Lufthansa Cargo China near tipping point - CEO

Thu Dec 15, 2011 4:00pm EST

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(For other news from Reuters Global Manufacturing and Transportation Summit, click here)

* Lufthansa Cargo CEO says keeping options open for China

* Says in constructive talks to raise capital at Jade Cargo

* Says favours sticking with one hub if night flight ban remains

By Maria Sheahan and Peter Maushagen

FRANKFURT, Dec 15 (Reuters) - The air freight arm of Deutsche Lufthansa is reviewing its business in China, the world's second-biggest economy, where cargo companies are struggling to make a profit, according to Lufthansa Cargo's chief executive.

"We are leaving all options open," Karl Ulrich Garnadt said at the Reuters Global Manufacturing and Transportation Summit.

"The market in China accounts for a fifth of our sales. But market share and strategic importance come only after economic viability," he said.

Lufthansa Cargo operates a joint venture in China, Jade Cargo, of which it holds 25 percent, with 51 percent owned by China's Shenzhen Airlines, and 24 percent by German development bank DEG. It does not publish details on the volume of freight it carries every year.

Lufthansa group Chief Executive Christoph Franz had said in October that the market in China was becoming more difficult and that the company would review its investment in Jade.

Hong Kong-based competitor Cathay Pacific has said that continued weak demand for air freight in China and Hong Kong pushed its cargo throughput down 17.5 percent in October from a year earlier.

Adding to the weak market, Garnadt said Lufthansa Cargo has known for years that Jade Cargo was undercapitalised and is now in "very constructive" talks with the Bank of China and Shenzhen Airlines to agree a capital increase for Jade.

"This needs to be dealt with soon," Garnadt said at the summit, held at the Reuters office in Frankfurt, but declined to say how long Lufthansa Cargo was willing to wait for a solution.

Jade Cargo, founded in 2004 and based in Shenzhen, has a fleet of six Boeing 747 freighters that fly to foreign destinations including Frankfurt and Chennai as well as to Chinese cities such as Shanghai and Chengdu.

Lufthansa Cargo has 18 MD-11 freighters and also uses the "belly space" on passenger planes operated by parent Lufthansa.

The company planned to lease two additional freighters in 2012 to add capacity but scrapped that plan after a court ruling halted night flights from its Frankfurt hub, Garnadt said.

Lufthansa Cargo expects to lose 15 million euros ($19 million) this year due to the ruling, which came into effect in October. A permanent ban would cost it about 40 million euros a year.

Lufthansa Cargo has said it was working on a "Plan B" for its operations should the night flight ban be upheld by a federal court due to make a ruling in March.

Its options are to either slash its growth plans and make do with a smaller chunk of business by limiting flights to daytime hours, or set up a second hub at an airport that does allow night flights, Garnadt said.

"I would say that we're tending more toward not working at two different locations," he said. Making do without night flights would then mean lower investments, less business and possibly a smaller fleet of freighters.

No final decision has been made on the matter yet, though, he said.

For now, the company has adopted an emergency winter schedule, which includes cutting two flights a week to China, moving flights to daytime, and introducing stop-overs in Cologne/Bonn for flights to China.

The night flight ban comes at a time when the global economic outlook is uncertain.

Global trade is expected to grow at a pace of only 5.8 percent this year, compared with 14.1 percent in 2010, as the European sovereign debt crisis buffets developed economies, according to the World Trade Organisation (WTO).

"At the moment we are seeing that we will not be able to repeat the very strong level (of business) we had last year. I see this as a return to normal," Garnadt said.

"The whole industry expects that we will have a very strenuous first half of the year," he said. ($1 = 0.7721 euros) (For summit blog: blogs.reuters.com/summits/; For more summit stories, see ; Editing by Will Waterman)

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