fleet of 1,070 aircraft. The team includes Air France Cargo, Delta Air Logistics, Alitalia Cargo, Aeromexico Cargo, CSA Cargo and not to forget, one of the heavies in the business, Korean Air Cargo. SkyTeam Cargo has quite similar goals as WOW. A complete network, harmonised products and sales. Huge efforts have already been taken and SkyTeam Cargo already is the major competitor of the WOW alliance. Also due to the fact that there are just two alliances of that size. All the remaining carriers are still working independent or are slightly grouped with codeshare-agreements.
While a global network is one of the goals for Lufthansa Cargo, the airline does also have a strong commitment to its home base in Germany. Frankfurt is home and the most important hub for the cargo carrier. Frankfurt is Europe's largest cargo airport and no surprise, Lufthansa Cargo is the largest cargo carrier on the place. At Frankfurt, the airline operates the Lufthansa Cargo Center (LCC). The LCC, which is designed to handle 1.5 million tons of freight per year, is an impressive sight. The complex consists of about 17 buildings of which each has a dedicated role in the logistics process. The facility was inaugurated in 1982 and during the years, it has seen numerous massive expansions to meet the growing needs of the carrier and its partners. Each shipment is passing through the various areas of the center.
It is also Frankfurt, where Lufthansa Cargo is facing huge challenges in the future. With the proposed expansion, the airport will also have to introduce night time flight restrictions between 23:00 and 05:00. These restrictions will have a major impact on Lufthansa Cargo's operations in Frankfurt, as a large number of flights is scheduled during the night. The airport authority is basically offering two options for the affected airlines. Either reschedule flights into daytime or relocate night time flights to a remote airport, preferably to Frankfurt Hahn, which is also operated by Fraport AG. But on a closer look, it shines as both options are not very suitable for the Lufthansa Cargo. It is a crucial part of the network strategy that flights can depart during the night. And of course, it would not make a lot of sense to ship all the goods to Frankfurt Hahn on the ground. Furthermore, despite the fact that Hahn is already handling freighters, there would still be a lot to do to upgrade the infrastructure in order enable a smooth operation of all cargo flights of Lufthansa. It is therefore no surprise that Lufthansa Cargo is lobbying against the night time flight reductions. But as it looks today, it shines to be unavoidable. We sure will see a lot of discussions until the final decisions will be taken. It's way too early to speak about possible changes but it is obvious that some new challenges are approaching for Lufthansa Cargo and the other affected carriers.
After the introduction of flight restrictions during the night, airport neighbours will benefit from more quiet nights. But already in the past years, Lufthansa Cargo has taken huge efforts to be a good partner for the surrounding towns, especially through it's fleet strategy. In 1998, the cargo airline has introduced the newest member of its fleet, the MD-11F. Today, the fleet is counting 14 machines of that type. Lufthansa Cargo is very happy with the airplane and it was a huge disappointment when Boeing announced that it will shed the production line for this plane some years ago. The MD-11F was originally designed by the McDonnell Douglas Company before the company was taken over by Boeing. The MD-11 was not such a big success in the passenger market, but it is very popular at cargo airlines. Beside Lufthansa Cargo, FedEx, UPS, Korean Air Cargo, Gemini Air Cargo and other carriers are flying the MD-11. But while Lufthansa's birds were delivered as cargo carriers, some of the other airlines are using converted passenger machines with a slightly lower payload. The airplane offered interesting new possibilities for Lufthansa Cargo, such as the "Round-the-World freighter". Since the introduction with the summer timetable 2001, an MD-11F is flying all around the globe. Three times a week, a freighter takes off from Frankfurt to the first destination, New York or Chicago, depending on schedule. After this first stop on the American continent, the airplane continues to Los Angeles and then across the Pacific. Following a technical stop in Tahiti, the Lufthansa Cargo freighter is continuing to Auckland, on the other side of the globe. The MD-11F is then returning to Europe via Australia, Malaysia and Pakistan. The freighter arrives back in Frankfurt after a total of 66 hours. The new service is operated in partnership with Air New Zealand and due to the chosen route, it enables Lufthansa Cargo to get a better payload on all the routes, including on the section across the Pacific.
Beside the MD-11F, Lufthansa Cargo does also operate the Boeing 747-200F. A total of seven machines are currently in service while one more 747 (D-ABZF) is stored in the desert until the market conditions are getting better. The Boeing 747F has been the workhorse of Lufthansa Cargo since 1972, when the airline took over the very first freighter from the Boeing Company. In the meantime, some of the older planes have been taken out of service. The oldest flying plane left the Boeing production line in 1978. Despite its age, the Boeings are in a really good shape, they will sure be kept flying for some more years. But even if the Boeing 747 will serve Lufthansa Cargo for some more years, the airline has to look for a replacement. One option would be the 747-400 or its long-haul pendant 747-400ER, Boeing's newest freighter. The airline sure has looked at this option but it was never really interested in the 747-400. The aircraft would not suit well into Lufthansa's route network. The search for a new type is going on and from time to time, the "rumour networks" are bringing up new stories. Just lately, there were rumours that Lufthansa Cargo would be very interested in a cargo variant of the Boeing 777, if this plane would become available. But these were only rumours and nothing about it has ever been confirmed. Boeing is not even selling a cargo variant of the 777. But perhaps a 777F will become available due to pressure from the airlines. But anyway, it will sure take some more time until Lufthansa Cargo is going to place an order for a replacement of the aging 747.
Lufthansa Cargo's history is the story of an airline who is leading the way in the air cargo industry. A lot of innovative changes and features have been initiated by the German airline. The airline went through really good times, but also through hard times.
Right now, the times are not so good for the industry. The economic environment is difficult and there are many points with a negative impact on the international cargo traffic. At the presentation of the results for 2002, Mr. Heinz-Ludger Heuberg (Chief Financial Officer) said: "We will do everything we can to minimise the negative effects on the cost side and on our flexibility. But the crucial factor in 2003 will be the future development of the macroeconomic environment and the global political situation." Lufthansa Cargo is a very strong carrier today, but despite that fact, the challenges of the current market conditions are not easy. The airline and also the cargo industry as a whole will sure manage these times and grow from them again. Airsider will certainly keep an eye on Lufthansa Cargo to see into which direction the carrier is leading within the next years. Michael Meier (Contact the author)
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Pictures Copyright: Celway Group (3), Lufthansa Cargo (3) | |
As
a next project, the group will do further harmonisation in its product
portfolio. During the years, each airline has developed its own
products with special features. In order to offer a standardised
global product, modifications are necessary. The most important
products will be bookable to all the destinations within the common
network. At the moment, the partners will keep their individual
product brand names such as "td.Flash" or "J Speed"
(JAL), but it will be interesting to see whether there will be fully
integrated products under the WOW brand in the future. Anyway, such
a development will take some more years as all the existing names
are valuable brands, which have been developed through years. They
all have a strong reputation in the airlines' core markets. 
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