Cargolux – Qatar Airways: Transparency in a sandstorm?

My Orchids, Unsecured Non Interest Bearing Oncidium.

Cargolux – Qatar Airways: Transparency in a sandstorm?

Last week was a target-rich environment for those following Cargolux. Cargolux’ Ex, after the broken marriage of 2011, seems to be scheming a vengeful plan. Thanks to unlimited budgets, Qatar Airways will dry out and smoke out poor CV that has to live on bare earnings. The European Commission would even get angry, if the Luxembourg government would help CV out, in order to survive the QR cannibalism.  

Unlimited budgets don’t rely on earnings but on unlimited money from elsewhere. That means it comes either from a drunken sailor, or a charity, or a mindless investor, or a government. In the case of a government, that money would be called a subsidy.

QR is really miffed at that type of insinuation, that it is a subsidized enterprise. In order to stop the gossip, it issued a “Consolidated Financial Statement” for full transparency, and available online. I gladly share my findings here:

https://theloadstar.co.uk/qatar-airways-reveals-financials-transparency-bid-kill-allegations-state-subsidy/

Oops! This is what you may get too:

The www.qatarairways.com page isn’t working

www.qatarairways.com redirected you too many times.

Try:

• Reloading the page
• Clearing your cookies

ERR_TOO_MANY_REDIRECTS

So now what? Let’s go to Loadstar and at least get a summary explanation about the transparency gig. The relevant article is: “Qatar Airways reveals financials in transparency bid 'to kill allegations of state subsidy'. Try the orange link in paragraph 2: 61-page statement. If you are unsuccessful too, we’ll tell His Highness, and He will kick ass in the IT department.

In the meantime, out of frustration, allow me to just look at the Loadstar’s article to find out about transparency. As you know the allegations of QR being massively subsidized (7 billion in 2015) has been a topic for some time and is resented as aggressive and unfair practice, in a field where others can’t get subsidies.

Back to the article, where it says: ‘The results show the company issued 473,395,000 shares, worth QAR10 each, to the government as payment for “shareholder advances”, which are non-interest bearing and unsecured.’

Alright then: QR has one shareholder since 2013. People agree to call that shareholder the government. If it were one person, this argument here would be moot. A private person can put unsecured and non interest bearing money and lose it wherever. But it is the government, the sole shareholder buying all those shares at 10 QAR each. That government owned 100% before buying these shares. After it bought for close to 5 billion QAR, it still owns 100%, unless you can own 200%.

That money is called “shareholder advances” which are non-interest bearing and unsecured. In other words, it is free money, the government graciously waives interest it would have to pay to itself, and it is unsecured (no guarantee to see it back). A gift. So the owner basically shores up the cash register. Shareholder advances are a nice euphemism for subsidies.The Luxembourg Pilot's Association ALPL could not be duped, Mr Forson the new CEO of CV knows better, only Minister Bausch sees no harm. He also thinks that there is no difference between Luxembourg airport with 5th Freedoms granted to QR, and Liege airport. Don't we all hope that this decision maker is right?

Luxembourg: The wondrous Cargolux negotiators and their ticking time bombs

My Orchids. Sovereign Niche. Photo ET

Luxembourg: The wondrous Cargolux negotiators and their ticking time bombs

We had some quiet moments around Cargolux over the past year. Last year it officially booked a profit, which is encouraging, even if put into perspective, it might be a short-lived blessing that was based on lower fuel costs. In any case the profit rate was only about 2.5%. It is difficult in the air cargo business to make a profit at all. That’s why the government has to care when in Luxembourg one company, CV, is a key activity. Considering gross revenue, the margins are not very comfortable in case markets turn down, or someone comes along spoiling the party. But it is nice for now to show positive results. This week however put Cargolux again in the news.

Dirk Reich’s happy departure to smell the roses.

Dirk Reich resigned as CEO after just a couple of years at the helm. That gets everyone listening, mindful that there was a management exodus a short time ago. Management put a nice face on the events: Dirk Reich, the CEO, chose to retire. Publicly it was much insisted that it was his decision, before anyone doubted it. That actually made some doubt, because the language seems so carefully crafted. His replacement is Mr. Forson, the CFO. He was already the interim CEO before Mr. Reich was recruited. Obviously if now he is the only possible successor in the leadership’s view, he could have been hired instead of Dirk Reich, saving the cost of the executive search at the time.  But for some reason, he was found less qualified than Dirk Reich. So this time he is, and it is done without an executive search, which means he has learnt a lot, so much that the choice is unavoidable. Mr. Forson will preside over the struggles of Cargolux in the near future.

