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AF-KLM Cargo: from here to obscurity.

Where did it all go wrong for Air France-KLM Cargo?

The short answer probably is, "from Day One." That's when the cargo divisions of two of Europe's strongest airlines became allied as part of a grand merger between Air France and KLM. That was more than a decade ago, in 2004, in a move which brought together what was then recognized as a couple of air cargo's most professional outfits, with a perhaps slight deference to Lufthansa Cargo, to create Europe's biggest cargo carrier.

But the seeds of uncertainty were all too quickly sown. As the lead partner, Air France demanded overall control of the passenger business of the new joint venture. For KLM, well it could, by way of a concession, take care of the cargo side. Immediately, the two business strands were split between Paris and Amsterdam.

This arrangement came despite the fact that Air France Cargo probably had the stronger business model. It certainly had the stronger candidate to head up the new organization in the form of Marc Boudier, an industry veteran known for a close accord with his workers, and thereby the unions.

KLM Cargo, on the other hand, had a relative newcomer at the helm, with Michael Wisbrun walking into the job just four years before the merger. He already had the unenviable task of taking over from the legendary Jacques Ancher, who had guided KLM Cargo for so many years.

The new cargo set-up created a core management team, based in Amsterdam, requiring the French members to commute between the two hubs. Boudier was soon to be effectively sidelined by this strategy. It was perhaps from here that the plight of what has become of AF-KLM Cargo today began to evolve.

According to Cargo Facts, the sister publication of Air Cargo World, prior to the merger, Air France operated an oceanic-sized fleet of twelve 747-400Fs, while KLM Cargo was able to field a fleet of three 747-400Fs. That combined total was further boosted when fellow Dutch carrier Martinair was brought into the Air France-KLM fold in 2008 and, with it, seven MD-11Fs and four 747-400Fs. AF-KLM-Martinair Cargo, it seemed, would be invincible. But that is not how it has turned out.

The glut of freighter capacity proved to be a burden rather than a bonus. Appalling operating returns have forced a rapid divestment. The AF Cargo 747 freighters have gone and, even more telling perhaps, the carrier will only retain two 777Fs, for which it was the launch customer.

KLM Cargo has fared little better.

Its cargo fleet, rolled-up with that of Martinair, has also been depleted. All that will soon be left will be three 747-400ERFs. This could spell the end for Martinair, which last month announced the layoffs of more than 100 pilots and 220 ground staff--a move that is being protested by Martinair's works council in Amsterdam.

It is argued that new passenger aircraft equipment will replace much of the outgoing freighter capacity. Ironically much of that belly hold capacity is being provided by the passenger variant of the 777. But even so, that does not really chime with any ambition to be a major force in cargo.

When the freighter realignment is completed by the end of this year, main-deck capacity will be responsible for just 15 percent of the group's cargo production, as compared previously with 30 percent. It was perhaps not such a difficult call to make after it was revealed that freighter operations have been responsible for half of the continuing losses of the cargo business.

And no one can argue with the catastrophic scale of the cargo results that have haunted AF-KLM over the last three years and, with it, serious questions about its entire viability.

Posted results for 2014 show continuing high operating losses of US$240 million, exceeding losses of $230 million for 2013. The group says, if the effects of a strike by Air France pilots last year are excluded, the cargo losses would be reduced to $215 million. Even so, there has been little year-on-year improvement from the $253 million in losses incurred in 2012.

And it does not look like it is going to get better any time soon. The most optimistic forecast the airline can come up with is that its cargo business will break even by 2017.

The majority of the losses incurred so far are laid at the door of KLM Cargo, it being argued that AF Cargo still runs a tighter ship. That leads to the notion it is poor management on the part of the KLMers that has marred the entire business.

Certainly, there seems to be a lack of depth in the ranks of KLM Cargo. Jacques Ancher was, by no means, a one-man show and included in his team such latter-day industry luminaries as Oliver Evans and Stan Wraight.

Yes, it is still a tough market out there, with increasing competition in particular from the Gulf carriers. But it is a situation faced by all the European carriers. Put into perspective, standalone Lufthansa Cargo achieved cargo revenues of $3.75 billion in 2013, a 3.9 percent fall, while the combined force of the Franco-Dutch duo could barely match those returns, with joint revenues of $3.74 billion, reflecting a 5.1 percent decline.

Could it get any worse? Well yes, it could. AF-KLM Cargo effectively became a rudderless ship at the beginning of the year when Erik Varwijk, it's executive vice president, announced that he would not be seeking renewal of his contract in July. Instead, he packed his bags and departed on March 1.

Time for a decisive response? Not necessarily. The response, as such, has been to shoe-horn Bram Graber, current CEO of Transavia, the group's Dutch budget carrier, into the job. Graber, a former KLM Cargo executive, will retain his role at Transavia and hold the reins at AF-KLM Cargo on a temporary basis for a few months until ... well, until another decision is made.

AF-KLM Cargo, it would seem, still has plenty of challenges ahead. Jacques Ancher, where are you now?
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Title Annotation:Around the world: EUROPE
Comment:AF-KLM Cargo: from here to obscurity.(Around the world: EUROPE)
Author:Turney, Roger
Publication:Air Cargo World, International ed.
Date:Apr 1, 2015
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