Airsider - Lufthansa Cargo Update

4. April 2006

Lufthansa Cargo Update

In a year overshadowed by ongoing consolidation and rising oil costs, Lufthansa Cargo was able to deliver strong results. Focuses are still on partnership, as with Swiss WorldCargo, the newest member of the Lufthansa Group. Michael Meier reporting from Frankfurt.

Revenue growth in 2005 stemmed principally from the core business. Despite a virtually unchanged transported volume of somewhat more than 1.7 million tonnes, earnings from traffic operations rose year-on-year by 239.2 million euros to 2.6 billion euros (+10.1%). The increase is attributable to perceptible stabilisation of per-kilo earnings (yields) and the imposition of fuel surcharges to cushion sky-high kerosene prices. Earnings of 54.6 million euros from partial chartering to other airlines also contributed substantially to the improved results. With an operating result of more than 108 million euros, Lufthansa Cargo has improved significantly on the prior-year level (2004: €33.5 million). Revenues for the year rose to about 2.88 billion euros (2004: €2.62 billion).

The last year was dominated by rigorous cost control. The workforce was reduced by 10% and expenses were also reduced in other areas as part of the ongoing Excellence and Growth programme, launched to improve the airline's bottom line. Beside a reduction in staff costs by 6.6 million euros to 335.4 million euros, the maintenance costs have also been trimmed down. This could be achieved with a new contract with Lufthansa Technik, in which the carrier now pays for every performed job and part, rather than paying a kind of a total service fee.

Despite these savings, operating expenses increased by 175.4 million euros to 2.74 billion euros (+6.8%) compared to the last year. The biggest increase came in the fuel bill (+24.4%). Chartering expenses rose by close to 114 million euros to 923 million euros. In addition to its own fleet of 19 MD-11 freighters and the bellies of Lufthansa's passenger fleet, Lufthansa Cargo also charters additional capacity from Air Atlanta and Gemini Air Cargo.

Strategic partnerships make a major contribution to the success of Lufthansa Cargo. The Company derives about half its revenues from business with the twelve forwarders which are members of its 'Global Partnership Programme'. The first major Asian forwarder, Nippon Express, joined the programme in April 2005.

In December 2005, Lufthansa Cargo concluded a comprehensive capacity accord with Swiss WorldCargo. Since Lufthansa took control of Swiss International Air Lines last year, the two cargo departments are also working together. The two partners are now jointly serving their customers in a significantly improved network out of and into Asia and Canada as well as in cross-border traffic between Germany and Switzerland. In the present business year, the two carriers are planning to leverage further synergies, for example, in road feeder services within Europe.

A partnership which didn't last long was the one with US Airways. Lufthansa Cargo was selling and managing all the belly space of US Airways flights to Europe. As part of US Airways' recent restructuring under Chapter 11, the carrier decided to reintegrate these services on its own again, thus cancelling the contract with the Germans.

Good growth prospects lie in store for Lufthansa Cargo in Asia. Both India and China are attractive airfreight markets with up to two-digit growth rates annually. During the business year, Lufthansa Cargo became the first European carrier to integrate the Chinese metropolis of Chengdu in its network of freighter services. Freighter services were also extended to Nagoya in cooperation with Japan Airlines Cargo.

This summer, Jade Cargo International, the new Chinese cargo carrier, is scheduled to commence operations from its base in Shenzhen. With a fleet of six new Boeing B747-400ER freighters, the new airline will fly to airports in Europe and possibly North America. The exact destinations have yet to be announced. It was initially planned to commence operations much earlier with a fleet of leased Airbus A300 freighters. This plan had then to be abandoned due to new regulations by the Chinese authorities who didn't allow the use of wet-leased aircraft. Jade Cargo is now set to start in July with its own 747s.

In 2006, Lufthansa Cargo is again facing challenging conditions in the business environment. Although industry experts are expecting growth in the international airfreight business to an average of six per cent over the next five years, the market will be characterised by a growing imbalance in trade flows, high fuel costs and increasingly fierce competition.

Despite these challenges, Lufthansa Cargo should be in a comfortable position to manage these challenges.