Vol. 10 No. 92                                                                                                               Monday September 19, 2011 Extra


Fuel Nixes Cargolux B747-8F Delivery

      Cargolux, the all-cargo airline that grew out and up from tiny Luxembourg has a proud tradition of pioneering firsts including being the first carrier worldwide to operate the B747-400 cargo airplane 18 years ago.
      As you read this, this week on Monday September 19, Europe’s largest all-cargo airline was to have launched a new era for air shippers and a new chapter in its great contribution to air cargo, as the launch airline to receive the first new-generation 747-8 F aircraft.
      But all of that was put on hold late last week, as Cargolux refused to accept the aircraft citing “contractual issues” that compelled its board, to reject the planes.
      According to sources, the Cargolux board shut down the deal because the fuel burn of the GE-manufactured turbines was not in accordance with the performance guaranteed by Boeing to Cargolux when the order for the B747-8Fs was signed.
      Sources say that the Qatar Airways faction within the Cargolux board of directors impacted blowing off the deal. Last June Qatar Airways purchased 35 percent of Cargolux from local Luxembourg banks and financial institutions.
      By way of background, airlines and manufacturers generally agree on a binding permanent improvement program weeks if not months prior to the first delivery of a plane.
      The agreement contains a firm deadline upon which all performance and other technical or organizational items have to be straightened out.
      If this fails to occur, the carrier can reject the acceptance of the aircraft.
     The 747-8 freighter won certification last month from the U.S. Federal Aviation Administration to enter commercial service. But Boeing is two years late with this airplane that so far has only delivered a reported $2.04 billion cost overrun at Boeing.
      Added to the B787 fiasco, right now with a three-day party all set up to celebrate B747-8F that the guest of honor refuses to attend, Boeing looks like the gang that can’t shoot straight, let alone build airplanes.
      There is also the specter of an embarrassing first for these type of things—an aircraft delivery all set to go with even some revenue cargo booked to fly—that didn’t happen.
      “We continue to work with Cargolux and look forward to delivering its airplanes,” was about all Boeing could come up with as an excuse.
      Financing, secured through JPMorgan, was put on hold, Cargolux said Friday.
      “In the event that the issues cannot be resolved in a timely manner, Cargolux will source alternative capacity to fully meet customer demand and expectations ahead of the traditional high season,” the company added.
      “It’s horrendous,” Ken Herbert, an analyst with Wedbush Securities in San Francisco, told Bloomberg News.
      “Just when you finally thought they (Boeing) were going to turn the corner, this happens.”
      Earlier Air Cargo News Flying Typers spoke to Frank Reimen, Cargolux President and Chief Executive Officer.

       Mr. Reimen was enthusiastic about Cargolux operating the B747-8F, which if nothing else indicates that once the impasse is cleared, focus will return to the efficiencies that the three aircraft scheduled (hopefully) to enter the Cargolux fleet this year will bring.
      “We have eagerly anticipated the first 747-8 delivery for a long time, because this aircraft will help us to improve our economic performance through higher payloads and lower unit costs.
      “The 747-8 freighter represents a new benchmark in fuel efficiency and environmental performance.”
      It upholds its predecessor’s efficiency, with nearly equivalent trip costs and roundabout 15% percent lower ton-mile costs.
      Added to that, the 747-8F improves on the environmental record of the 747-400F with further reduced fuel consumption and lower CO2 emissions, well below ICAO limits. Applied to Cargolux’s operation, this represents a saving of up to 400,000 tons of CO2 per year.
      “After we receive the first three out of a firm order of 13 aircraft, Cargolux will see four additional deliveries in 2012.
      “Initially, we will deploy the new aircraft on our routes to Asia. The aircraft will not change our business; it will rather support it. That was in fact one of the reasons why we selected the 747-8. It fits into our network because it has a similar range as the 747-400, but with improved capabilities. The most important aspect is that the 747-8 Freighters will make our business model more economical because of lower unit costs.
      “It is a real game changer and will boost our position as a leading air cargo carrier. So at the end of 2011, we will operate the three new 747-8Fs plus our remaining 13 747-400Fs.”
      We wonder about the business climate in 2011 and ask Mr. Reimen what lies ahead in 2012.
      “The year of 2011 has been difficult so far, capacity growth has exceeded demand by quite a margin and this has continued throughout the summer.
      “It has naturally put load factors under pressure.
      “And even though the industry sees a slight improvement in demand in the markets, our profit margins have come under pressure in the first half of the year, also driven by extra wet-leased capacity we had to bring in to cover our network while awaiting the B747-8’s.
      “Fuel prices remain very high; they are still almost 50% above the second quarter 2010 level, which is denting our results, too.
      “The overall air freight market showed a small decline in July compared to July 2010, so it is basically stagnant.
      “The Asian export business in particular has been hurt. Current situation can, to a certain extent, be attributed to the earthquake and tsunami in Japan, and most of all is due to the general economic gloom which causes general caution to ship goods to markets.
      "We have to live with the current economic difficulties for almost a whole year now. What matters most in our business is the supply/demand ratio. Ensuring network management and fleet size/capacity flexibility whilst keeping your head cool is the best recipe to manage a downturn."
      But on the brighter side Frank notes:
      “At this moment, South America is strong, in particular Brazilian imports. We see a similar situation for Africa imports. Unfortunately, exports from there are not keeping up the same pace.
      “Imports and exports to the USA are looking reasonably good, but it’s certainly not a ‘pot of gold’ over there.
      “Through our partnership with Qatar Airways, we have the chance to expand our destination network. Due to the complimentary nature of our networks and fleet structure, we will strengthen the respective hubs in Luxembourg and Doha. The Qatar deal will, in essence, give us further access to Central and East Asia.”
      We wonder, as an innovator if Cargolux has ever considered utilizing other aircraft?
      “We have looked at other aircraft models throughout the years,” Frank Reimen says.
       “We had offers for the MD-11 freighter, we were active in the A380 freighter project, we looked closely at the 777F, which would also have been an interesting aircraft.
      “But in the end, the 747 fits our route structure and our business model best and we pushed Boeing to go ahead with the 747-8.
      “A single-type fleet is more attractive for us because more aircraft types translate to more complexity and higher maintenance costs. Boeing has stated that, without Cargolux, there would probably be no 747-8.
      “And it is interesting to see that, for the first time ever, Boeing has developed the freighter version of an aircraft before the passenger version."
      In terms of what Mr. Reimen views as the most important challenge to the global air cargo business?
      “The most important challenge is to deal with the rapid, short cycles that occur at the moment. Markets go up and down quickly - like never before. So, adjusting the network is a permanent challenge for us.”
Geoffrey Arend/Heiner Siegmund


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     Here is an update on Air Cargo News FlyingTypers exclusive story about a $360 million proposal to build an Aerotropolis in St. Louis, Missouri USA, reported here first in early June of this year.
     Last week the Aerotropolis bill was prodded through and approved by the Missouri Senate legislative process.
     But what emerged can be described as “Aerotropolis Lite” as Missouri lawmakers whittled down the money to a mere $60 million in tax credits for companies that facilitate exports.
     Among other things, Aerotropolis Lite no longer includes a provision aimed at stimulating high-tech and science-based businesses or warehouse building.
     Still left for final approval for Aerotropolis Lite, is passage by the Missouri House of Representatives.
     There is some speculation that this watered down version minus factors of a back-room compromise deal reached earlier this summer between House & Senate and Missouri Governor Jay Nixon could need some more wheeling and dealing before passage by the Missouri House.
     Stay tuned.


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