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Lufthansa Says Cargo Rebound Crimped by Hold-Space Glut

Hannelore Foerster/Bloomberg

Cargo is loaded into a Lufthansa McDonnell Douglas MD-11 freighter aircraft at the Deutsche Lufthansa cargo terminal at Frankfurt International Airport in Frankfurt.

Cargo is loaded into a Lufthansa McDonnell Douglas MD-11 freighter aircraft at the Deutsche Lufthansa cargo terminal at Frankfurt International Airport in Frankfurt. Photographer: Hannelore Foerster/Bloomberg

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Lufthansa Says Cargo Rebound Crimped by Hold-Space Glut

Antoine Antoniol/Bloomberg

Air France-KLM Group, Europe’s biggest airline, suffered a 10 percent drop in cargo traffic last month, which the Paris-based company blamed on a weak economy and the timing of the Chinese New Year.

Air France-KLM Group, Europe’s biggest airline, suffered a 10 percent drop in cargo traffic last month, which the Paris-based company blamed on a weak economy and the timing of the Chinese New Year. Photographer: Antoine Antoniol/Bloomberg

A recovery in demand for cargo
shipments is failing to lift prices as bigger passenger jets
like the A380 superjumbo create a glut of belly space, crimping
margins at Deutsche Lufthansa AG (LHA) and Delta Air Lines Inc. (DAL)

Air freight rose 0.2 percent in December, year-on-year,
after shrinking most months since mid-2010, the International
Air Transport Association said Feb. 1. Still, the load factor,
a measure of cargo-hold utilization, was stuck at 48.1 percent.

“The more capacity is put into the market, the more
profits will be under pressure,” said Karl Ulrich Garnadt,
cargo chief at Lufthansa (LHA), the biggest freight carrier among
passenger airlines. “All wide-body planes have an impact.”

The revival in cargo traffic, which generated sales of
about $66 billion in 2011, was led by an order surge in the
weeks before Christmas. Airlines need to turn the rebound into
improved profitability amid slowing gains in passenger travel,
which can lag cargo trends by months.

Shares of Cologne-based Lufthansa, Europe’s second-largest
airline, have advanced 20 percent so far this year after falling
44 percent in 2011. Freight contributed operating profit of 310
million euros ($412 million) in 2010, 36 percent of the total.

Atlanta-based Delta is up 34 percent and FedEx Corp. (FDX) of
Memphis, the No. 1 cargo carrier, has gained almost 13 percent,
while United Parcel Service Inc. (UPS), largest package-delivery
business, also headquartered in Atlanta, has added 4.2 percent.

Debt Crisis

Unlike passenger traffic, which tends to track consumer
confidence and employment figures, cargo demand is driven by
business sentiment as companies restock using the fastest mode
of transport, according to IATA Chief Economist Brian Pearce.

Though traffic showed month-on-month growth in November and
December, rebounding from a 4.7 percent drop in October, which
usually marks the Christmas peak, it’s too early to say whether
the surge presages a sustained recovery, he said by phone.

“The air-freight environment has stopped deteriorating, but
it’s a mixed picture and I’d want to see a solution in Europe to
be sure that we’re moving toward a better place,” Pearce said.

Europe, beset by the sovereign debt crisis, will suffer a
“mild recession” in 2012, with the economy shrinking 0.5
percent, the International Monetary Fund said Jan. 24, cutting
its global growth forecast to 3.3 percent from 4 percent.

Expansion should return in the second half and the prospect
of a “true double-dip” is only 40 percent, according to Jean- Michel Six, an economist at Standard Poor’s in London.

Air France Slump

IATA estimates that air-cargo sales will be little changed
this year, though it says the market could shrink about 6
percent to $62 billion in the event of a renewed banking crisis.

January’s traffic figures were skewed as the early Chinese
New Year led to a slump in demand as Asian companies took time
off, making it tough to spot longer-term trends, carriers said.

