AIRLINE INTERVIEW: Lufthansa Cargo

posted on 3rd April 2018

A modernised cargo handling IT system is opening up new services, products, and possibilities, Lufthansa Cargo CEO Peter Gerber tells Will Waters

The air freight sector has been talking for some time about the need to modernise, become more sophisticated, more transparent, and more agile. But some senior figures believe this is no longer just hype and is finally now beginning to become a reality, at least among some of the industry’s front-runners.

Peter Gerber, CEO of one such self-proclaimed front-runner, Lufthansa Cargo, is among the believers. “I really do believe that we are moving into a new phase of air freight, due to digitalisation, and this means a lot of things are possible now from a technical side that were not possible before – especially more transparency and more agility,” he says. “There are a lot of players in the air freight industry; it is not just the carriers or the shippers; there are also the forwarders. And I think everybody in the industry feels that something is happening, and I think everybody is working on it. So I will presume that in some years we will clearly see a totally different industry.”

Of course, no one knows quite how many years that will be. But Gerber believes there are at least three levels that air freight providers have to go through in terms of digitalisation, starting with airlines replacing their ‘legacy’ IT systems.

“The first level, what the carriers have to do, is to provide ourselves and our customers with IT of the 21st-century,” he says. “This means our core systems have to be completely renewed, meaning the core handling systems and the core sales systems that you need in your company – so that you’re able to receive the data, but also to send the data to your customers and have this ‘digital readiness’.”

He says Lufthansa Cargo is already close to completing this. “We renewed our handling system, now we are renewing our sales system – which everybody has to do, and it is extremely important; it has to be done properly,” he stresses.

The second level is to acquire the “plug-in-ability” to all your customers and partners so that you can work with their IT systems, Gerber says, adding: “This is extremely important for our industry, because our industry is for the moment very transactional. There is a lot of manual work going on – phone calls, writing, a lot of people working around this. And I think we have to really resolve this problem, because when you create this ‘plug-in-ability’, then you can drive efficiency and you can drive quality.”

The third level is to look at whether your business model as a whole needs to change as a result of the opportunities or threats that digitalisation provides. This means identifying whether there are “new digital platforms that you can do business with, or whether some of the business will be going to those platforms”, Gerber notes, adding: “For the moment, we have a classical middleman industry, with big forwarders in the middle position. They are strong and they do a good job, but it may well happen that there will be established some platforms that take some of the business. We don’t see this up to now, but as it happens in other industries, it could happen.

“These are the three levels we are clearly working on, and I do believe these are drivers which will change the industry during the next years.”

ORDER OF PRIORITY

To a certain extent, these processes need to be done in order.

“It is clear that everybody has to work on the first level,” Gerber says. “The second level is between obligatory and mandatory, and on the third level you have to decide whether you want to take part. I think that is how it works.”

He claims Lufthansa Cargo is making “good progress” towards being able to meet the requirements of the new-generation air cargo environment, under a programme that it now calls Cargo Evolution, a name that has itself evolved from the company’s Cargo 2020 plan. Having renewed the handling system, he expects the renewal of the company’s sales system will be done by 2018.

“We are also working heavily within our e-cargo programme on this ‘plug-in-ability’,” he adds. “Both things we believe will be delivered around 2018; maybe some things in 2019.”

As for the third level, he says: “We clearly look at developments of the market, and if there are opportunities, we will have to decide whether we try to use some of them or not.” This means there may be opportunities for carriers to participate in and benefit from disruption that may take place.

“I do believe that when an industry changes, and there are some disruptive elements around, there is an opportunity for every player in the market to look and to change its own position,” he notes. “So, we clearly have to look at this and then we have to decide.”

Some carriers already deal directly with some of the big e-commerce players like Amazon. Whether that is something he sees increasingly taking place, Gerber responds: “I think we don’t know this up to now. It is a possibility; it may also be an opportunity, but it clearly lies in the future.”

NEW TRACKING CAPABILITY

Meanwhile, recent technology-driven developments from Lufthansa Cargo include an advanced real-time tracking system, ‘liveSensor’. Gerber says the timing of its introduction was more about the market than a new technological breakthrough.

“The technology was already there,” he says. “During the last years there are a lot of possible innovations around, and it is really a question of whether you can offer a product innovation for a price customers like or can afford. And if we think that this is the case, then we try to bring those innovations onto the market.”

LiveSensor is available “on a flat-fee basis” and, although Gerber says he can’t talk about prices, he notes: “It is a premium service and it is not without costs for a customer.” As well as tracking where a shipment is, the product also tracks and notifies customers about other aspects of the shipment’s status, such as temperature, humidity, pressure, alignment and vibration levels − and when a shipment has been opened.

“It is mostly automated, and we have the technical and IT capabilities to do this because we have invested in our new handling system,” Gerber says.

