Cargolux has higher volumes but lower profits

Cargolux, a company that has until recently suffered from what it described as “worryingly low yields, fierce competition and overcapacity”, saw continued increases in volume over the 2016 financial year. Freight tonne-kilometres were higher by 10%, whilst utilisation, as measured by load factor, rose to 66.76% from 65.9% the previous year. Over the year Cargolux carried 964,131 tonnes of freight as compared to 889,652 tonnes in 2015.

The company’s President & CEO, Richard Forson, commented that it was the last quarter of 2016 that distinguished the results, being “one of the strongest in many years”.

Despite this, net profit crashed to US$5.5m in 2016, down from US$49m in 2015. Why this should be is unclear. Cargolux is a private company owned by a mix of Luxembourg and Chinese investors and there is not much transparency around its finances, however two factors could be depressing profits. Firstly, fuel costs were key to a rapid increase in net profitability in 2015 and higher oil prices may have dragged down the number in 2016. However, it seems unlikely that this would account for the entire drop of almost 90%. Rather Cargolux may have been aggressive in its pricing, something supported in the increase in market share from 3.8 to 3.9%. The Luxembourg-based cargo network is now the sixth largest cargo carrier in the world, something possibly helped by Lufthansa’s continued aggressive rationalisation. 

Despite relatively soft market conditions, Cargolux continues to expand its fleet, taking delivery of a 14th 747-8F in a fleet totalling 22 aircraft.

China remains a key driver of business growth, with the company’s hub at Zhengzhou now larger than its Shanghai operations, although to what extent this is due to the influence of its Henan investors is not clear. This hub interfaces with both North America, via Chicago, as well as Europe, via Luxembourg.

The fact that a company such as Cargolux can continue to survive in a market where so many of the larger passenger airlines’ cargo operations are loss making or shrinking is interesting. Although Cargolux may have a lower cost base it lacks the ability to flex the price of its cargo operations as it is unsupported by its passenger business. Cargolux may be just positioning itself in the market better than its airline rivals.

Source: Transport Intelligence, April 27, 2017

Author: Thomas Cullen