The bad news

Cargoforwarder exposed those struggles to come: the unfair competition from QR, a residual booby-trap left behind from the incredibly incompetent negotiation Luxembourg held with Qatar in 2011, and the ensuing 18 month alliance with QR. Most people remember the embarrassing deal for Luxembourg, selling 35% of CV for $117,5 million! A company counting 1.500 professionals at the time and 16 aircraft was valued at about $300 million, the list price of one aircraft. When finally that alliance was cancelled, the largely unknown collateral agreement granting QR 5^th Freedom rights was not canceled. CV still has reciprocal rights in Qatar, but opportunities there are scarce, mostly empty pallets. It is QR that holds the jackpot in Luxembourg. Opportunities abound, and QR is reported to plan to use its 5^th Freedom on 20 routes, with 24 weekly flights, competing with CV on all those routes but one. It practices dumping prices, down 75% from CV’s pricing. Something has to give. Either the granted rights have to be clawed back, or the dumping practices have to be banned and sanctioned with huge fines. CV did not even practice dumping, just a little coordination of pricing with others, and it cost about $250 million in fines. What is good for the goose is good for the gander. QR was known for its practices. When it was a partner with CV, it already raided CV’s customers in a bidding war on prices.

This time the assault on CV will be merciless. The CEO of QR has sworn revenge for the aborted alliance CV. The corporate culture there was summarized by his quote about the owner, “His Highness will kick ass!” From their due diligence and hiring away key personnel while acquiring 35% of CV, QR knows all of CV’s trade secrets. CV knows nothing about QR, except that their possibilities are endless, and their intentions have been announced: revenge. Never ignore a threat.

The Stockholm Syndrome

Alerted, the government, through the wisdom of Minister Bausch, laid out the battle plan for CV’s defense: Mr. Bausch surrenders, without canceling that agreement on the 5^th Freedom, that was however an integral part of the aborted alliance agreement. He is held hostage, he believes, by some Qatari billions in the Luxembourg economy: Precision Capital, BIL, and KBL. That is called the Stockholm syndrome, when the hostage sympathizes with the hostage taker. I would assess though that Qatar might need Luxembourg more than vice-versa. First of all as an element of their well-planned program to diversify away from Qatar’s finite oil and gas reserves. Second for the interesting opportunities offered in Luxembourg, not to forget a government that is really, really easy to negotiate with. Proof is, we won’t touch the 5^th Freedom and hope His Highness is very pleased.

The spiral

As a consequence of doing nothing, it is inevitable that CV will lose market share to QR. CV is headed for a downward spiral. We seem to be willing to sacrifice an airline in favor of Qatari banks in Luxembourg? There is no other explanation around this. If the reciprocal freedoms are not revoked, CV is going to be the sacrificial lamb to honor the Qatari golden calf.

The reality and the irony

And here is the perfect political storm: as the scheduled Cargolux crisis unfolds, Luxembourg gradually gets closer to the next elections in 2018. According to conventional wisdom, Mr. Bausch will not be part of the new government, dominated by the comeback of the Christian Social party. Interesting news came out in that respect during this week too: the Christian Social party has just designated/elected/nominated its leaders for the elections to come: Mr. Wiseler for the national elections, Mr. Frieden for the European elections. Well that suits us well. We’ll hear expert explanations on the announced disaster from the two specialists: Mr. Frieden did the QR deal almost all by himself while he was Minister of Finance, and Mr. Wiseler was Minister of Transportation. They are the two fathers of the problem, that stepfather Bausch seems unwilling to solve.

As for Luxembourg in the meantime, it will be accused of once again abusing its sovereign rights by letting in the cannibals that ruin European air cargo corporations. The usual abuse through its niche policies. But that could be the solution: as we don’t have the “cojones” to claw back the air agreement from Qatar, let’s Brussels force us to do so. Brussels was invoked time ago to sell to QR in the first place. So our friends can be only mad at Brussels.