“That upgrade of the handling system was a huge IT project that lasted more than two years, and it was a heavy investment. We replaced the old system with a totally new system – a total exchange of the handling IT.”

With the right IT in place, the only new physical infrastructure needed was the tracking devices. And having got this IT system in place, other things become possible, Gerber believes.

“I think we will clearly see developments in the future, not only in air freight but everywhere, where the Internet of Things means you can connect data from everything you have; and in the right IT systems, you can then use this information for business more and more in every respect.”

As with previous technology breakthroughs, the costs of providing this level of tracking technology − and other perhaps unidentified technology-driven capabilities and services – are expected come down over time and become standard. “I think so,” Gerber agrees. “Not for the moment, but maybe the development goes in this direction.”

And then the company will have to find another new competitive advantage. “We have to,” he says. “When you are an innovator, that is always the game. You have to bring the innovation, try as long as possible to stay ahead, and afterwards if your competitors are catching up, think about something new.”

INVESTMENTS IN CARGO

In contrast to the situation in North America, where cargo was neglected for many years until recent consolidation in the market has meant that the airline industry as a whole has become more stable and less vulnerable to these cycles of profit and loss, Gerber says historically the big European carriers have always invested in cargo.

Lufthansa Cargo

“This is the reason the big global players are European players or Asian players,” he notes. “We never saw the situation when nobody invested into cargo. But if the situation is more stable from the economic side, it is good for every business unit and there are more investment possibilities, and there will be more possibilities for the cargo side if this is the case. So, in general this is right from an economic perspective.”

For Lufthansa, the second successive year of record results means “at the moment we see the situation as stable or even quite good”. And that is relevant for cargo investments, he acknowledges. “If business is going well, it helps us. So, we have ideas (of things we may want to do) through investment, and I am sure that, as always, the group will help us in that respect.”

PARTNERSHIPS

One of the ways Lufthansa Cargo has been investing in its capacity in the last few years is through partnerships, including three major agreements recently with ANA, United, and Cathay. Gerber says it is too early to quantify the benefits that have come from the recent partnerships in terms of efficiencies or the bottom line.

“For the cooperation that is running longer now, with ANA for two years, we clearly all see that there are benefits, and maybe even more benefits than we expected. But for the other co-operations, I think we have to look at this something like two years from now.”

These benefits from the ANA agreement come “in every respect: more business; a better cost position; better service position for the customers; and of course we see sales picking up”, Gerber says. Chiefly this is thanks to the expanded network. “Cross bookings is one item; but the bigger network for the customers, more flexible possibilities, more destinations, I think that is (what is) driving better sales and services.”

So, is that how he anticipates mainly expanding Lufthansa Cargo’s capacity or network in the future rather than through expanding the freighter fleet? “I think one doesn’t exclude the other,” Gerber says. “Both ways are possible in the future, and it probably depends on the demands of the market.

“What we do believe is that some consolidation steps have to be taken in our industry − which is not so easy, because of the regulatory environment. So, joint ventures get consolidation effects in certain markets, and our partners and we believe this is an important step for us as the carriers, but also for our customers, because we can provide them with more destinations with a wider choice, and in the end a better service.”

He continues: “So we do believe that these are consolidation steps that are clearly necessary in our industry, and investment there is merely into IT systems, because we have to link the IT systems to each other to make everything bookable on the other side.”

Whether Lufthansa Cargo will need to expand its own cargo capacity “depends on how we see the market developments, and if an investment looks promising economically or not. So, both ways are possible for us, and we will decide based on the market demand.”

The company still has open options for five Boeing 777Fs to join the carrier’s existing fleet of five Boeing 777Fs and 11 MD-11Fs − plus two additional 777s within Aerologic. Gerber says there is no imminent need to renew any of the airline’s MD-11s “because we bought the last production freighters, which was around 2000, so they are now 16 or 17 years old, which is not old for freighters”.

SEEING INTO THE FUTURE

Although the market will dictate what is required in terms of capacity, seeing into the future remains “really difficult” for the air freight sector. Gerber says the company and the market had a very good start to the year “and everything looks quite promising. But our market is more like a rollercoaster, so for the next three or four weeks you foresee the developments, but nobody knows what happens after that”. That said, a strong second quarter is likely to lead to “quite a good year”.

GREATER TRANSPARENCY

But will this always be the way, that air freight can only see three of four weeks see into future, or will growing digitalisation, greater transparency of what is coming down the pipeline, enable companies to see further into the future?

“I don’t think so,” Gerber responds. “Because what we experienced during the last years is that with the better possibilities of communication around the world; with immediate news spread around the world; with better IT possibilities, decisions are taken much faster than they used to be taken − which means it is even more volatile because things go that way. So, I wouldn’t expect IT to change this (volatility) − maybe it will even increase,” he says. “So, I think fundamentally this won’t change; we may need even more flexibility then we can provide up to now.”T