Lufthansa Cargo Combats Yield Crisis with Further Cost Cuts

A cost-cutting initiative Lufthansa Cargo has revised to double targeted savings to €80 million ($85 million) from an originally planned €40 million will bring Lufthansa Group’s all-freight subsidiary back into operating profit, but not in 2016, according to the company’s top executive in the Americas.

Briefing reporters in New York last week, Bernhard Kindelbacher, appointed as Lufthansa Cargo’s vice president for the Americas in June, said the carrier began experiencing a cargo-yield crisis last year, as new airlift capacity flooded a stagnant air freight market.

Lufthansa Cargo’s yield plunged 15 percent and its revenues by 15.9 percent during the first nine months of 2016, as the carrier posted a €69 million operating deficit for the period.

“We can’t recover” from a yield crisis that large, so “we faced a situation where we had to do more on the cost side,” said Kindelbacher. “We started with the aim of [cutting] €40 million, but we had to go to €80 million, because more capacity was coming into the market and there was no market growth. The good thing is, we had ideas for €80 million” of cuts.

Although Lufthansa Cargo started seeing cargo yields stabilize in October – —particularly in North America – —it expects to announce an operating loss this year. However, the loss will not total €80 million: “The €80 million is derived from the yield differential,” to compensate for which “we need a cost differential,” said Kindebacher. “€80 million puts Lufthansa Cargo back into profit.”

The cost-cutting involves Lufthansa Cargo laying off 800 employees, starting at senior-management level. It has announced a management and operational restructuring, which  that reduces from 22 to eight the number of geographical regions into which it organizeds its business.

“We felt we were too hierarchical and there was too much internal discussion in the past,” said Kindelbacher. Lufthansa Cargo realized it had over-specialized in premium cargo-service products over the past two to three years, and needed to concentrate on bringing in lower-yield but much higher-volume “basic business.”

Customers have responded positively, said Kindelbacher, as the company took care of what he called “price-sensitive business, which, he added, allowed it to maintain market share. Lufthansa Cargo controls the biggest share of the North Atlantic cargo market, at 13.5- to 14 percent, and its share from the U.S. to Asia exceeds those of the major U.S. airlines.

Each new region has a regional head. Kindelbacher himself will see his role change from January 1 to head Lufthansa Cargo’s U.S. and Canada operations, while another regional head oversees Latin America. “North America is our second-biggest market after China and Asia, and 75- to 80 percent of our Americas revenues come from North America,” he explained.

This past summer Lufthansa Cargo launched a new “TD Basic” digital cargo-documentation, a flexible flight-date service that allows forwarders to “avoid a lot of costs,” said Kindelbacher. He revealed the carrier expects to launch new cargo joint ventures with United Airlines and Cathay Pacific Airways next year.