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Lufthansa Aims to Outgrow Air-Freight Rivals as Weakest Exit

Deutsche Lufthansa AG (LHA), Europe’s second-largest airline, said it plans to increase freight volumes faster than rivals this year as bigger planes join the fleet and some carriers cease competing as fiercely.

Lufthansa aims to boost volumes 5 percent, versus a projected industrywide gain of 2.9 percent, Andreas Otto, head of sales at the cargo unit, said at a briefing in Frankfurt. On average, freight cargoes to and from Europe will grow 4 percent a year through 2020, he said, citing Seabury Group forecasts.

Carriers including World Airways Inc., Air Cargo Germany GmbH and Frontier Airlines were forced to fold, file for bankruptcy or cease freight flights last year as stuttering economic growth led to overcapacity. The glut was heightened by the arrival of new cargo planes and additional belly space in wide-body passenger jets entering service with Gulf operators.

“We saw the biggest consolidation since I’ve been in this industry,” Otto said at the event. “The key question is which carriers will even offer freighter services going forward?”

Lufthansa’s cargo business, which had an operating profit of 43 million euros ($58 million) in the first nine months of 2013, ended the year with a profit in the “high double-digit million euro range,” Otto reiterated. The Cologne-based company had earlier aimed to grow earnings at the unit, which now faces a third straight annual profit decline.

‘Critical Mass’

The tough market means Lufthansa’s goal of posting a record cargo profit by 2015 may be hard to reach. The carrier posted an all-time high 310 million-euro operating profit from freight operations in 2010, meaning it must more than triple the unspecified 2013 figure to meet its target. Asked if Lufthansa stands by the goal, Otto said: ‘That you have to ask the CEO.’’

The cargo operations of Air France-KLM Group (AF), Europe’s biggest passenger carrier, lost 184 million euros in the nine months, while Singapore Airlines Ltd. (SIA) posted a loss of $71 million in freight for the first six months of its fiscal year.

Air France has said it will reduce the freighter fleet to 10 planes by 2015, a move Otto reckons will weaken its product.

“That’s not the critical mass needed for such an operation,” the executive said of Air France-KLM’s plans.

Lufthansa is retiring some of its Boeing Co. (BA) MD-11s as it takes five new 777 freighters by 2015. The company has an option for another five of the wide-bodies it can exercise this year, Otto said, adding that it wants to operate an all-777 fleet.

Gulf Challenge

Four-engine freighters such as Boeing’s 747-8 jumbo aren’t a reasonable proposition for Europe-based carriers with fuel at more than $80 a barrel, he said, while some of the younger three-engine MD-11s could fly for another 10 years.

Though many cargo operators have struggled, Dubai-based Emirates jumped from fourth to first place globally in 2012, according to the International Air Transport Association. Emirates overtook Cathay Pacific Airways Ltd. (293) and Korean Air Lines Co. (003490), while Lufthansa remained in fourth spot.

“The biggest challenge is the development of carriers in the Middle East,” Otto said. “That’s our biggest threat.”

Still, competing against Emirates is healthier than vying with ailing rivals offering cut-price fees to survive, he said.

Otto said Lufthansa is seeking one or two cooperation partners from the cargo industry this year to share belly space on passenger planes and potentially also freighter capacity.

“We’ve announced that for quite some time, but this year we are pretty sure it will happen,” he said, adding that taking over the management of belly capacity from other passenger airlines is also an option for growth.

Lufthansa’s efficiency initiatives in cargo, which include the fleet revamp and changing administrative procedures to a digital platform, are progressing according to plan, Otto said.

“Half of our business is short-term, it happens ad hoc,” he said. “For that, going digital will be a game changer.”

To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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