My Orchids. Phalaneopsis "Three Headed Dragon". Photo ET
Cargolux and the
Three Headed Dragon
I
hoped that the Cargolux story had reached a point of relative calm, though an
uneasy calm, because of the lack of visibility, of a bad deal, (1) and of obvious
uncertainties. I thought though that the story was moving in a pattern of
circles, with repeating scenarios, with inadequate Luxembourg posture, where
you had to wonder: is this incompetence, naiveté or worse? Whatever the
response to that question is, fact is that the pattern of circles is tridimensional,
and is actually a spiral downwards. Here is the wild ride:
1. The partnership
with QR was poorly negotiated, and was a mistake.
Imagine,
we sold 35% of a company that has 40 years of experience, the best qualified
workforce in the industry, the newest,
large fleet of the best aircraft, major, major clients and a route network that
is the envy of the other cargo airlines. How much did QR pay for those 35% in
ownership? $117.5 million, and that is from QR, a competitor. Who came up with
that miserable valuation?
Of
course once onboard, QR slapped Boeing in the face, cannibalized clients and
routes before going home with the loot, and the bad deal collapsed.
2. The partnership
with HNCA was poorly negotiated, and turns out to be a mistake too.
There
are too many perplexing hiccups in the HNCA partnership, as we discover day by day,
for this venture to be successful. First of all, why did this deal mimic the QR
deal, when it comes to the order of magnitude of CV's valuation? And other
provisions, such as the right of the new minority shareholder to veto majority
decisions? Then who can explain that surprising bait and switch strategy away from HNA, that was
bidding for the partnership, to HNCA? HNA is a Chinese airline from the
wealthier coastal areas, HNCA is an economic development agency from a poor
interior Province.
The
Luxembourg government, a sovereign State, was negotiating with a sub-entity of
a Chinese Province, and thus could be rebuked by both the Provincial government
and vetoed by the Chinese central government? One had to expect that
difficulties would arise from the fact that we were relying on the good grace
of three (uncoordinated, or more machiavellian, coordinated) entities: the
Chinese government, HNCA and Zhengzhou airport. We should have evaluated the
realm of possibilities, when negotiating with a three-headed entity, and
comprehend how these seemingly independent instances would play together.
Instead, I'm afraid we believed in promises and assigned wishful good
intentions to all three of them. Which is testimony to our fair minded and
innocent approach. Trust is good, but
put it in writing. Who engineered this?
It
becomes more unsettling even, if you consider that the former Luxembourg government,
heavily criticized for its poor handling of
the Cargolux situation had framed this deal, and that Mr. Wiseler,
Minister in charge made efforts to rush it through before the new government
was in place. Incredibly, the new government actually almost blindly supported it.
The
rush to sign this deal remains mysterious, mostly considering the subsequent
delays and still unresolved problems on the Chinese side. What takes them so
long? Has Mr. Song's power and hence his new position been overvalued, if a
piece of bureaucracy between the three heads is insurmountable? I would expect
that a really credible and influential representative for CV could have
resolved any bureaucratic bottleneck with a phone call. Instead of a new delay
of 5 weeks for a flight that was anticipated on the Luxembourg side with almost
childish expectation. In view of present developments, the rush might have been
a costly mistake.
3. Is Cargolux
check and mate?
We
already know that HNCA has a veto right. We watched in awe how the inaugural
flight scheduled in late April has been a flop, with a Luxembourg advance team
headed by a Minister waiting in vain for CV to land in Zhengzhou.
The
excuses about clerical and bureaucratic encumbrance don't fly. Because let's
face it, there are not many choices as for the reasons: it is either
incompetence that those things were not taken into account, or it is naiveté
that things would be OK all by themselves, or that the new partner would be so obliging
and well intentioned as we are, and bend backwards to get rid of any obstacle
in our way. And hopefully, there is no worse reason such as corruptive expectations,
still quite common in the area, and the accompanying retaliation if one does
not oblige.
I
would warn that this last one comes to mind again, when we hear about another surreptitious
event on behalf of the Chinese side, that comes like a warning shot across our
bow: The signing with an airport to airport agreement with Hahn. And then with
Leipzig. Signed by people in the know, because involved with both, the
Zhengzhou airport and the Cargolux Board. No one should even dare to explain
that we should be schizophrenic about this, that it is unrelated, because HNCA
is not the same entity as the airport. Everyone and everything is related to
the State in a directed economy.
By
the way, why isn't there a similar agreement with the Luxembourg airport? Why
would it be needed, or not needed?
4. What is the
way out?
So
far none. CV is check and mate. CV has lost its freedom of action. HNCA has
veto power.
If
all these disturbing actions get no good explanation, even then a QR bis, a
divorce and the unwinding of the HNCA deal is unlikely. Why would HNCA ever
want this to happen? They won a pretty good deal, their obligations are minimal,
and they can and do ratchet up pressure by creating foreseeable problems, and invoking
alternatively either the Province, or the airport, or Beijing as the source of
the problem. HNCA was and is playing chess, our guys marbles.
There
are only two satisfactory ways out:
The
first one is that the Chinese side finally plays nice, and performs according
to the Luxembourg phantasm of an idyllic partnership. And HNCA forgets that
Luxembourg forgot to get a non compete agreement in place.
The
second one is that CV diversifies its own partners, if that can be done without
a veto from HNCA. Or create a new Luxembourg JV "Luxcargo", with the
Luxembourg stakeholders in CV, if HNCA continues to be a problem. Maybe now is
the time to look around for other carriers for CV to take over, as some went
out of business, or others may be available. In the US it is well known that
might actually be the case for Martinair, cargo activities of which have become
redundant with KLM's and Air France's cargo capacity on full bodied passenger
planes such as the A 380. Others are confronted with similar strategic
challenges, a possible opportunity for CV.
5. The standalone
option
If
the Chinese partnership fails, an escape forward as indicated would be costly.
But it would be the price to pay to preserve the concept of the great Luxembourg
logistics center. Two past questionable partnerships would plead this time for a
standalone.
But,
remember the many theories and demonstrations advanced in the past to show that a standalone was not
possible? Including the argument, that
the European regulations did not allow the government to remain a shareholder, and
that turned out to be a lie? Apart from the fact that once in a while, we have
to fight the European Commission's unreasonable pushiness, it remains a lie, as
the State remains as a shareholder even today. Or maybe we finally just pushed back
successfully. In both cases, a false argument eliminated the most viable
solution in the past.
Also
doubting the survivability of a standalone is a myth. CV did not do well with a
partner, QR in 2012. As a standalone last year it did well. OK some old engines
were sold and contributed to the numbers. But maybe we could have a look at
Profit and Loss in the first quarter of 2014, or the first four months, to
verify how everything worked out until the best managers left. Adjust for
seasonality. I'm sure OGBL will see those numbers in an upcoming feel good meeting
with the Minister of Transportation, who might give up his obsession with a new
tramway system for Luxembourg City, at a cost of almost half a billion Euros.
Budget those for CV's survival.
