UPDATE 1-Lufthansa Cargo sees airline partnership by mid-year

Tue Mar 25, 2014 8:54am EDT

* CEO says partnership would expand network, cut costs

* Lufthansa Cargo eyes second partnership in 2015

* CEO eyes significant improvement in opg profit this year

* Lufthansa shares up 1.3 pct, in line with Dax (Adds comments from CEO on partnerships, freighter plans)

FRANKFURT, March 25 (Reuters) - Lufthansa Cargo, the air freight arm of Germany's largest airline, aims to set up a partnership with an airline outside of the Lufthansa Group by the middle of this year ahead of further cooperation deals, it said on Tuesday.

Karl Ulrich Garnadt, CEO of Lufthansa Cargo, said the aim of such partnerships would be to increase the number of routes and destinations Lufthansa Cargo could offer while helping to cut costs by taking advantage of the partner's logistics handling facilities, for example.

"We are in talks with more than one airline, a second partnership should follow in 2015," Garnadt said.

Air freight companies are coming under increased price pressure because of a growing number of passenger services carrying cargo in the belly of the aircraft.

With Middle Eastern airlines in particular expanding routes fast, that has put prices under pressure and forced some airlines, such as British Airways and Air France to scale back their own use of freighters.

Industry body IATA revised up its forecasts for global cargo demand to 4 percent growth for this year, but said yields would fall 1.5 percent.

Lufthansa Cargo presented its annual report on Tuesday and Garnadt said that yields at the company had stabilised at the end of last year, but that it was difficult to make any forecasts beyond that.

Any partnership between Lufthansa Cargo and another airline needs to be approved by antitrust authorities before it is announced, he said.

Garnadt, who will become CEO of Lufthansa's passenger airline business in May, has experience of a similar partnership during a previous stint at the passenger unit. A joint venture with United and Air Canada, called Atlantic Plus Plus, was set up to enable the airlines to coordinate schedules and pricing on transatlantic routes.

"What works in the passenger business should also work in cargo, even though it is more difficult to set up," he told Reuters.

BELLY AND FREIGHTERS

Lufthansa Cargo reported a 2013 operating result of 77 million euros, a 27 percent fall on 2012 and below what it had expected at the start of 2013, Garnadt said. Revenue fell 9.2 percent to 2.44 billion euros.

The company said it hoped to increase the amount of goods it carries by 5 percent this year and significantly improve operating profit.

In the summer, when travel peaks, Lufthansa Cargo transports over 50 percent of its freight in the bellies of Lufthansa passenger aircraft. Garnadt said having the flexibility to mix freighters and belly capacity was key to survival in the present market.

"Those with only freighter capacity will have tough times ahead," he told Reuters.

It will be flying four new Boeing 777F freighters this year. Rather than expanding its fleet, they will be used to replace four MD-11s. Garnadt said that two of those MD-11s had been sold but two would be kept in reserve in case demand picked up.

The two MD-11s will also be needed in the coming years after Lufthansa decided to postpone a decision on whether to firm up an option for the first of what could be a further five 777Fs.

Postponing the decision means any new 777F plane will only now be delivered in 2017 at the earliest, instead of 2016.

(Reporting by Victoria Bryan and Peter Maushagen, editing by Louise Heavens)

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