Can New Chinese Investor Boost Cargolux?

By Tom Pleasant
Source: Aviation Week & Space Technology
February 03, 2014
Credit: Cargolux

Initially, it looked like a good move for struggling freight carrier Cargolux that China's Henan Civil Aviation & Investment Co. (HCNA) bought a 35% stake in it last month. It seemed to open new opportunities in a fast-growing market for an airline that only recently had to be bailed out by the Luxembourg government. But now the deal is creating tensions on both sides, raising further doubt about the future of what still is one of Europe's most important cargo carriers.

At home, unions and politicians are concerned that the Luxembourg base will suffer as a result of plans for the airline to support an emerging Chinese freight hub. In China, the airline might face problems if government-owned incumbent carriers decide to fight back, industry officials say.

Cargolux's recent history has been tumultuous: In 2011, Qatar Airways bought a 35% stake in the already struggling company. Following multiple disputes over strategy and fleet planning, Qatar threw in the towel a year later, selling the stake back to the Luxembourg government.

The freight carrier's biggest problem, however, is finding a viable business case for an all-cargo operation at a time when the global demand for air freight is still rock bottom and belly capacity in passenger jets is growing. Also, unlike Lufthansa Cargo, Cargolux does not have a network of passenger aircraft to feed its freighters, so it operates point-to-point services, a practice that is difficult to sustain. In addition, its fleet composition makes the airline vulnerable: The nine Boeing 747-8Fs in particular can be filled only on a limited number of routes.

Cargolux does have some factors working in its favor. For one, European freight forwarders do not want to see it fail, as it is one of only a few alternatives in a region dominated by Lufthansa Cargo, which the forwarder community resents for its arrogance. Cargolux's management is not only well-liked and respected but it has kept the carrier afloat despite the revolving door of investors, continuing troubles with the unions and the imprisonment of two executives in the U.S. for price-fixing.

Following the Qatar stake debacle, the Luxembourg government is trying its luck with a Chinese investor. Cargolux will apply for traffic rights to Zhengzhou Airport (CGO) in March, open an office there soon after and start flights by the end of April under a $231 million deal that is part of China's goal to turn Zhengzhou into Asia's aviation equivalent of Dubai.

In Luxembourg, the sale immediately provoked protests from unions, which described it as “disastrous” and having “dire consequences” for both the airline and the country, while the airline's management and freight-forwarder customers made similar behind-the-scenes objections.

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