Lufthansa, where December cargo traffic rose 2 percent, had
a 12 percent decline last month, though the cargo unit halted
flights in advance and the load factor slipped only 0.6 points.

Air France-KLM Group (AF), Europe’s biggest airline, posted a 10
percent drop, greater than the 6 percent capacity cut, so that
the Paris-based company’s load factor fell 3 percentage points.

“The international situation isn’t brilliant,” said Jean- Claude Raynaud, a spokesman for the carrier’s cargo unit.
“Visibility is low, and I don’t think any sensible person can
say what the market will be like in three or four months.”

‘Optimistic’

International Consolidated Airlines Group SA (IAG), the regional
No. 3, has less exposure to China and recorded a 0.9 percent
advance in January cargo traffic, which grew at its British
Airways unit while sliding 7.4 percent at Madrid-based Iberia.

At Lufthansa, Garnadt says he has been actively managing
capacity while stopping short of sending planes to the desert
for storage, as many carriers did during the last recession.

“We are cautiously optimistic for 2012,” he said by e-
mail. “We expect a first half with weaker market development,
but for the second half we see a positive development.”

Half of European air-freight shipments come from Germany,
whose 2010 exports were worth three times those of the U.K.,
World Trade Organization data show, with Bonn-based Deutsche
Post AG (DPW) the biggest carrier of air and sea cargo by volume.

Turning a profit from cargo handling has become tougher
even after a reduction in dedicated freighter capacity as
passenger-fleet decisions taken prior to the last slump and
during the optimism of the 2010 rebound create oversupply.

Twin-Aisle Influx

Airbus has so far delivered 68 A380s since 2007, while 240
Boeing Co. 777 wide-bodies have entered service in the past
three years. The Chicago-based company also brought its new 747
freighter to market in 2011, handing over nine of the planes.

Gulf carriers are adding capacity fastest, with Dubai-based
Emirates building up a fleet of 90 A380s, Etihad Airways of Abu
Dhabi ordering 96 long-haul planes and Qatar Airways Ltd.
planning to operate as many as 190 planes by 2010.

“A lot of new aircraft are coming into service this year,
so we expect that capacity will be outweighing demand,” said
Henrik Lund, head of air freight at Switzerland’s Panalpina
Welttransport Holding AG (PWTN), the fourth-largest freight-forwarding
company. “Rates have stabilized in some of the traditional large
trade lanes out of Asia, but it is still a very soft market.”

Overcapacity has also become a “challenge” for Delta, the
No. 2 carrier by passenger traffic, as rivals deploy jets away
from East Asian routes to counter a drop in shipments to the
West, said Danita Waterfall-Brizzi, the company’s cargo sales
director for Europe, the Middle East, Africa and India.

‘Buyer’s Market’

“There’s a lot of freighter capacity moving around,” she
said. “Whereas it used to be residing mostly in Asia, with the
changes in the market we see a lot more moving into India and
Germany. The upshot is that the pricing rate gets brought down.”

That’s being accentuated as Mideast carriers increasingly
target U.S. shipments, funneling capacity via Europe, she said.

Delta, which in 2011 derived almost 50 percent of its $1.2
billion profit from cargo, had a “strong” January, Waterfall-
Brizzi said, and while there’s a “question mark” over the
first few quarters of this year, the expectation is that
“things then really come forward in the second half.”

With demand remaining below that seen in the middle of last
year even after the recent recovery, IATA’s Pearce said it will
still take months of growth to reach peak levels of early 2010.

“The capacity situation means that it’s still a buyer’s
market,” the economist said. “And that means it’s a very
difficult one to make money in.”

To contact the reporter on this story:
Alex Webb in Frankfurt at
awebb25@bloomberg.net

To contact the editor responsible for this story:
Chad Thomas at cthomas16@bloomberg.net

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Article source: http://www.bloomberg.com/news/2012-02-09/airlines-ponder-careful-what-s-wished-for-in-a380-glut-freight.html