In March 2014, when Dirk Reich, a former executive with forwarder Kuehne + Nagel, was appointed president and CEO of Luxembourg-based cargo carrier Cargolux International, it was not the best time for the company that he was going to lead from the front and the industry that he was being part of. The company and the air freight industry were going through turbulence. Two years since taking over the leadership at Europe’s largest scheduled all-cargo carrier, Reich has managed to steer through tough weather conditions. He is turning Cargolux into a global brand with a unique dual hub strategy in Europe and Asia and an already successful joint venture in Italy (Cargolux Italy) and a new joint venture in China (Cargolux China) that will be fully operational in 2017. In an exclusive interview, on the sidelines of Air Cargo China last month in Shanghai, Dirk Reich, President and CEO of Cargolux Airlines International, tells Reji John the challenges of turning Cargolux truly global under extremely difficult circumstances. Edited Excerpts:
(This interview was done and published before Dirk Reich announced that he would step down as CEO and President of Cargolux for personal reasons. Reich will leave Cargolux at the end of July. Richard Forson, Executive Vice-President and CFO, has been nominated as the company’s new President and CEO with effect as of August 1, 2016.)
Your rationale for a dual hub strategy and how do you think it is contributing to your positive growth numbers?
If we go back to 2014, we have had no flights to Zhengzhou. Our flights to China were daily flights to Shanghai and two to Beijing and Xiamen combined. We already had 34 flights a week to Hong Kong so the main base of our activities for China was really Hong Kong. That dramatically changed when we went into the partnership with Henan Civil Aviation Development and Investment Company (HNCA) in 2014. We did increase the flights to Zhengzhou from 0 to 14 in two years and in tonnage from 0 to 66,000 tonnes. We now have direct flight and traffic rights not only to Luxembourg but also to Milan, Kuala Lumpur, Singapore and Chicago. So it really developed into a hub and it contributed to a big extent to our tonnage growth but also contributed to our transformation from being a Luxembourg-based carrier to a global carrier. And that is far more than just the traffics. There is more traffic between China and Europe. We are now 35 percent Chinese owned even though you can’t see it. It opens the eyes for other traffics between China and other regions really globally. It has been the beginning of a transformation from a Luxembourg-based global carrier into truly global cargo carrier.
What is your outlook for the current year and do you continue to maintain the growth numbers recorded for 2015?
The target is to achieve positive result. After the first five and half months, we have to state that the market has been slower than expected in terms of yield. It has been as per expectations in terms of volume growth. In the January to May figures, Cargolux has grown five and half percent. Gained market share, luckily at the expense of low yields — specifically yields on the North Atlantic East bound have been very depressed. Largely to the influence of the Middle East carriers who are selling at extremely low prices on the ever intensifying passenger services but also on the increased cargo services. On the top, the elimination of the fuel surcharge in Hong Kong. That has led to a decrease of yields in Hong Kong and it was not compensated by other measures. We still have another two months before the next high season starts and then we are certain it will change round again. We are still confident to reach positive numbers. Nevertheless on the yield side there is more pressure and more overcapacity in the market because everybody probably came out of a bullish 2015. Everybody had the first quarter of last year somehow in their books. So now the market is normal again. And you will see better figures because you then begin to compare May, June, July, and August with the same months last year and not anymore with the very bullish first quarter.
Does the slow pace of economic revival in China bother you?
Yes. Short term it does bother. But long term, the growth perspectives of China are very much intact. It is the biggest air freight market worldwide today and with a growth rate between 5 to 6 percent, we expect China to stay the biggest air freight market in the world at least for the next decade if not longer. Long term, the trend is intact, our market share between Europe and China in fact is only 10 percent, so we are still 90 percent of the market to grow even if the market would stagnate, which we don’t expect it to.
Do you think the time is right to launch Cargolux China?
The economy will be tougher and tougher and yields will be lower. At this stage it is very courageous to start any cargo airline any place in the world. So if you do it, then you better do it fast and you don’t do it later. There is never the right time in the challenging market. For us, as part of the global network, it makes sense. As a standalone carrier I would never do it.
There is lot of planning for the alignment between all shareholders and all government institutions. The national air freight market in China is very much fragmented. There are integrators, e-commerce companies, and traditional carriers. Everybody is now pushing into that market. We will only participate in two or three routes in the national market and mostly concentrate on the intra Asia and on the Pacific, which we believe is one of the biggest growth markets of the future.
Cargolux China is only one puzzle for filling up the global network. So it is not just for having an airline here but it is for having truly a global network and then having flights, for example, from here (Zhengzhou) to Australia. Europe to Australia is lot harder than linking China to Australia and back and then through Luxembourg-Zhengzhou connection we also have new services through the hub in Asia to Australia so it is a nice addition to the global network.
How do you plan to position Cargolux China and how will it differentiate as an all cargo carrier in your global network?
The transpacific flights we launched last year were warming up the market for what is to come. These are just four flights that go to Chicago and two come back. They were to get a foot in the market; to get known to the global forwarders that we truly offer not only round the world services which we had been doing since a long time but also transpacific west bound. I think the differentiation will be that it is not just another Chinese carrier which is based in China but really a part of a global network that offers Chinese forwarders an access to global services. We are a forwarders’ airline.
What’s the plan ahead for your fleet size enhancement?
The mid-term plan is to increase the fleet size by one aircraft a year plus five aircraft for Cargolux China. So at the end of this year we plan to have 26 aircraft — 13 Dash 8s and 13 400s and until 2020 there will be probably 30 aircraft in Luxembourg including the four of Cargolux Italy plus another five here (Zhengzhou). You need to grow in order to bring your unit cost down and the only way to survive is to be the first leader in the industry. So our key goal is to be the first leader and the last man standing. To make this happen, we need controlled growth, we don’t want to increase our capacities but just grow the fleet size as per market demand. And keep a constant market share of roughly 4 percent in Europe (of Cargolux worldwide) and another .8 to 1 percent of Cargolux China. So the total market share is of around 5 percent worldwide.
What is the update on your partnership with Oman Air particularly in the Indian market?
India is one of the toughest air freight markets worldwide due to the huge presence of belly capacities especially of the Gulf carriers. So the development at this stage is frozen due to low margins. The intensity of the partnership depends on how the yields and how the markets evolve. We will continue to stay in India. We are at this stage looking at having triangular flights combining two locations in India. We have to realize that yields are so competitive that we will concentrate on the oversize pieces. There is hardly any 747. I think we might be the only 747 carrier going into India. So will exploit the outsize but will not increase the services like the way we have done it in Zhengzhou. The market doesn’t pay it. The plan to cover every single city in India with a freighter going through Muscat is not viable at this stage due to low yields. We are looking at the profitability of the partnership. That is the reality.
When the mandatory container weight verification for sea freight comes into effect starting July 1, do you think air cargo could benefit some volume of cargo moving from sea to air?
Absolutely. Safety is number one criteria; more important than economics. We are very much supporting in their request to not to have any exception on the sea freight side on the security issue. Harbours like Shanghai, Hamburg and Rotterdam are very well prepared for the first of July, when the regulations will come into force. But other harbours in remote locations are not prepared at all. In general there is big uncertainty in the industry; nobody really knows what will happen. We hear rumours about a grace period of three months. But there will be some disruptions. How much? We don’t know. But air freight is so small compared to sea freight in terms of volumes. A one percent disruption of sea freight will already lead to doubling of air freight volumes. We will see some upswing of those customers who in preparation of some problems they will definitely not decrease air freight in that time and maybe we will have some increase. I don’t think Boeing will sell another 100 Dash 8s due to this, but there is hope at least for the next two weeks.