With 52 years’ experience, a record $1.3bn in profit after tax last year, a fleet of 30 freighters, close to 2,500 employees globally and a network that spans over 75 destinations, Cargolux is clearly a Luxembourg success story.
But as with any other business managing an international logistics network in the context of the current geopolitical tensions, supply chain disruptions and rising inflation, predicting future trends can be challenging. It can be hard to stay optimistic. Nevertheless, as the last quarter of the year begins, Cargolux president and chief executive officer Richard Forson analyses some of the underlying trends that may feed into its 2023 outlook and does not rule out the possibility of a best- or worst-case scenario.
Market volatility has marked the industry for years, and this is increasing due to economic circumstances, explains Forson. He adds that the attractiveness of the air-cargo market, the grounding of a major portion of normal fleets combined with an initial lack of capacity to meet demand has since led to the entrance of newcomers in the market, thereby propelling supply capacity. However, he expects the levels of record profitability will not “continue ad infinitum,” and cautions of a future scenario where a significant supply capacity surpasses demand.
“I’m very cautious when I look out into the future… The covid period really brought the recognition that the air freight industry deserves. Combination carriers which had been pulling back from cargo [are] suddenly going back in. So there’s a lot more capacity to take advantage of what the market has given us as an industry over the past two and a half years. [However,] a time will come when countries are opened to passenger services again, which means belly capacity comes back into the market.”
While keeping an eye out for geopolitical and macro-economic development in the short term, Forson underlines the decision to increase interest rates by the European Central Bank as critical to quelling inflation and stresses the impact it will have on industry and consumer demand. Another key trend he’s watching is the evolution of China’s zero-covid policy and extreme weather conditions, and how this will impact the exportation of various products from China to the rest of the world. “There’s a variety of factors, [and] a lot of it is outside of our controls [as] an airline.”
“If I look at the future, I see more concern for overcapacity than I do see for continued levels of demand that we currently see now. And, as I say, when the bad times come, we might really see a level of capacity in the market that’s never been seen before. So things can switch rapidly from extremely high rates [to] lack of capacity, [and] to one where there is oversupply of capacity which will result in downward pressure on the rates. Others might be more optimistic than I am but if I look at the various issues that [we] are confronting, it all seems to be a perfect storm that’s coming together globally at the end of the day.”
A clear roadmap is needed
Sustainability is a buzzword in the industry, but clarity is still needed from an industry perspective on the blueprint towards net-zero carbon emissions and on who will bear the costs. “I do not think that if you ask anybody today what the roadmap is in getting towards carbon neutrality by 2050, that they will be able to give it to you. This is going to come at a cost and that cost cannot be borne by the airlines alone,” explains Forson.
EU trilogues on the ReFuelEU aviation law (set to begin on 8 September, prior to the time of writing) will determine sustainable aviation fuels (SAF) targets. While the bone of contention centres on whether the 2050 target will be set at 63% or 85%, consensus seems to have been reached on the 2025 SAF target set at 2% for EU airports.
In addition to a clear roadmap, Forson recommends observing the global reaction to the legislation when it comes into effect. “There is also risk that other countries don’t do the same, and that might cause further distortion in the level playing fields between airlines operating from different countries at the end of the day.”
Scaling up the production of sustainable aviation fuels to meet potential high demand levels, the need for new-generation aircraft, and advancing the research and development phases of new forms of SAF--including e-Fuels--are key areas to be developed, according to Forson. “If you look at what is being manufactured as sustainable aviation fuel today versus the demand, it’s not even 1%. There are many additional facilities coming online--all that is in the planning phase--but even then, I think 2% is realisable by 2025, but it’s still going to represent a challenge.”
Staff and recruitment plans
Many airlines had to let go of staff during the pandemic to cope with reduced demand and lower revenues and now have to re-employ staff to deal with labour shortages. This is not a problem that Cargolux has to deal with, Forson explains. “We’ve not laid off any staff because of the pandemic; rather we’ve been employing staff in order to meet the increased intensity of operations that we had to undergo and meet the demand from our customers.”
For the future, it intends to keep employment going to cope with retirement or attrition rate. Forson however stresses that expansion plans will have to go hand-in-hand with maintaining a certain level of competency and ensuring optimum service delivery in a highly regulated environment.