Lufthansa Cargo bullish on 2023 despite Ukraine war, economic slowdown - FreightWaves

2023-03-08 15:08:16 By : Mr. zhao li ming

Deutsche Lufthansa’s cargo subsidiary posted record adjusted operating income of 1.6 billion euros ($1.7 billion) for 2022, but executives said a correction in demand and yields will continue this year, resulting in lower profits.

Nonetheless, Lufthansa Cargo will be “significantly” more profitable than before the pandemic, executives said.

The fourth quarter was a culmination of deteriorating market conditions, with adjusted earnings before interest and taxes down 10.4% to $310 million as the normal peak season failed to materialize because of high inventories, slower consumer spending and easing of ocean freight bottlenecks. 

Full-year EBIT increased 7% year over year on a 22% gain in cargo revenue to $4.9 billion, according to financial results issued Friday. Freight ton kilometers, a key revenue metric that accounts for distance, were flat at 7.2 billion. Revenues were boosted by higher surcharges to cover inflation for fuel and space commitments on sister companies like Austrian Airlines, but those higher costs also cut into margins, management said.

Cargo’s performance essentially kept the Lufthansa Group (DXE: LHA) out of the red. Overall group results showed Lufthansa returning to profitability with $808.1 million of net income. Cargo represented 14% of the company’s total revenue of $34.8 billion.

Officials attributed the cargo division’s ability to outperform the market to the addition of new aircraft, decades of airfreight expertise, efficiency gains through technology and a focus on specialized products that command higher prices.

Available cargo capacity increased nearly 10% because passenger aircraft returned to service after the COVID pause. Belly space now accounts for about half of Lufthansa Cargo’s managed capacity. With more international widebody capacity and lower demand, average capacity utilization by weight decreased 10 points year over year to 61%. Passenger aircraft distort load factor measures because the planes are more weight limited and don’t always fly to destinations that generate goods shipments. Load factors based on the amount of freighter space that is filled were better.

Lufthansa Cargo subsidiaries such as on-demand forwarder Time:matters, container provider Jettainer and ground handling joint ventures contributed to the bottom line results with a 25% increase in earnings.

The record profits are noteworthy considering global airfreight demand shrank 8% last year while capacity increased. At the same time, freighter capacity declined because of the Ukraine war as aircraft are forced to fly longer routes around Russia and Russian all-cargo carrier AirBridgeCargo exited the market. The Russian detours have cost Lufthansa Cargo itself the equivalent of 1.6 freighters, or about 11% of fleet capacity, nearly canceling out the capacity from two new 777s added over two years, said Cargo CEO Dorothea von Boxberg during a virtual press conference.

And bypassing Russia may limit cargo capacity this year even as more passenger services are added between Europe and Asia because the extra fuel that needs to be carried limits how much cargo can be carried, she added.

Management’s outlook is for strong cargo performance relative to the year prior to COVID, which skewed the global economy, led to a severe shortage of airfreight capacity and sent shipping rates through the roof.

“Our cargo yields are sure to decline from their 2022 levels but still should be significantly higher than in pre-pandemic times. Lufthansa Cargo is consistently digitalizing its sales and handling processes more than any of its competitors known to us,” said CEO Carsten Spohr during the earnings presentation. 

Spohr echoed other air logistics professionals who say that rates likely won’t regress to 2019 levels. 

CFO Remco Steenbergen said the reopening of China after a lengthy period of COVID lockdowns will be positive for air cargo, not just passenger travel.

Lufthansa Cargo, he said, is better equipped to maintain solid profits even with less demand because the company’s cost structure is much better than before the pandemic, especially with more modern 777s replacing older tri-engine MD-11 aircraft. And its emphasis on high-value products such as pharmaceuticals and live animals will help sustain margins. Cargo yields, he explained, will be 70% better this quarter than four years ago.

Cargo chief von Boxberg said the company enjoys a $1.32 yield premium per kilogram over competitors because of its variety of direct connections, freighter uplift and specialty products. Priority business interests include improving the customer experience with enhanced digital interfaces, but also processes such as proactively recovering and rebooking shipments when there is a breakdown before the customer even realizes there is a problem.

The carrier is also starting to work on the International Air Transport Association’s One Record standard, “trying to figure out how we can exchange data among all parties in the value chain better so that we have data earlier and can make airfreight faster rather than it standing around in some warehouses too long,” she said.

Lufthansa Cargo operates 16 Boeing 777 freighters on long-haul routes and two Airbus A321 converted freighters for same-day e-commerce customers within Europe. Eleven aircraft are operated by Lufthansa Cargo crews under the Lufthansa Cargo brand. Five aircraft are chartered from AeroLogic, a joint venture with DHL, and operated by AeroLogic on behalf of Lufthansa Cargo. Lufthansa Cargo also manages the belly cargo for Lufthansa and all sister airlines besides Swiss International.

The narrowbody Airbus aircraft were new additions last year, and the company plans to double the size of its short- and medium-haul fleet this summer with two more retrofitted jets as online shopping continues to spur demand for express delivery. Having more planes will make the network more reliable, executives said.

Lufthansa last year also ordered three 777s and seven next-generation 777-8 freighters that won’t start delivery until 2027. The reimagined 777s will produce 13% less carbon emissions than the current model and have more cargo space. One aircraft was delivered in 2022. Von Boxberg said the other two will arrive in the second half of this year. The first will be placed with AeroLogic and the destination of the second has not been determined.

Von Boxberg said Lufthansa Cargo opted for the 777-8 over the new Airbus A350 freighter because operating with two aircraft types within a small fleet is not very efficient. “It’s simply a question of less complexity.”

Lufthansa Cargo last year added a second station in Vietnam, underscoring growth in Asian markets beyond China.

Click here for more FreightWaves/American Shipper stories by Eric Kulisch.

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